Brian, could you do a tutorial on how to do the quick mental math in finance? A lot of the calculations seem to be done in the head rather than carefully calculated -- could you give some tips on how to become good at that? Thanks
Thank you again for the grat contents! I was wondering about how does the math work in the 1st question, as I have the following point: - if the buyer P/E > seller P/E and 100% stock is accretive, why in say 50% stock should not be? given that the less the stock consideration the more accretive is the deal, generally speaking
It may still be accretive in a 50% stock deal. But the point is that you can't know for sure. Think about a company like Amazon, where, due to its sky-high P/E multiple, its Cost of Equity is actually *lower* than its Cost of Debt. That's why you can get weird results with less than 100% Stock.
Sorry to be so off topic but does someone know a trick to log back into an Instagram account? I was stupid forgot my password. I would appreciate any tricks you can offer me.
@Korbin Jerry Thanks for your reply. I got to the site thru google and Im in the hacking process atm. Takes a while so I will get back to you later with my results.
Calculate the weighted cost of acquisition and compare it to the seller's yield. Use Target Net Income / Purchase Equity Value for the seller's yield. If it's 100% Debt, set that equal to Interest Rate on Debt * (1 - Tax Rate) and solve for the Interest Rate.
@@financialmodeling Thank you for the clear explanation - it was very helpful! I had a follow-up question from an interview: how would the maximum interest rate change if the debt were only 50%? I'd appreciate your insight. Best regards, Tom
@@Tom-ky8is You can use the same approach but add a term to the equation and use algebra to solve it: 50% * Interest Rate on Debt * (1 - Tax Rate) + 50% * Cost of Other Funding Source = Seller's Yield at Purchase Price
Hi Brian, thanks for a really informative video. Quick question for you in regards to Principle #4: is it fair to say that cash does not go towards equity value because that cash is not exclusive to equity holders (it would be used to pay off debt or preferred stock first)?
Yes, but I wouldn't use that as a reason to explain or understand Principle #4. It's easier just to say that Eq Val-based multiples depend on capital structure, while TEV-based ones are capital structure-neutral (in theory, not in real life).
Hi Brian, thanks a lot, great insights, really helpful for interviews. I have a question on pro-forma P/E multiple. When buyer pays premium to the seller, in the absence of synergies do you take into account premium when you calculate combined Equity Value and P/E multiple?
Yes. All these questions assume that the premium has already been factored in. That is why the multiples are "Purchase Multiples". If you get numbers without the premium factored in, you should ask and see if there is a premium, and if there is, factor it in.
It seems like whenever the deal is dilutive, the P/E ratio is no longer between the buyer and seller multiples. For example, if you try an all debt deal and increase the interest rate to 20%.
Maybe? You could be right, but I would hesitate to state that in an interview unless you test it under many different cases/conditions because the interviewer could hear something like that and then spend a lot of time trying to find exceptions.
Hi Brian, Thanks for everything you're doing. You're sort of a messianic figure in the finance world. If I may ask, I have a final round M&A interview coming up at a tech company's in-house team tomorrow. Do you have any tips regarding which topics I should focus on to prepare? Again, thank you very much for everything!
There is literally nothing I can add at the last minute that would help you. Know your story, be ready to discuss a recent tech M&A deal and a tech company you like, and make sure you can explain why you would fit in with this group specifically. Don't even bother with technical prep at this point since you won't learn anything new. Everything else here is covered in various articles on M&I.
Thanks a lot for the video. Quick Question - In question 5, the deal becomes less accretive when the buyer's is getting bigger in equity size compared to the seller's equity size, but no matter how bigger the buyer's equity is, as long as the buyer's P/E is bigger than the seller's P/E, it will mean that the deal will be accretive, right?
Thank you so much for this great video. I can't believe it's really detailed. I'm wondering if u can share the excel that you used in the video? Thanks
Great video, but one question on the EV/EBITDA multiples. You mention that the combined EV/EBITDA multiples are unaffected by the way the deal is funded (e.g 100% cash, 100% debt or 100% stock), but wouldn't a 100% debt funded takeover leave the combined group with more debt and therefore result in a higher EV/EBITDA multiple?
