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APV Method: Adjusted Present Value Analysis

The standard Discounted Cash Flow (DCF) method is the typical tool used to value firms, but one drawback its inability to handle changing debt to equity levels. As we know, higher debt offers a higher tax shield, which in turn increases both firm value and equity value. To explicitly account

Introduction to Capital Structure

Firms can choose to finance themselves with a number of securities: shares, bonds, preferred shares, convertible bonds, etc. These securities can be classified into two broad categories, debt and equity, and each comes with its own cost. Capital structure describes the way a firm finances itself. Data from Statistics Canada, 2009 Capital

Value Capture Model

Porter's five forces, founded in the 1980's, is the classical framework used to understand and analyze competitive forces in an industry. In the 1990's, a new framework was formed, the Value Capture Model. The Value Capture Model extends on previous frameworks in two ways. One, it formally describes competition as a

Understanding Porter’s Five Forces

Porter's five forces is the most famous concept in strategy, and is a part of every business undergrad/MBA curriculum. The concept is a succinct yet brilliant way of describing the competitive forces in an industry. For banking, it is an immensely useful framework for industry analysis, a key part of

Modern Portfolio Theory and the Capital Allocation Line

In our Capital Asset Pricing Model post, we discussed risk and return for stocks. We also discussed the use of the relationship to value stocks, by interpolating what the return for a stock should be given a certain level of risk. We will build on these concepts and discuss how

M&A Deal Case Study

M&A Transaction Case Studies are commonly seen in case competitions, and often in actual investment banking work. Every time a pertinent transaction in the value range that is relevant to the investment banking group happens, the analyst will prepare a case study for distribution to the broader group. They are

Introduction to Enterprise Value and Valuation

It has become apparent to us that our website assumes a level of knowledge which may make it difficult for people newly interested in investment banking to jump into our interview section. So before someone goes from 0 to 60 and is asked about more advanced valuation concepts, we are going

Option Contracts and Put Call Parity

An option contract is a financial instrument that gives the buyer the right, or option to buy or sell a stock on a future date, at a predetermined price. The party that writes, or sells the option has the obligation to fulfill the terms of the contract. There are two

Fama French and Multi Factor Models

In a previous article, we talked about CAPM and its applications. As a quick review, CAPM is a model used to calculate the expected return on a security, based on its market risk, commonly denoted as β (Beta). The model says that a security that is risky relative to the market

Capital Budgeting Methods

Capital budgeting is a tool for decision making at the firm level. As a manager, you will be constantly approached with projects from different departments. To make the best decisions for your shareholders, you need a tool that can compare projects of different size, duration, and nature. Capital budgeting provides