Cover image for Investment Banking For Dummies

Investment Banking For Dummies

Author Robert R. Johnson , Matthew Krantz
Release Date: 2014/02/01
ISBN: 9781118615881
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Book Description

Enrich your career with a review of investment banking basics

One of the most lucrative fields in business, investment banking frequently perplexes even banking professionals working within its complex laws. Investment Banking For Dummies remedies common misconceptions with a straightforward assessment of banking fundamentals. Written by experts in stock market proceedings, this book runs parallel to an introductory course in investment banking. It clearly outlines strategies for risk management, key investment banking operations, the latest information on competition and government regulations, and relationships between leveraged buyout funds, hedge funds, and corporate and institutional clients. With this reference, you can ace investment banking courses and grasp the radical changes that have revamped the stock market since the financial crisis.

  • Thoroughly addresses the dramatic financial changes that have occurred in recent years

  • Outlines expectations to prepare you for the future

  • Teaches the practical aspects of finance and investment banking, how to value a company, and how to construct a financial model

No serious business student or banking professional should be without the basic knowledge of issuing bonds, stocks, and other financial products outlined in this excellent resource.

Table of Contents

  1. Introduction
    1. Introduction
      1. About This Book
      2. Foolish Assumptions
      3. Icons Used in This Book
      4. Beyond the Book
      5. Where to Go from Here
    2. Part I: Getting Started with Investment Banking
      1. Chapter 1: Introducing Investment Banking
        1. What Investment Banking Is
          1. The role investment banking plays
          2. How investment banking differs from traditional banking
          3. The services investment banks provide
          4. How investment banks are organized
          5. The current lay of the investment banking land
          6. Types of investment banking operations
          7. How investment banks get paid
        2. How Investment Banking Is Done
          1. Finding the financial statements
          2. Understanding the importance of financial statements and ratios
          3. Zeroing in on past transactions
          4. Seeing the value of fixed income
        3. Turning Into an Investment Banking Pro
          1. Putting the discounted cash flow analysis to work
          2. Seeing how leverage becomes a force in investment banking
          3. Pinpointing buyout targets
        4. Putting Investment Banking to Work
          1. Staying in compliance with the rules
          2. Looking beyond the published financial statements
          3. Making adjustments to financial statements for comparability
      2. Chapter 2: The Purpose of Investment Banking: What Investment Bankers Do
        1. Putting the For-Sale Sign on Corporate America
          1. Mergers and acquisitions
          2. Leveraged buyouts
          3. Private business sales
          4. Initial public offerings
        2. Helping Investors Decide Whether to Buy or Sell
          1. The importance of research
          2. What do the analysts do?
        3. Digging Into the Role of the Trading Desk
          1. Why investment banks are into trading
          2. How investment banks turn pennies into billions
          3. The type of analysis used in trading operations
      3. Chapter 3: How Investment Bankers Sell Companies
        1. Getting Companies Ready for Sale on Public Markets
          1. Meeting the requirements to make an IPO happen
          2. Writing the prospectus
          3. Supporting the IPO: Making success last
        2. Seeing What Sell-Side Analysts Do
          1. The goals of the sell-side analyst
          2. What investors look to sell-side analysts for
          3. Spreading the word: Disseminating sell-side research
        3. Examining a Sample Research Report
          1. What to look for in the document
          2. The main sections of a research report
          3. Ways to look beyond the “buy” or “sell”
      4. Chapter 4: How Investment Banking Is Used in Mergers and Acquisitions
        1. Come Here Often? The Basics of Mergers and Acquisitions
          1. Kinds of mergers
          2. Why companies merge instead of simply growing organically
          3. Firms that make attractive acquisition targets
          4. How companies identify firms to merge with
          5. The nature of the merger: Friendly or hostile?
        2. Tools Used to Analyze the M&A Deal
          1. The role of the buy-side M&A advisor
          2. The role of the sell-side M&A advisor
        3. Why Many M&A Deals Go Wrong
          1. Misplaced incentives
          2. Faulty analysis
          3. Overstated synergies
          4. Culture wars
          5. The winner's curse: Overpaying
      5. Chapter 5: How Investment Banking Is Used in Leveraged Buyouts
        1. In This Corner: Introducing the Players
          1. Investment banks
          2. Big institutions
          3. Management
          4. Stock and bond investors
        2. Aiming for the Right Targets in a Leveraged Buyout
          1. Identifying companies that can work in a leveraged buyout
          2. Appreciating the power of cash flow
          3. Coming to terms with the return analysis: Internal rate of return
        3. Finding the Exit
          1. Setting a target for exit in time
          2. Considering how the exit will happen