No. Issuing Debt is equivalent to issuing Stock or using Cash in terms of its impact on the Combined Enterprise Value: It always goes up because either Debt or Equity Value increases (and both of those are positives in the Enterprise Value calculation), or Cash decreases (and Cash is a negative in the Enterprise Value calculation). Set up a simple Excel file and you'll see how it works.
Dear Brian, Thanks, great video as always! 6min 30; question 2 ; do we agree that it is almost an oversimplification to stipulate that the buyer can issue 6 shares to buy the other company, at 150$, taking into account the initial share price of his company (25$), and no potential decrease of share price after the issue? I mean, it seems soo "simple" not to take into account other factor / effect of the issue on the price/share, that I have some difficulties following this ; and Wonder what happens in practice in a 100% equity deal Thx
It's an interview question, of course it is simplified. The point of interview questions is to test whether or not you understand the fundamentals, which 99% of people do not (you should see some of the transcripts from mock interview we've done...). I recommend not over-thinking questions or adding complications unless you are specifically instructed to do so. There are other lessons here covering what might happen to both companies' share prices in real life.
Got an interview question about company A acquiring company B, that has just distributed dividends and how the equity post deal is affected by that. Told that the Equity Value post deal would be the equity value of company A minus dividends, this is correct, and if so why ?
@@financialmodeling I Will see It. But i still have a doubt, if the company's B shareholder value gets vanished in the deal and only Company's A Equity stay after the acquisition, the equity value post acquisiton should only be Company's A Equity, because dividends affects only Company's B Equity that gets vanished anyway
@@flaviohns1 Company B no longer exists as a standalone entity, but its Equity Value does not exactly "disappear" - it simply becomes a part of the acquirer's Equity Value or Enterprise Value. For example, if the acquirer issues stock to do the deal, now its Equity Value increases to reflect the equity purchase price they just paid for Company B. Of course this may change if the market reacts negatively to the news and doesn't like the price, deal terms, etc., but this is the initial assumption.
Hi Brian, great video I recently came across a DCF for a an acquisition target in which future Growth Capex was not included in the DCF. The reason given was that this is value that the potential buyer will add . Is this a standard assumption in M&A modeling ? Thanks
That assumption only makes sense if you are also assuming no revenue growth or very limited revenue growth for the company in the standalone projections. Otherwise, CapEx and revenue growth must be linked... or if the company does not depend on hard assets, revenue growth must be linked to other forms of spending such as on employees.
It depends on the specific question. They may include synergies, or they may ignore them. If you're unsure, ask the interviewer. The basic EPS math questions here based on purchase prices and cash/stock/debt components do not include synergies unless otherwise specified.
Do these sorts of things get asked if you're going into an internship? I feel like I might be going above what I need for SA internships, and in-fact doing work to level of interview for a FTime position. Any advances on that?
Questions on merger models can and do come up in internship interviews. They may not be as complex as the more difficult ones here, but you will 100% be expected to know the basics of a merger model and how different assumptions affect it. You should know the fundamentals of all the core topics (accounting/3 statements, equity value/enterprise value, valuation/DCF, merger models, and LBO models) even for internship interviews. Other topics and more advanced questions on those topics are less important.
Question what could happen if the debt of the target is higher than the cash? and I would please to clarify why cash is presented as negative? thats because need to discount from the EV?
Which of these questions are you referring to? The target having higher Debt than Cash doesn't really affect anything because the true purchase price is still the Enterprise Value, and all the rules about the Combined Enterprise Value are still true. Cash is negative when you move from Equity Value to Enterprise Value. But, again, I'm not sure I understand which question or topic here you're asking about, so feel free to clarify.
@@financialmodeling Firstly thanks for take the time to answer and also making this free material available on RUclips, I think you do an amazing job of it, and referring to my question is not a specific question per se is more about the Excel merger model interview, also Im rookie in finance so maybe is a really silly question, but under the two statements company A and Company B the current enterprise value is the sum of cash ,total deb, preferred stock and noncontrolling interests, what I feel curious about is why cash is negative and debt is positive? try to understand the logic behind it. Thanks again for the knowledge you share and your time. Blessings.
