Category Archives: Investment Banking

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If a company has negative enterprise value, what does that mean?

This means that the company must have more cash than the equity value, debt, and preferred equity combined together. Cash is subtracted from the enterprise value, so the larger cash is, the lower the enterprise value. The company also likely has a suppressed equity value due to negative investor sen...
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What is adjusted funds from operations (AFFO)?

Adjusted Funds From Operations (AFFO) is calculated as: AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts For reference, the formula for Funds from Operations (FFO) is:FFO = net income + depreciation & amortization + property sales losses – proper...
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What is funds from operations (FFO)?

Funds From Operations (FFO) is calculated as: FFO = net income + depreciation & amortization + property sales losses – property sales gains – interest income FFO measures the cash flows generated from a real estate company’s core operations. Unlike net operating income, FFO is leve...
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What is net operating income (NOI)?

Net operating income (NOI) measures the core profitability of real estate properties. It’s calculated as: NOI = revenue generated from property – operating expenses NOI is before any cost of financing (such as debt or mortgage interest expense) as well as income taxes. It focuses only on the...
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Why do we write-down existing goodwill in an LBO?

The write-down of existing goodwill on the balance sheet increases the excess purchase price. Sometimes, a % of the excess purchase price can be allocated to a PP&E and / or intangible asset write-up. In this scenario, it would be important to write-down existing goodwill since it would impact t...
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If you do an LBO with $100M initial equity and exit at $400M equity in 6 years, what is your IRR?

Using rule of 72, we can find the approximate IRR to double an investment for a given # of years. $100M growing to $400M equity in year 6 is similar to $100M doubling to $200M equity in year 3, and then doubling again to $400M in year 6. So by finding out what IRR is […]...
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If multiple of capital is currently 2.5x, roughly how much does a 0.1x change in multiple of capital impact IRR? Assume a 5 year hold period.

A 0.1x change on a 2.5 multiple of capital is effectively a 4% change in multiple of capital, since 0.1 / 2.5 = 1 / 25 = 4%. Therefore, a 4% change in return corresponds to roughly a 4% change in IRR. With a 5 year hold, a 2.5x multiple of capital is equivalent to […]...
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In a private equity deal with co-investors, how can you reward the GP for sourcing the deal and improving the operations of the company?

In a private equity deal with co-investors, the GP (General Partner) sources the deal and operates the company while the LPs (Limited Partners) co-invest in the deal by providing a portion of the initial equity investment. Since the GP has sourced the deal, performed the majority of the deal diligen...
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Walk me through your resume / tell me about yourself. (Equity Research / Hedge Fund)

Hedge funds and equity research – both buy side and sell side – are looking for candidates who are truly passionate about investing. Ideally, investing in stocks and following the market is what makes the successful candidate tick. To tell this story, make sure to begin from where you st...
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How would I find the interest rate on a revolver in a PE deal for a small, niche manufacturing company? Assume this is a pitch, and that there are no public comps available.

Since this is for a pitch and not for a live deal, we cannot simply ask the bank lender. Since there are no public comps, we should look at past LBO deals in a similar sector and see what the past revolver spread was. For example, we can find the average revolver spread over 3-month […]...
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