    3. Part II: Digging In: Performing Investment Banking
      1. Chapter 6: Finding the Data: Documents and Reports
        1. Finding What You Need on the Securities and Exchange Commission's Website
          1. What types of information you can find
          2. The key types of documents
          3. How to use EDGAR to pinpoint information
        2. Getting Data in a Format You Can Work With
          1. Assembling the tools you need
          2. Importing financial information into Excel
          3. Getting in tune with interactive data
        3. Paying Attention to the Non-Financial Information
          1. Monitoring news streams for investment banking ideas
          2. Quickly processing information with aggregators
          3. Doing research on the key players in a deal
      2. Chapter 7: Making Sense of Financial Statements
        1. Income Statements
          1. Locating the areas of interest to investment bankers
          2. Tweaking the statement with different assumptions
          3. Finding investment banking opportunities
        2. Balance Sheets
          1. Finding your way around the key parts
          2. Understanding a company's financial strength
          3. Locating pitfalls and opportunities
        3. Statement of Cash Flows
          1. Seeing why the cash flow statement is so important in deal making
          2. Understanding the key parts of the document
          3. Calculating free cash flow
        4. Proxy Statements
          1. Learning about the key players in a deal
          2. Identifying the management team's incentives
          3. Analyzing management pay packages
      3. Chapter 8: Perfecting the Financial Ratios for Investment Banking
        1. Valuation Multiples: Assessing How Much the Company Is Worth
          1. Investors’ favorite valuation tool: P/E ratio
          2. Going old school with price-to-book
          3. Putting a price on profitability
        2. Liquidity Multiples: Checking Companies’ Staying Power
          1. Deciphering debt to equity
          2. Getting up to speed with the quick ratio
          3. Interpreting interest coverage
        3. Profitability Ratios: Seeing How a Company's Bottom Line Measures Up
          1. Why gross margin isn't so gross after all
          2. Income from continuing operations: Looking at profit with a keen eye
          3. Keying into profits with net margin
        4. Efficiency Ratios: Knowing How Well the Company Is Using Investors’ Money
          1. Finding out about return on assets
          2. Digging into return on capital
          3. Uncovering company secrets with return on equity
          4. Calculating a company's growth rate
      4. Chapter 9: Sizing Up the Industry
        1. Performing an Industry Analysis
          1. Understanding why industry analysis is important
          2. Creating a comparison universe
          3. Adjusting the industry comparison universe
        2. Unearthing Company Trends and Common sizing the Financial Statements
          1. Comparing growth rates
          2. Comparing leverage
          3. Comparing various profit margins
        3. Seeing How a Company Stacks Up: Comparing the Key Ratios
          1. Sizing up valuation
          2. Comparing total debt-to-equity
          3. Sizing up companies on their efficiency
          4. Industry ratios
      5. Chapter 10: Understanding Stocks and Focusing on Past Transactions
        1. Introducing Stock
          1. Characteristics of stock
          2. Types of stock
          3. Understanding stock pricing
        2. Finding Past Transactions
          1. Tracking the stock market
          2. Studying private deals
          3. Looking at pre-IPO marketplaces
          4. Examining buyouts
        3. Analyzing Past Transactions
          1. Knowing what the market will bear
          2. Knowing when the market is distorted
          3. Tabulating key ratios for past deals
          4. Understanding the pitfalls
      6. Chapter 11: Applying Investment Banking to Fixed Income
        1. Introducing Bonds
        2. Identifying the Various Types of Bonds
          1. Convertible bonds
          2. Callable bonds
          3. Puttable bonds
          4. Floating-rate bonds
          5. Zero-coupon bonds
        3. Knowing Their Place: The Position of Bondholders
        4. Understanding Bond Pricing
          1. Introducing the concept of present value
          2. Relating yield to maturity and price
          3. Playing the spread: How different factors affect bond prices
          4. Considering bond sensitivity to changes in interest rates
        5. Tracking the Bond Market
        6. Debt or Equity: How a Company Chooses
    4. Part III: Taking Investment Banking to the Next Level
      1. Chapter 12: Doing a Discounted Free Cash Flow Analysis
        1. Gearing Up for Discounted Free Cash Flow
          1. Computing free cash flow
          2. Forecasting free cash flow
        2. Calculating the Weighted Average Cost of Capital
          1. Understanding why the weighted average cost of capital is so important
          2. Measuring the cost of debt and equity
          3. Understanding the capital asset pricing model
        3. Going for Terminal Value
          1. Knowing the perpetuity growth formula
          2. Applying the constant growth formula
          3. Applying the two-stage growth model
          4. Stress-testing the results
        4. Valuing a Share of Stock
      2. Chapter 13: Structuring a Leveraged Buyout
        1. Seeing How Leveraged Buyouts Are Structured
          1. The types of financing
          2. Understanding seniority and maturity
        2. Building a Leveraged Buyout Model