Depends completely on how you present yourself and how much you know going into the interview. If you already have multiple internships and claim financial modeling knowledge, sure. If not, the harder questions here are unlikely, but they'll still expect you to know the very basics of M&A deals.
Mergers & Inquisitions / Breaking Into Wall Street thanks for your response. Interesting, I’m at an M7 and this is what we were told to study. Luckily I am reading each of the BIWS chapters as well and haven’t really focused on just the 400 questions guide. But my question is, the chapters also have questions that are split between advanced and more basic. It includes a caveat about only focusing on advanced if not an “entry level interview or if u have years of finance experience”. If I’m interviewing for MBA associate role, should I focus on the advanced topics regardless? And my background isn’t in finance at all
@@pierer5559 If you have purchased our guide, feel free to contact our help desk (breakingintowallstreet.com/biws/contact/) with these questions. If not, then I'm not going to answer detailed product questions on our free RUclips channel.
![Equity Value and Enterprise Value Interview Questions: What to Expect [REVISED]](http://i.ytimg.com/vi/21BE38E3zu8/mqdefault.jpg)
Thank you so much for these really intuitive and detailed videos.
Thanks for watching!
excellent way of explaining
Thanks for watching!
This video is really great!
Thanks for watching!
Brian, could you do a tutorial on how to do the quick mental math in finance? A lot of the calculations seem to be done in the head rather than carefully calculated -- could you give some tips on how to become good at that? Thanks
There are some tips in this article: www.mergersandinquisitions.com/sales-trading-interview-technical-questions/
Thank you again for the grat contents! I was wondering about how does the math work in the 1st question, as I have the following point:
- if the buyer P/E > seller P/E and 100% stock is accretive, why in say 50% stock should not be? given that the less the stock consideration the more accretive is the deal, generally speaking
It may still be accretive in a 50% stock deal. But the point is that you can't know for sure. Think about a company like Amazon, where, due to its sky-high P/E multiple, its Cost of Equity is actually *lower* than its Cost of Debt. That's why you can get weird results with less than 100% Stock.
Sorry to be so off topic but does someone know a trick to log back into an Instagram account?
I was stupid forgot my password. I would appreciate any tricks you can offer me.
@Kylo Callum instablaster ;)
@Korbin Jerry Thanks for your reply. I got to the site thru google and Im in the hacking process atm.
Takes a while so I will get back to you later with my results.
@Korbin Jerry it did the trick and I actually got access to my account again. I'm so happy!
Thank you so much, you really help me out :D
Thanks for the video! How do you calculate the maximum interest rate so that the deal does not become dillutive? (100% debt)
Calculate the weighted cost of acquisition and compare it to the seller's yield. Use Target Net Income / Purchase Equity Value for the seller's yield. If it's 100% Debt, set that equal to Interest Rate on Debt * (1 - Tax Rate) and solve for the Interest Rate.
@@financialmodeling
Thank you for the clear explanation - it was very helpful!
I had a follow-up question from an interview: how would the maximum interest rate change if the debt were only 50%? I'd appreciate your insight.
Best regards,
Tom
@@Tom-ky8is You can use the same approach but add a term to the equation and use algebra to solve it:
50% * Interest Rate on Debt * (1 - Tax Rate) + 50% * Cost of Other Funding Source = Seller's Yield at Purchase Price
Hi Brian, thanks for a really informative video. Quick question for you in regards to Principle #4: is it fair to say that cash does not go towards equity value because that cash is not exclusive to equity holders (it would be used to pay off debt or preferred stock first)?
Yes, but I wouldn't use that as a reason to explain or understand Principle #4. It's easier just to say that Eq Val-based multiples depend on capital structure, while TEV-based ones are capital structure-neutral (in theory, not in real life).
Hi Brian, thanks a lot, great insights, really helpful for interviews.
I have a question on pro-forma P/E multiple. When buyer pays premium to the seller, in the absence of synergies do you take into account premium when you calculate combined Equity Value and P/E multiple?
