1. A strong understanding of financial statements is required: Having a strong understanding of financial statements is critical for building financial models, including DCF and LBO models. Some important areas to focus on include:
- Income statement: Understanding how revenue and expenses are calculated, and how to project future revenue and expenses based on historical trends and management guidance.
- Balance sheet: Understanding the relationship between assets, liabilities, and equity, and how to project future balance sheet items based on assumptions about future operations.
- Cash flow statement: Understanding how cash flows are calculated and how to project future cash flows based on assumptions about future operations and capital expenditures.
For example, if you are given a case study for a company, you should be able to analyse the financial statements provided and project future financial statements based on assumptions about the company's future operations.
2. You need to be proficient in Excel: Excel is the primary tool used for financial modelling in investment banking. Some important Excel functions and tools to master include:
- Building financial statements: You should be able to build a three-statement model (income statement, balance sheet, and cash flow statement) from scratch, and know how to link the statements together.
- Financial modelling functions: You should be familiar with financial modelling functions such as SUM, PRODUCT, NPV, IRR, and XNPV.
- Data analysis tools: You should be able to use Excel's data analysis tools such as pivot tables, charts, and filters.
For example, you may be asked to build a DCF model for a company in Excel, which requires building a three-statement model and calculating discounted cash flows using Excel formulas.
3. You will be required to have knowledge of valuation methods: Valuation is a critical component of investment banking, and there are several commonly used valuation methods. Some important methods to master include:
- Discounted cash flow analysis (DCF): DCF analysis involves projecting future cash flows for a company and discounting those cash flows back to their present value using a discount rate.
- Comparable company analysis (CCA): CCA involves comparing the financial ratios of a company to similar companies in the same industry to determine relative valuation.
- Precedent transaction analysis (PTA): PTA involves comparing the valuation of a company to similar companies that have been acquired in the past.
For example, you may be asked to value a company using a combination of DCF, CCA, and PTA methods and explain your reasoning for selecting each method.
4. A familiarity with LBO modelling is required: To demonstrate familiarity with LBO modelling, you should be able to build an LBO model that incorporates a variety of different inputs and assumptions. This might include creating pro forma financial statements, calculating cash flows available for debt service, determining appropriate leverage ratios, and analysing returns to equity investors. You should also be able to explain the key risks and benefits associated with leveraged buyouts.
5. You will require strong communication and presentation skills: To demonstrate strong communication and presentation skills, you should be able to clearly and concisely explain your analysis and recommendations to others, both verbally and in writing. This might involve creating a PowerPoint presentation that summarizes your key findings and recommendations, or delivering a verbal presentation that highlights the most important aspects of your analysis.
6. Attention to detail is essential: To demonstrate attention to detail, you should be able to spot errors and inconsistencies in your financial models, and make corrections as necessary. This might involve double-checking your formulas, verifying your inputs, and comparing your results to industry benchmarks or other sources of data.
7. Time management skills are a must: To demonstrate strong time management skills, you should be able to complete the modelling test within the allotted time frame, while also ensuring that your analysis is accurate and thorough. This might involve setting realistic timelines and prioritising tasks based on their importance.
8. Practice and preparation are important!: To prepare for the modelling test, you should practice building financial models and analysing real-world scenarios. This might involve using sample tests and case studies to hone your skills, attending training sessions or workshops that focus on financial modelling and analysis, or working with a mentor or coach who can provide feedback and guidance. The more you practice and prepare, the more confident and competent you will be when it comes time to take the test.
10. Stay hydrated: A hydrated brain is more alert and functions better, always have a bottle of water on hand during your modelling test to help your cognative processing and aid your performance.
5. You will require strong communication and presentation skills: To demonstrate strong communication and presentation skills, you should be able to clearly and concisely explain your analysis and recommendations to others, both verbally and in writing. This might involve creating a PowerPoint presentation that summarizes your key findings and recommendations, or delivering a verbal presentation that highlights the most important aspects of your analysis.
6. Attention to detail is essential: To demonstrate attention to detail, you should be able to spot errors and inconsistencies in your financial models, and make corrections as necessary. This might involve double-checking your formulas, verifying your inputs, and comparing your results to industry benchmarks or other sources of data.
7. Time management skills are a must: To demonstrate strong time management skills, you should be able to complete the modelling test within the allotted time frame, while also ensuring that your analysis is accurate and thorough. This might involve setting realistic timelines and prioritising tasks based on their importance.
8. Practice and preparation are important!: To prepare for the modelling test, you should practice building financial models and analysing real-world scenarios. This might involve using sample tests and case studies to hone your skills, attending training sessions or workshops that focus on financial modelling and analysis, or working with a mentor or coach who can provide feedback and guidance. The more you practice and prepare, the more confident and competent you will be when it comes time to take the test.
10. Stay hydrated: A hydrated brain is more alert and functions better, always have a bottle of water on hand during your modelling test to help your cognative processing and aid your performance.
