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Happy Wednesday, future bankers!

Hope everyone is doing well! Today we’re covering how to value a private company, what interests you in investment banking, and Jerome Powell’s recent comments that interest rate cuts will likely happen this year.

🚀 Let’s get into it.

🔢 Technical Question

How would you go about valuing a private company?

Valuing a private company is a complex process and can be approached in several ways. Here’s a general approach you might take:

1. Comparable Companies Analysis: Identify a set of comparable publicly traded companies and calculate valuation multiples such as Price/Earnings (P/E), Enterprise Value/EBITDA, and Price/Sales. Apply these multiples to the private company’s financials to estimate its value. In this instance, you may consider adding a discount to the total value that you calculate (maybe 10-15%) due to the illiquidity of a private company.

2. Precedent Transactions Analysis: Look at recent transactions involving similar companies in the same industry. Calculate the valuation multiples from these transactions and apply them to the private company.

3. Discounted Cash Flow (DCF) Analysis: Project the company’s free cash flows into the future and discount them back to present value using an appropriate discount rate (usually the company’s Weighted Average Cost of Capital, or WACC). The sum of these discounted cash flows plus the terminal value (the value of the company at the end of the projection period) gives the estimated enterprise value of the company. This method can be particularly difficult for private companies because they don’t have a market capitalization or a beta. In this instance, you’d likely have to estimate the private company’s WACC based on those of public, comparable companies.

4. Net Asset Value: If the company is asset-heavy (like a real estate or manufacturing company), you might value it based on the value of its net assets.

5. Cost Approach: This method considers the cost to recreate the company from scratch, taking into account both tangible and intangible assets.

Remember, each method has its strengths and weaknesses, and the choice of method depends on the nature of the business, the availability of information, and the purpose of the valuation. It’s often best to use a combination of methods to arrive at a range of values. This gives a more holistic view of the company’s value and accounts for different market scenarios.

Also, it’s important to note that valuing a private company often involves more uncertainty and subjectivity than valuing a public company due to the lack of publicly available information. Therefore, it’s crucial to clearly state your assumptions and to be prepared to defend them.

Finally, always keep in mind that the value of a company is ultimately determined by what someone is willing to pay for it. This is especially true in the case of private companies where market prices are not readily available.

🗣 Behavioral Question

What is it about investment banking that interests you?

It’s important to be genuine and specific. Here are some best practices:

Show Your Understanding of the Field: Demonstrate that you understand what investment banking is and what the job entails. This could include mentioning aspects such as financial modeling, mergers and acquisitions, capital raising, and due diligence.

Connect to Your Interests and Skills: Explain how your interests and skills align with the work in investment banking. For example, if you enjoy problem-solving and have strong analytical skills, you might talk about how these would help you excel in creating financial models.

Discuss the Learning Opportunities: Investment banking is known for its steep learning curve. You might express excitement about the opportunity to learn a lot quickly, and about being able to work on significant transactions early in your career.

Talk About the Impact: Investment bankers play a crucial role in helping companies grow and succeed. If this aspect appeals to you, it could be worth mentioning.

Mention the Fast-Paced Environment: The fast-paced, high-stakes nature of investment banking is something that many people find exciting. If you thrive in such environments, this could be a good point to bring up.

🗞 Industry News

📈 Rate Cuts Likely This Year

During his testimony before the House Financial Services Committee, Federal Reserve Chair Jerome Powell took lawmakers through a rollercoaster of economic topics, from interest rates to bank regulations. Powell hinted at the possibility of interest rate cuts in 2024, but made it clear he's not hitting the panic button just yet, preferring to wait for more data before making any sudden moves. In his characteristic cautious manner, he emphasized the importance of taking time to get things right.

When it came to bank regulations, Powell showed a willingness to shake things up with a proposed rule requiring banks to beef up their capital reserves. Dubbed the Basel III endgame, this proposal has raised eyebrows and tempers among politicians and bankers alike. Powell, however, remained unfazed, stressing that quality trumps speed in this game. He hinted that if the proposed changes don't hit the mark, he's not afraid to hit the reset button and try again. Powell's testimony showcased the delicate dance between financial stability and regulatory finesse.

Read more about this story below.

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Thanks for tuning in today! Best of luck to everyone working through recruiting right now. If you sign an offer, reply to this email and let us know about it! Like seriously, do it—we’d love to hear about it!