Might be the wrong section as its for a Private EQUITY gig however it more of an Investment Banking question.
Bit of background. I was in Oil and Gas finance where the modelling is much different especially in assumptions where the data is much more streamlined and projections are worked on many times by engineers etc. And the discount rate is an industry standar 10% yada yada.
Now the thing is..
I had a long interview at a PE firm (ME) today and I thought that would be the end of that and there had been no indiccation. But nI have a Modelling Test tomorrow.
From what I can figure out they will basically give a name of a Public Company and I guess Financials of the last few years, They will then ask me to make an Operating Model and do a DCF analysis. My concepts of the analysis are good and so are my excel skills in terms of building a model.
But where it is getting tricky is the following:
A) I am unsure (might as well say clueless for the purposes here) of how to make good defensible assumptions.
Lets say its a food company in the consumer goods industry. (or anything else which has standard modelling really)
In the operating model. How do I determine the growth rate. In terms of Growth of revenue, growth in COGS, D&A etc etc. Same with other items of financial statements. I would have thought just using historical (3 years) and then getting a mean and standard deviation should be fine but apparently not.)
B) Again Assumptions. What assumptions to use for Discount rate, rf, rm, TV calculations etc etc.
Basically where and how can I make good assumptions by using only the financial statements.??
THIS is kinda last minute so any and every help or tips will be appreciated. URGENT PLEASE.
Thanks in advance.
any one?
From what I know, these things should be specific to the company. If it's a public company, you'd typically have equity research reports and consensus estimates on things like revenue growth, margin/EBIT/EBITDA projections, etc. Or if available, management projections can be helpful (but usually not very conservative). To make things truly defensible, as with any argument, you'd need at least a somewhat sound grasp of the company's fundamentals - I'm sure there is at least some overlap with what you've done in O&G banking.
For discount rate assumptions, again it's dependent on the valuation target. For cost of equity, you typically use CAPM. If the company is likely a going concern, you can use long-term Treasury bill rates as your risk-free rate. For MRP, you will probably have to look up and match numbers on a chart of some kind...if I recall correctly, a standard MRP is 5.6% dating back from 1926. For beta, get the equity betas of comparable companies and weight them somehow, then unlever to get an asset beta, and relever using your valuation target's target capital structure to get a defensible equity beta.
For cost of debt, you will need to find current yields of publicly traded debt and weight-average them. For private debt (revolvers, term loans, etc.), you'd probably want comparable debt (in riskiness, credit profile, etc.) and arrive at a defensible Rd through that way of thinking. Cost of debt is typically not as cookie-cutter depending on the company's debt profile.
I doubt you'll be able to do all that stuff on a modeling test, but if you understand the intuition behind some of the assumptions, chances are you'd be able to come up with a pretty rational/defensible set of assumptions and valuation ranges on a simplified test. Good luck
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