Yes. All these questions assume that the premium has already been factored in. That is why the multiples are "Purchase Multiples". If you get numbers without the premium factored in, you should ask and see if there is a premium, and if there is, factor it in.
Thank you for the great video!!! Where can we download the excel file?
Click "More" or "Show More" below the video and scroll to the links.
It seems like whenever the deal is dilutive, the P/E ratio is no longer between the buyer and seller multiples. For example, if you try an all debt deal and increase the interest rate to 20%.
Maybe? You could be right, but I would hesitate to state that in an interview unless you test it under many different cases/conditions because the interviewer could hear something like that and then spend a lot of time trying to find exceptions.
Hi Brian,
Thanks for everything you're doing. You're sort of a messianic figure in the finance world. If I may ask, I have a final round M&A interview coming up at a tech company's in-house team tomorrow. Do you have any tips regarding which topics I should focus on to prepare?
Again, thank you very much for everything!
There is literally nothing I can add at the last minute that would help you. Know your story, be ready to discuss a recent tech M&A deal and a tech company you like, and make sure you can explain why you would fit in with this group specifically. Don't even bother with technical prep at this point since you won't learn anything new. Everything else here is covered in various articles on M&I.
@@financialmodeling Thanks, Brian! Will drill that in, then! I have one hour to prepare ._.
Thanks a lot for the video. Quick Question - In question 5, the deal becomes less accretive when the buyer's is getting bigger in equity size compared to the seller's equity size, but no matter how bigger the buyer's equity is, as long as the buyer's P/E is bigger than the seller's P/E, it will mean that the deal will be accretive, right?
Yes, assuming all the other conditions and simplifying assumptions are true
Thank you so much for this great video. I can't believe it's really detailed. I'm wondering if u can share the excel that you used in the video? Thanks
Click "Show More" and scroll to the bottom under Resources.
@@financialmodeling Got it. Thanks man
Great video, but one question on the EV/EBITDA multiples.
You mention that the combined EV/EBITDA multiples are unaffected by the way the deal is funded (e.g 100% cash, 100% debt or 100% stock), but wouldn't a 100% debt funded takeover leave the combined group with more debt and therefore result in a higher EV/EBITDA multiple?
No. Issuing Debt is equivalent to issuing Stock or using Cash in terms of its impact on the Combined Enterprise Value: It always goes up because either Debt or Equity Value increases (and both of those are positives in the Enterprise Value calculation), or Cash decreases (and Cash is a negative in the Enterprise Value calculation). Set up a simple Excel file and you'll see how it works.
Dear Brian,
Thanks, great video as always!
6min 30; question 2 ; do we agree that it is almost an oversimplification to stipulate that the buyer can issue 6 shares to buy the other company, at 150$, taking into account the initial share price of his company (25$), and no potential decrease of share price after the issue?
I mean, it seems soo "simple" not to take into account other factor / effect of the issue on the price/share, that I have some difficulties following this ; and Wonder what happens in practice in a 100% equity deal
Thx
It's an interview question, of course it is simplified. The point of interview questions is to test whether or not you understand the fundamentals, which 99% of people do not (you should see some of the transcripts from mock interview we've done...). I recommend not over-thinking questions or adding complications unless you are specifically instructed to do so. There are other lessons here covering what might happen to both companies' share prices in real life.
Got an interview question about company A acquiring company B, that has just distributed dividends and how the equity post deal is affected by that. Told that the Equity Value post deal would be the equity value of company A minus dividends, this is correct, and if so why ?
Dividends reduce Equity Value, so yes. See the videos on Equity Value and Enterprise Value and how they change after specific events.
@@financialmodeling I Will see It. But i still have a doubt, if the company's B shareholder value gets vanished in the deal and only Company's A Equity stay after the acquisition, the equity value post acquisiton should only be Company's A Equity, because dividends affects only Company's B Equity that gets vanished anyway
@@flaviohns1 Company B no longer exists as a standalone entity, but its Equity Value does not exactly "disappear" - it simply becomes a part of the acquirer's Equity Value or Enterprise Value. For example, if the acquirer issues stock to do the deal, now its Equity Value increases to reflect the equity purchase price they just paid for Company B. Of course this may change if the market reacts negatively to the news and doesn't like the price, deal terms, etc., but this is the initial assumption.
