I’ve been studying the guides now for months and can’t seem to fully understand the technical portion of ib interviews (accounting, enterprise/equity value, dcf). Any tips on how to learn and understand this info?
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Maybe YouTube videos would help more than reading the guides
Do you have any recommended channels?
No, but I know a guy who did all his interview prep with videos, so I know they exist. Just an idea since it might cater to a different learning style
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It took me a while too because the way I learn is not just learning the “how” but “why” it works the way it does. To me it has to make sense why certain deductions or calculations are applied, and honestly a lot of the guides kind of just throw content at you, maybe touch on the “why” a bit, and move on.
I would try and break down the fundamental “why”. If you can understand those fundamentals, you can build up the story from there.
An example that I had struggled with is getting to UFCF for a DCF.
First thing is to understand what is UFCF conceptually and why we need it.
Remember we are adding together UFCF to get to the Enterprise Value. The definition of EV is operational value to all shareholders (include BOTH debt and equity holders).
“Unlevered” means we account for both debt and equity. “Free” means that the money isn’t being tied up elsewhere in the business, that it can be returned to shareholders. “Cash flow” just means a stream of money.
Let’s look at the UFCF formula:
UFCF = NOPAT + D&A - CapEx - NWC
Let’s start with NOPAT. NOPAT is EBIT (the paper operational products, before any shareholders have gotten a bite of it) * (1 - Tax Rate). Why don’t we use Net Income? Because net income accounts for interest, which means we would be excluding the cash going to debtors. As we said, UFCF goes to all shareholders.
D&A is simple. It doesn’t affect cash, so it has to be added back. You don’t actually lose physical money accounting for D&A
Remember what “Free” means. For CapEx, the money no longer is “free” because we are tying it down by converting it into capital. We can’t pay our shareholders with a factory.
Same for NWC. “Working capital” means that the capital is being used for operations. So an increase means more capital is being locked away for operations. I.e. an increase in inventory means money is being held in the form of inventory, and you can’t pay your investors until you sell that inventory and transform it into profits.
All in all, with these adjustments, you get UFCF.
Wow thank you for the response will definitely try to understand the fundamentals more. Thank you!
How long did it take you to really understand the technicals and learn all the fundamentals? If I may ask
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Your issue is likely that you don't understand things on a first principles basis. I.e. you're trying to learn Level 4 accounting when you don't understand level 1. Trying to logically understand why and how you get to UFCF in a DCF is much easier when you understand the 3 statements. The 3 statements are much easier to understand when you comprehend what they are and why they flow in certain ways. The comprehension of a balance sheet or income statement is easier to understand when you get can do simple double entry accounting. This may not be the quickest, nor most efficient way, but if you want true understanding with the ability to solve problems yourself, start by understanding the fundamental principles of accounting and financial statements. This is before developing knowledge on valuations, analyses, etc.
Thank you I appreciate the help. I have been trying to really understand accounting because I have heard it’s the backbone and literacy of finance.
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