⏱ Reading Time: 3 Minutes 21 Seconds

Happy Monday, future bankers!

Today we’re going to be going over valuing unprofitable companies, tactics for describing your experiences working with teams, and talking about Reddit’s upcoming IPO.

Hope that everyone has had a great start to their week!

🚀 Let’s get into it.

🔢 Technical Question

“You are tasked with valuing a fast-growing software company using the Discounted Cash Flow (DCF) method. The company has limited operating history and is not yet profitable. What approach would you take to estimate the free cash flows for the DCF analysis?”

Estimating free cash flows for a young, non-profitable company requires careful consideration and adjustments. Here's a possible, 10-step, approach that you could take for answering the question:

1. Start with historical data:

• If available, analyze historical operating cash flow statements to understand trends in revenue, expenses, and investments.

2. Project future financials:

• Utilize analyst reports, industry benchmarks, and management guidance to forecast future revenue growth, operating expenses (including depreciation and amortization), and capital expenditures. Consider different growth scenarios (optimistic, base case, pessimistic) to account for uncertainty.

3. Adjust for non-cash items:

• Add back depreciation and amortization to operating cash flow, as they are non-cash expenses.

• Subtract any one-time expenses or gains that won't recur in the future.

4. Consider working capital changes:

• Account for changes in working capital (accounts receivable, inventory, accounts payable) as they impact cash flow. This might involve analyzing historical trends or using industry benchmarks.

5. Calculate free cash flow:

• Subtract capital expenditures from the adjusted operating cash flow to arrive at the Free Cash Flow to the Firm (FCFF).

• Alternatively, calculate Free Cash Flow to Equity (FCFE) by further subtracting interest expense and adjusting for taxes.

6. Apply a discount rate:

• Choose an appropriate discount rate that reflects the company's risk profile and market conditions. This could involve using the Capital Asset Pricing Model (CAPM) or other valuation methodologies.

7. Discount future cash flows:

• Use the chosen discount rate to discount each year's projected free cash flow back to its present value.

8. Calculate terminal value:

• Determine the company's terminal value, representing its value beyond the explicit forecast period. This can be done using perpetuity growth models or comparable company multiples.

9. Sum present values:

• Add the present value of all projected free cash flows and the terminal value to arrive at the company's enterprise value.

10. Adjust for debt:

• If the company has debt, subtract the present value of its debt from the enterprise value to arrive at the equity value.

🗣 Behavioral Question

"Tell me about a time you worked effectively on a team project, even when faced with challenges or disagreements. Did you take any initiative to improve the outcome?"

Answering Strategy:

• Focus on a specific example: Describe a real-life situation where you collaborated with others on a project, highlighting your contribution to the team's success.

• Demonstrate teamwork skills: Emphasize your communication, collaboration, and conflict resolution abilities. Mention how you actively listened to different perspectives and valued diverse strengths.

• Showcase initiative: Highlight an instance where you went beyond your assigned role, identified a problem, and proactively took steps to address it.

• Quantify your impact: If possible, showcase the positive outcome of your teamwork and initiative with concrete results or achievements.

Example Response:

"During my finance club's fundraising event, our team was tasked with managing social media marketing. While initial ideas were diverse, some disagreements arose on the content strategy. I actively listened to everyone's perspectives and facilitated discussions to find common ground. A few of the team members thought that it would be enough to post on our club socials. However, recognizing the need for a more personalized approach, I proposed an initiative to do one-on-one direct outreach from club members to relevant alumni. The team agreed, and I took the initiative to create these elements, leading to a 20% increase in alumni attendance and ultimately exceeding our fundraising target by 15%. This experience taught me the importance of open communication, adapting to diverse ideas, and taking initiative to achieve collaborative success."

Remember:

• Be honest and genuine in your response.

• Tailor your answer to the specific skills and qualities sought by the interviewer.

• Keep your response concise and focused on the key points.

• Show enthusiasm and passion for teamwork and problem-solving.

By following these tips and using the STAR method (Situation, Task, Action, Result), you can effectively answer behavioral questions in your investment banking interview and make a positive impression on the interviewer.

🗞 Industry News

Reddit Preps for IPO with over $800M of Revenue 💵

Social media giant Reddit saw over 20% revenue growth in 2023, reaching $800 million, as it gears up for a highly anticipated IPO this year. Despite not yet achieving full-year profitability, the company generated a quarterly profit in 2023 and reportedly eyes a $5 billion valuation.

This potential listing is closely watched as a test of the recovering IPO market after a two-year slump. Reddit is expected to file its public offering documents this month and may begin marketing its NYSE IPO as early as March. With 16 major banks involved, including Morgan Stanley and Goldman Sachs, Reddit could be among the first big tech IPOs of 2024.

Founded in 2005, Reddit boasts over 70 million daily active users and gained notoriety during the "meme-stock" era due to its popular WallStreetBets forum. Now, with strong revenue growth and an upcoming IPO, Reddit aims to capitalize on renewed investor interest in the tech sector.

Read more about this story below.