@@financialmodeling So in this case Equity post Deal = Equity from Company A - Dividends issued by Company B + issued Stocks from Company A
Hey Brian. Great video. I can not see the link to download the excel file.
Click "Show More" and scroll to the bottom.
Hi Brian, great video
I recently came across a DCF for a an acquisition target in which future Growth Capex was not included in the DCF. The reason given was that this is value that the potential buyer will add . Is this a standard assumption in M&A modeling ?
Thanks
That assumption only makes sense if you are also assuming no revenue growth or very limited revenue growth for the company in the standalone projections. Otherwise, CapEx and revenue growth must be linked... or if the company does not depend on hard assets, revenue growth must be linked to other forms of spending such as on employees.
@@financialmodeling Makes sense ! Thanks
Hi. Are all these assuming there is no synergy benefit to merger ?
It depends on the specific question. They may include synergies, or they may ignore them. If you're unsure, ask the interviewer. The basic EPS math questions here based on purchase prices and cash/stock/debt components do not include synergies unless otherwise specified.
Do these sorts of things get asked if you're going into an internship? I feel like I might be going above what I need for SA internships, and in-fact doing work to level of interview for a FTime position. Any advances on that?
Questions on merger models can and do come up in internship interviews. They may not be as complex as the more difficult ones here, but you will 100% be expected to know the basics of a merger model and how different assumptions affect it. You should know the fundamentals of all the core topics (accounting/3 statements, equity value/enterprise value, valuation/DCF, merger models, and LBO models) even for internship interviews. Other topics and more advanced questions on those topics are less important.
Question what could happen if the debt of the target is higher than the cash? and I would please to clarify why cash is presented as negative? thats because need to discount from the EV?
Which of these questions are you referring to? The target having higher Debt than Cash doesn't really affect anything because the true purchase price is still the Enterprise Value, and all the rules about the Combined Enterprise Value are still true. Cash is negative when you move from Equity Value to Enterprise Value.
But, again, I'm not sure I understand which question or topic here you're asking about, so feel free to clarify.
@@financialmodeling Firstly thanks for take the time to answer and also making this free material available on RUclips, I think you do an amazing job of it, and referring to my question is not a specific question per se is more about the Excel merger model interview, also Im rookie in finance so maybe is a really silly question, but under the two statements company A and Company B the current enterprise value is the sum of cash ,total deb, preferred stock and noncontrolling interests, what I feel curious about is why cash is negative and debt is positive? try to understand the logic behind it. Thanks again for the knowledge you share and your time. Blessings.
@@ChristianDG21 Please see: mergersandinquisitions.com/enterprise-value-vs-equity-value/
Are these questions common for internship positions?
Depends completely on how you present yourself and how much you know going into the interview. If you already have multiple internships and claim financial modeling knowledge, sure. If not, the harder questions here are unlikely, but they'll still expect you to know the very basics of M&A deals.
For mba associate intern interviews, should I study all advanced topics in the 400 questions guide? Like for merger too?
You should not even be using that guide because it's out of date and many questions in it are wrong. So... no.
Mergers & Inquisitions / Breaking Into Wall Street thanks for your response. Interesting, I’m at an M7 and this is what we were told to study. Luckily I am reading each of the BIWS chapters as well and haven’t really focused on just the 400 questions guide. But my question is, the chapters also have questions that are split between advanced and more basic. It includes a caveat about only focusing on advanced if not an “entry level interview or if u have years of finance experience”. If I’m interviewing for MBA associate role, should I focus on the advanced topics regardless? And my background isn’t in finance at all
@@pierer5559 If you have purchased our guide, feel free to contact our help desk (breakingintowallstreet.com/biws/contact/) with these questions. If not, then I'm not going to answer detailed product questions on our free RUclips channel.