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Happy Saturday, future bankers!

Congrats on officially making it to the weekend. Hope that recruiting has been going well for everyone! Today we’re going to be comparing LBOs and DCFs, talking about where you see yourself over the next decade, and Sam Altman’s ambitious idea to raise $7 trillion.

🚀 Let’s get into it.

🔢 Technical Question

“Which valuation method would give you a lower valuation? An LBO or a DCF?”

Here's how you can offer a nuanced and insightful answer:

1. Context matters:

• Briefly acknowledge that both methods have their limitations and the "correct" choice depends on the context. Factors like industry, financing constraints, and growth potential can influence the final valuation.

2. LBO nuances:

• While LBOs typically result in lower valuations, emphasize that it's due to explicitly prioritizing debt repayment and limited consideration of intermediate cash flows.

• Briefly mention how LBOs heavily discount future cash flows to account for the debt burden, leading to a lower present value.

3. DCF considerations:

• Reiterate that DCF incorporates all future cash flows, leading to a potentially higher valuation.

• Briefly mention the impact of the discount rate on DCF results: a higher discount rate leads to a lower present value.

4. Beyond the basics:

• Briefly mention additional valuation methods (e.g., comparable company analysis) that might be relevant depending on the context.

• Briefly touch upon synergy considerations: LBOs often factor in potential synergies due to mergers or acquisitions, which can influence valuation.

5. Conclusion:

• Summarize by stating that understanding the specific circumstances and limitations of each method is crucial for choosing the most appropriate one.

• Briefly reiterate your confidence in applying both methods for informed valuation decisions.

Example:

"While technically either method could yield a lower valuation, LBOs often result in lower values due to their focus on debt repayment and discounting future cash flows heavily. Conversely, DCFs consider all cash flows, potentially leading to higher valuations depending on the discount rate. However, context matters! Industry, financing constraints, and growth potential can influence the choice. Additionally, comparable company analysis or synergy considerations might be relevant in specific situations. Ultimately, understanding the limitations and nuances of each method is key.”

🗣 Behavioral Question

"Where do you see yourself in 10 years?"

Key Principles to keep in mind:

• Honesty & Transparency: Be upfront about your eventual goals, but show commitment to the current opportunity.

• Relevance & Connection: Emphasize how investment banking skills translate to your desired future and how learning from the company benefits you.

• Realistic Expectations: Acknowledge the effort and learning required for your long-term goal.

• Present Focus: Demonstrate strong interest and value for the current internship.

Example Response:

"In ten years, I aspire to be actively involved in investment research and analysis, ideally within a hedge fund environment. However, I firmly believe that a foundation in core financial skills will be crucial. Working in investment banking at your firm presents an opportunity to develop my analytical and modeling capabilities, learn firsthand about deal execution, and gain exposure to diverse industries.

While my long-term vision is ambitious, I recognize the time and dedication required to achieve it. I'm looking forward to actively seeking mentorship from experienced professionals within the industry, and continuously updating my knowledge to stay ahead of the curve.

Right now, my focus is on maximizing the value of this internship and immersing myself in the learning experience offered by your team. I'm confident that the skills and insights gained here will be invaluable assets in my future endeavors, regardless of the specific path I choose. This internship represents an exciting stepping stone on my journey, and I'm eager to contribute meaningfully to your team while laying the groundwork for my long-term aspirations."

🗞 Industry News

Think Really Big, $7 Trillion Big 🤯

OpenAI CEO Sam Altman is on a mission to revamp the global semiconductor industry, aiming to address the supply-and-demand issue with AI chips that has hindered OpenAI's growth. Altman is reportedly in discussions with potential investors, including the government of the United Arab Emirates, to raise trillions of dollars for a project that would expand global chip-building capacity. The exact amount needed, estimated between $5 trillion and $7 trillion, remains unconfirmed, but Altman believes such an endeavor is crucial for economic competitiveness and to meet the increasing demand for AI infrastructure.

This initiative comes amidst previous controversies surrounding Altman's chip ventures and investments, including his involvement in Rain Neuromorphics, an AI chip startup. Altman's efforts to compete with industry giant Nvidia, which controls about 80% of the AI chip market, reflect a broader aim to diversify and expand the market. OpenAI's strategic moves, such as the launch of ChatGPT, have proven successful in gaining traction and attracting millions of users, positioning the company as a major player in the AI landscape.

Despite internal and external challenges, including Altman's temporary ouster as CEO and subsequent reinstatement, OpenAI is forging ahead with its ambitious goals. With a newly structured board and support from investors like Microsoft, the company is poised to continue its efforts to innovate and shape the future of AI technology.

Read more about this story below.