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Happy Friday, future bankers!

Hope everyone is doing well! Today we’ll be going over terminal value exit multiples, discussing how you deal with stress, and whether or not the AI bubble has popped.

🚀 Let’s get into it.

🔢 Technical Question

“How do you go about selecting an exit multiple when calculating the terminal value for a company?”

When selecting an exit multiple for calculating the terminal value of a company, you should consider the following factors:

1. Comparable Company Multiples: Look at the multiples of similar companies in the market to gauge what a reasonable exit multiple might be for the company in question.

2. Industry Average Multiples: Analyzing the industry’s average multiple can provide a broader context and guide you towards an appropriate exit multiple.

3. Business Dynamics: The exit multiple should reflect the expected business dynamics at the end of the explicit forecast period, not at the valuation date.

4. Financial Metrics: The value of the business is obtained by multiplying financial metrics such as EBITDA or EBIT by a factor obtained from comparable companies that were recently acquired.

5. Market Conditions: Current and projected market conditions can also influence the selection of an exit multiple.

Remember, the most commonly used multiples are EV/EBITDA, EV/Revenue, and EV/EBIT. These provide a direct relationship between enterprise value and the profits of the company, which can be standardized in most cases. The selected multiple is then multiplied by the projected EBIT, EBITDA, or revenue in the final year of the projection period to give the future value. This future value, also known as the terminal value, is then discounted back using the company’s Weighted Average Cost of Capital.

🗣 Behavioral Question

"How do you cope with stress and pressure in a fast-paced environment?"

Here are some best practices to follow when responding to this question:

1. Provide Specific Examples: Discuss specific instances where you’ve successfully managed stress in your past experiences. This could be during your studies, previous internships, or even extracurricular activities.

2. Highlight Your Stress Management Techniques: Whether it’s through time management, prioritization, meditation, or regular exercise, mention what works for you. This shows that you have a system in place to handle stress.

3. Show Your Understanding of the Role: Acknowledge that high-pressure situations are part and parcel of the investment banking industry. This shows that you understand the demands of the role.

4. Focus on Your Growth Mindset: Stressful situations are often opportunities for learning and growth. Highlight how these situations have helped you grow professionally.

5. Demonstrate Your Resilience: Provide examples that show your ability to bounce back from challenging situations. Resilience is a valuable trait in fast-paced environments.

Example Response:

“In my current role as a member of my college’s basketball team, I frequently find myself in high-pressure situations, whether it’s during a crucial game or balancing my academic responsibilities with my athletic commitments. I’ve found that maintaining a disciplined routine, including regular exercise and adequate rest, helps me manage stress effectively. I also use mindfulness techniques to stay focused during high-pressure moments in games, which I believe will be beneficial in a fast-paced investment banking environment.

I understand that the industry is fast-paced and demanding, and I view these challenges as opportunities for growth. For instance, being part of a team that made it to the conference championships taught me the value of resilience and hard work. I believe these experiences have equipped me well to thrive in stressful situations and will enable me to contribute effectively in an investment banking role.”

🗞 Industry News

Has the AI Bubble Popped? 🫧

The discussion surrounding artificial intelligence seems to be undergoing a normalization phase, as indicated by a decrease in mentions of AI-related terms on company earnings calls over the past two quarters. Data compiled by Bloomberg and Apollo chief economist Torsten Sløk revealed a decline in mentions from 517 instances in Q4 2023 to only 198 in Q1 2024. This decline raises questions about whether AI is truly revolutionary or merely a continuation of the technological trends that began in the 1990s, according to Sløk.

The surge in AI mentions occurred in late 2022 and peaked in the third quarter of 2023, coinciding with significant developments such as the launch of OpenAI's ChatGPT and Microsoft's deal with Bing. However, the hype seems to have cooled off since then, even as major tech companies like Microsoft and Google continued to invest in and profit from AI technologies. Nvidia, in particular, experienced significant growth attributed to its investments in AI, reporting a 206% year-over-year increase in revenue driven by its data center segment.

Despite the decline in mentions, analysts recognize that AI remains a significant focus for major tech companies, with its potential impact on various industries. As AI becomes more integrated into everyday technologies and business strategies, the question persists as to whether it represents a genuine game-changing advancement or merely a continuation of ongoing technological evolution in the internet age.

Read more about this story below.

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