As a CS student who will never go into investment banking and is just watching this for the fun of it, mad respect to all of you finance/IB guys out there. This stuff sounds complicated as hell.
I'm a medical student who did finance before this. This stuff is NOT complicated. It's just a method based on our understanding which this guy does REALLY good job of explaining. You can teach it to anyone because there is so little background knowledge you need.
I take both finance and cs classes, here is how I describe them. CS concepts are hard to understand, but once you really understand them, and if you are a good coder, then it is easy to implement them. Finance concepts aren't that hard to understand, but you deal with tons of edge cases and unique situations.
This was a useful video, but you also left out that the main problem with WACC is that it assumes a constant cost of debt and cost of equity over the course of the investment, which is rarely ever the case.
Lol an unexpected update: didn't get the job, realized I wanted something different, now taking an exchange semester at art school in Europe and looving every second of it! I'm still completing my finance degree but don't think I'll go into the field. :)
Hey, I’m a senior auditor at a big 4 public accounting firm. I’m inexperienced in finance but have begun prep as I would like to apply for investment banking analyst roles. Have you seen any/many people breaking into such roles from this background? I’d expect a 1st year analyst role, and while I’ll lack finance knowledge compared to some I’ll come in with an accounting knowledge and 3 years of built up professional maturity. Thanks for your time!
Hey Luke, in short Yes I have seen a few auditors and consultants break into Investment Banking. Expect to get grilled on why you are now switching roles and your technical knowledge. Most people in your situations would consider doing an MBA and apply for the Associate role because you might be too old for a first year Analyst role. Check out my week in the life of an Analyst if you are still interested in becoming an Analyst ➡️ruclips.net/video/hDE3Q0TMoIE/видео.html
@@naasirramjaun6414 what , too old for a role as financial analyst or investment banking. I m screwed than even more . I"ve done Mineral economics and had bunch of financial analysis classes, but in Suriname the market is too small for people with tis background. now im 46 .. and returnng to financial analysis
Excellent video, found it very informative and useful. Can you please also make a video about private equity and what kind of question an interviewee get asked? I’m an ACCA affiliate and looking forward to start my career in any one of these fields. Thank you.
@@mickbibi Because money is more like a production factor to banks than it actually is the residual of their performance. A bank can lend money for basically zero costs at the respective central banks,. This makes the CF statement actually useless for valuation purposes.
Aren't you supposed to always get a lower number for the EV if you don't use the mid-year discount period, as you will use a higher discount factor than you would otherwise? ( in the video you say that you will generally get a higher number)
Why would it be better to project FCFs shorter out? You said that would be more accurate but shouldn't you do it 15-20 years out into the future for more data points or until a stable growth rate is reached? Great video, using it to prep for current recruiting.
3:08 this approach is wrong if you seek an intrinsic valuation - you are mixing relative and intrinsic valuation together. Not sure why this is such a popular approach when it’s clearly wrong.
@@HarryMcGuire1738 about TV calculation based on market multiples which contradicts with the concept of intrinsic valuation method. This way 2/3 of your company value will be based on multiple valuation and only 1/3 on FCF.
I think the assumption is that you operate this company for 5 years and at the end you sell if off to another investor who would value the firm using a multiple approach?
I m working as Business Analyst for one of investment banking client but into alternative investments. This role mostly falls into operations and IT of wealth management. I am from MBA finance background. How do I get into M&A role of an investment bank? I have never received any calls for such position.
Thanks for the video! Got a bit lost with the stub period and mid-year discounting period portion. The DCF assumes that you have a full year to collect the cash flow and that you collect the cash flow on December 31, so are these 2 things just fixing for those assumptions? Assuming the answer is yes, what is the difference between the 2 concepts, then?
The stub period is only for the 1st year of projected CF , while the mid-year discounting period portion applies for the rest of the projected CF. For example, if the current year is 2021 and we wish to work out the net present value of the cash flow in 2025 with a discount rate of 10% and an estimated cash flow of $1000 per year, the process would be as follows: 2025 is the 4th year in the future The general formula would be 1000 / 1.1^4 = $683 This method assumes all the cash for 2025 comes in on the 31st December 2025 whereas in reality, it comes in throughout the year . Therefore we use a mid-year discount to say that that cash flow will come in, on average, in 3.5 years time (and not in 4 full years) Cash Flow / (1+Discount Rate)^((Year-Current Year)-0.5) The new formula is 1000 / 1.1^3.5 = $716 Hope that helps...
@@Missquichante Hey thanks for looking. For your first formula, I'm confused where exactly the stub period comes in. If it was July 1st 2021, and we started in January 1 2021, would you have said 1.1^.5? Because it seems like you just have ^4 which is what you would have done in normal circumstances. Thank you. For second formula, are you assuming you're collecting it in 3.5 years time on average, but not necessarily on July 1st 2024? So is stub period is an exact time period for less than one year, while midyear discount is an average time period based on more than one year?