          1. Creating a pro forma model
          2. Deciding on methods of financing
          3. Seeing how the results work out
          4. The importance of taxes in a leveraged buyout
          5. What can go right and what can go wrong
      3. Chapter 14: Determining the Strength of a Company's Return on Equity
        1. Understanding the Importance of Return on Equity
          1. What return on equity shows
          2. Pros and cons of return on equity versus other profitability measures
          3. How return on equity can help guide an investment banking deal
        2. Using a DuPont Analysis
          1. The three-factor DuPont method
          2. The five-factor DuPont method
        3. Interpreting the Results
          1. Cola wars
          2. What the numbers mean
          3. Looking past the numbers for insight
          4. Telling companies how to react to the numbers
    5. Part IV: Applying Investment Banking
      1. Chapter 15: Knowing the Rules
        1. The History of Regulation of Investment Banking
          1. The goals of investment banking regulation
          2. Why the rules of today are the result of days past
          3. How regulations have shaped the investment banking industry
        2. The Ins and Outs of Modern Investment Banking Rules
          1. The types of rules imposed on investment banking
          2. How investment banking rules changed after the financial crisis
        3. The Rules on Analysts
          1. Why rules were needed
          2. The not-so-delicate balancing act analysts play
          3. What disclosure and compliance are required
        4. Why Simply Making Rules Isn't Enough
      2. Chapter 16: Seeing How Some Companies Lie, Cheat, and Steal Their Way to the Top
        1. Did You Really Sell That? When Companies Aggressively Report Revenue
          1. Don't let the sun go down on me
          2. The truth?
        2. Lucy, You Got Some ’Splainin’ to Do: When Companies Understate Their Expenses
          1. What a waste
          2. Crazy like a fox
        3. Missed It by That Much: When Companies Overstate Their Financial Position
          1. Those pesky pensions: The epidemic of firms understating pension liabilities
          2. We are the world
        4. Keeping Investors Off-Balance
          1. Enron's special purpose
          2. A mountain of a scandal
          3. Swap meet
        5. What Should an Investment Banker Do?
      3. Chapter 17: Understanding Alternative Investments and Asset Management
        1. Knowing Your Alternatives
          1. Hedge funds
          2. Venture capital
          3. Commodities
          4. Real estate
        2. Digging Into Asset Management
          1. Attracting investors to asset management
          2. Creating asset management tools
        3. Managing Potential Conflicts with Clients
          1. How asset management can cause conflicts
          2. How to eliminate and manage conflicts
      4. Chapter 18: Trying Your Hand at Investment Banking with a Case Study
        1. Setting the Scene
          1. The acquirer
          2. The target
        2. Considering the Options
          1. Identifying the options
          2. Looking at financing
        3. Creating the Analysis
          1. An analysis of the financial statements
        4. Structuring a Deal
          1. Form of acquisition
          2. Creating pro forma statements
        5. Success or Failure
    6. Part V: The Part of Tens
      1. Chapter 19: Ten of the Biggest Debacles in Investment Banking History
        1. The Dot-Com Boom and Bust
        2. Tainted Research Scandals
        3. Enron and the Accounting Scams
        4. The Mortgage Debacle and Collapse of Lehman
        5. The Flash Crash
        6. The London Whale at JPMorgan and Barings Bank
        7. Long-Term Capital Management
        8. Bankruptcy in Jefferson County, Alabama
        9. IPO Allocations with CSFB
        10. Bad Mergers and Acquisitions Like AOL Time Warner
      2. Chapter 20: Ten Ways to Improve a Discounted Cash Flow Analysis
        1. Financial Analysis Isn't Physics
        2. Show Your Sensitive Side
        3. Monte Carlo Isn't Just for High Rollers
        4. What Can Go Wrong Will Go Wrong
        5. It's Tough to Make Predictions, Especially about the Future
        6. The Investor of Today Doesn't Profit from Yesterday's Growth
        7. Garbage In, Garbage Out
        8. Rates Are Falling — It's a Better Deal!
        9. Read Your Putt from Several Angles
        10. The Weighting Is the Hardest Part
      3. Chapter 21: Ten (Or So) of the Best Online Resources for Investment Bankers
        1. Bloomberg
        2. Reuters
        3. Standard & Poor's
        4. Renaissance Capital and IPOScoop.com
        5. The Securities and Exchange Commission
        6. Moody's
        7. FreeStockCharts.com
        8. Index Fund Advisors
        9. Morningstar
        10. Bureau of Labor Statistics
        11. Department of Commerce
        12. Federal Reserve
        13. Trefis
      4. Appendix: Where Investment Banking Came From
        1. Exploring the Roots of Investment Banking
          1. Going way back: Evolving out of traditional banks
          2. The Renaissance of banking
          3. Banking starts to spread to Britain
        2. Banking Catches On in the United States
          1. Witnessing the development of modern investment banking
          2. Seeing how investment banks were threatened by banks
          3. Feeling the pain: The financial crisis of 2007 changes everything
    7. About the Authors
    8. Cheat Sheet
    9. More Dummies Products
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