@@philliphochman1654 The first formula I wrote isn’t for the stub period but for the rest of the projection (=for the 4 remaining years, if we use the example I used), hence ^4 For second formula (^3.5) as per its name, “mid-year discount”, you’ll get 0,5, because in reality the money will come throughout the year
Dear Friends, I have confused between company valuation and capital budgeting use DCF method: 1/ With company valuation by DCF method, I use Free Cash Flow and discount rate (ex: WACC) evaluate?. 2/ With Capital Budgeting by DCF method, I use Operating Cash Flow and discount rate (ex: WACC) evaluate?.
The fact that you have to know all of this for an interview BEFORE a job is stupid - like all these things can be taught on a job, why expect candidates to know it before even working in IB..
Hi Naasir, quick question on the stub period and mid yr period. for stub period, do we discount the cash flow in half as well, if it was july or just the period (t variable), e.g. fcf 1=100, if its july then 50^0.5, or 100^0.5? and for mid yr period t value goes up by 0.5, yr 1 = 0.5, yr 2 = 1 yr3 = 1.5? new subscriber, love your videos.
As a CS student who will never go into investment banking and is just watching this for the fun of it, mad respect to all of you finance/IB guys out there. This stuff sounds complicated as hell.
I'm a medical student who did finance before this. This stuff is NOT complicated. It's just a method based on our understanding which this guy does REALLY good job of explaining. You can teach it to anyone because there is so little background knowledge you need.
I take both finance and cs classes, here is how I describe them. CS concepts are hard to understand, but once you really understand them, and if you are a good coder, then it is easy to implement them. Finance concepts aren't that hard to understand, but you deal with tons of edge cases and unique situations.
Can you make me a flying carpet? Just sayin.
It's not that complicated but will seem like it if you have no desire to learn it and in general don't care about Business
Please don't inflate bankers' egos any more than they already are lol they're somehow worse than lawyers
This was a useful video, but you also left out that the main problem with WACC is that it assumes a constant cost of debt and cost of equity over the course of the investment, which is rarely ever the case.
Thats why you can be conservative and change the numbers to what you think they should be, its better to have a margin of safety
Please make a video of those 20-30 follow-up questions.
Has he Done ut?
I have an interview in 2 days and retained nothing during my finance classes...you sir are a lifesaver
Did you get the job?
Update?
Lol an unexpected update: didn't get the job, realized I wanted something different, now taking an exchange semester at art school in Europe and looving every second of it! I'm still completing my finance degree but don't think I'll go into the field. :)
@@user-ln2eq8vg7u ah damn😭 hope you make it to what u want to do now 👍
This topic is very interesting. I’ve been enjoying your videos....a pure gold mine!
Great stuff! Can you send us the link to an actual unlevered/levered DCF model?
Keep up the great work. Very informative videos from what I've seen.
I’m in business school just getting prepared:) Thankyou
So I’m supposed to regurgitate all this during an interview? Okayyyyyy
Hey, I’m a senior auditor at a big 4 public accounting firm. I’m inexperienced in finance but have begun prep as I would like to apply for investment banking analyst roles. Have you seen any/many people breaking into such roles from this background? I’d expect a 1st year analyst role, and while I’ll lack finance knowledge compared to some I’ll come in with an accounting knowledge and 3 years of built up professional maturity. Thanks for your time!
Hey Luke, in short Yes I have seen a few auditors and consultants break into Investment Banking. Expect to get grilled on why you are now switching roles and your technical knowledge. Most people in your situations would consider doing an MBA and apply for the Associate role because you might be too old for a first year Analyst role. Check out my week in the life of an Analyst if you are still interested in becoming an Analyst ➡️ruclips.net/video/hDE3Q0TMoIE/видео.html
@@naasirramjaun6414 what , too old for a role as financial analyst or investment banking. I m screwed than even more . I"ve done Mineral economics and had bunch of financial analysis classes, but in Suriname the market is too small for people with tis background. now im 46 .. and returnng to financial analysis
@@throopasahdew2477 fuck what ever anyone else says, you do it bro chase your dreams
Just to clarify when you say adjust for the mid-year in subsequent years does that mean you'll go to the power of .5, 1.5, 2.5, and so on?
Excellent video, found it very informative and useful.
Can you please also make a video about private equity and what kind of question an interviewee get asked?
I’m an ACCA affiliate and looking forward to start my career in any one of these fields.
Thank you.
Can you give an example and do it on an actual company (I.g USBank)
You are not using DCFs when valuing banks but DDV approaches
@@sebhub8632 why
@@mickbibi Because money is more like a production factor to banks than it actually is the residual of their performance. A bank can lend money for basically zero costs at the respective central banks,. This makes the CF statement actually useless for valuation purposes.
Really appreciate this video！
You are very good at explaining, keep going!
Aren't you supposed to always get a lower number for the EV if you don't use the mid-year discount period, as you will use a higher discount factor than you would otherwise? ( in the video you say that you will generally get a higher number)
Why would it be better to project FCFs shorter out? You said that would be more accurate but shouldn't you do it 15-20 years out into the future for more data points or until a stable growth rate is reached? Great video, using it to prep for current recruiting.
But you don't have all those data points, you can't assume the same growth rate for 15 years ahead, there's already enough assumptions in a dcf
super clear! Thanks, mate!
The best explanation :)
3:08 this approach is wrong if you seek an intrinsic valuation - you are mixing relative and intrinsic valuation together. Not sure why this is such a popular approach when it’s clearly wrong.
What are you talking about??
@@HarryMcGuire1738 about TV calculation based on market multiples which contradicts with the concept of intrinsic valuation method. This way 2/3 of your company value will be based on multiple valuation and only 1/3 on FCF.
@@VV-bd2pg Awesome explanation. Thank you.
I think the assumption is that you operate this company for 5 years and at the end you sell if off to another investor who would value the firm using a multiple approach?
Very complicated explanation
We can directly use XNPV function rather then doing all this
I m working as Business Analyst for one of investment banking client but into alternative investments. This role mostly falls into operations and IT of wealth management. I am from MBA finance background. How do I get into M&A role of an investment bank? I have never received any calls for such position.
Thanks for the video! Got a bit lost with the stub period and mid-year discounting period portion. The DCF assumes that you have a full year to collect the cash flow and that you collect the cash flow on December 31, so are these 2 things just fixing for those assumptions? Assuming the answer is yes, what is the difference between the 2 concepts, then?
The stub period is only for the 1st year of projected CF , while the mid-year discounting period portion applies for the rest of the projected CF.
For example, if the current year is 2021 and we wish to work out the net present value of the cash flow in 2025 with a discount rate of 10% and an estimated cash flow of $1000 per year, the process would be as follows:
2025 is the 4th year in the future
The general formula would be 1000 / 1.1^4 = $683
This method assumes all the cash for 2025 comes in on the 31st December 2025 whereas in reality, it comes in throughout the year
.
Therefore we use a mid-year discount to say that that cash flow will come in, on average, in 3.5 years time
(and not in 4 full years) Cash Flow / (1+Discount Rate)^((Year-Current Year)-0.5)
The new formula is 1000 / 1.1^3.5 = $716
Hope that helps...
@@Missquichante Hey thanks for looking. For your first formula, I'm confused where exactly the stub period comes in. If it was July 1st 2021, and we started in January 1 2021, would you have said 1.1^.5? Because it seems like you just have ^4 which is what you would have done in normal circumstances. Thank you.
For second formula, are you assuming you're collecting it in 3.5 years time on average, but not necessarily on July 1st 2024? So is stub period is an exact time period for less than one year, while midyear discount is an average time period based on more than one year?
@@philliphochman1654 The first formula I wrote isn’t for the stub period but for the rest of the projection (=for the 4 remaining years, if we use the example I used), hence ^4
For second formula (^3.5) as per its name, “mid-year discount”, you’ll get 0,5, because in reality the money will come throughout the year
Dear Friends, I have confused between company valuation and capital budgeting use DCF method:
1/ With company valuation by DCF method, I use Free Cash Flow and discount rate (ex: WACC) evaluate?.
2/ With Capital Budgeting by DCF method, I use Operating Cash Flow and discount rate (ex: WACC) evaluate?.
Thank you so much!
Do you discount the terminal value back to year one also? If so by what power?
The fact that you have to know all of this for an interview BEFORE a job is stupid - like all these things can be taught on a job, why expect candidates to know it before even working in IB..
to save time
Valuable video, thank you!
Buffet says depreciation a real expense so leave it in
this would have been better if you show examples. throwing up a bunch of different formulas doesn't help with learning the process.
Please make more interviews Q&A
What happens to the non operating assets of the company like land , office building , investments etc ? these should be added to DCF value ?
these are non-current assets..
Please invest in a new camera and microphone for visual and sound clarity
Get Access to our Free Members Area - Resumes, Cover letter, Interview Questions, Guides...: goo.gl/4G1W9e
Accent 🔥🔥
Can anyone recommend a textbook that goes over all of this?
Check CFI course
But then how do you discount the terminal value?
(1+WACC)^n
Hi, Is the course available on udemy?
Wow brilliant
Hi Naasir,
quick question on the stub period and mid yr period.
for stub period, do we discount the cash flow in half as well, if it was july or just the period (t variable), e.g. fcf 1=100, if its july then 50^0.5, or 100^0.5?
and for mid yr period t value goes up by 0.5, yr 1 = 0.5, yr 2 = 1 yr3 = 1.5?
new subscriber, love your videos.
This is simple math
4:09 that's a c r a z y thing to say
great!
your video is full of knowledgeble but Your speaking destroys every thing please speak normally that i grasp what u are saying
Ily
CFA baby
Lol there's no way they're asking these stupid questions