PDF Essential Accounting for Investment Banking Part 3

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You may also have to downplay your full-time accounting experience and emphasize internships that were more relevant e. We covered the most common objections above, so you must be prepared for all of those — the hours, the airport test, why banking, finance knowledge, and job-hopper issues. For inspiration, here are stories from readers who moved from accounting-related backgrounds into investment banking:.

The reader here spent a year in audit, another year in valuation, and then won the IB role. This story is a good example of how to leverage banking-related experience at a Big 4 firm and a top MBA program to get in. The reader here found it difficult to recruit for IB roles because he had too much work experience, so he moved into corporate development instead. In this story, the reader skipped IB entirely and moved directly into a private equity role at a pension fund in Canada. And then you could leverage this role into something else, such as in the corporate development and pension fund examples above.

Yes, banking gives you high pay, good exit opportunities, and solid advancement opportunities, but it also requires brutal hours and a lot of silly grunt work. You might be much happier if you take a role in corporate development or corporate finance, or if you go into something more specialized, such as real estate private equity or commercial real estate lending. A top MBA program is not a magic bullet, and neither is a top MSF degree , but they can give you better access to recruiters. Once you go past years in accounting, or any other field, it gets very difficult to move into investment banking without using the nuclear option business school.

In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron. Free Exclusive Report: page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews. I gather my best bet is to do an MBA program assuming I am accepted into a good program and there are a few very good ones in my city.

Is a full time program almost always a better bet versus staying in my tax position and pursuing a part-time MBA, even if the part-time MBA is very highly rated? Assuming a few years down the road I get a MBA, my only concern with actually performing the job is having time with my son. Is there no possibility for flexibility in IB or PE? Thanks so much in advance! Full-time programs are better bets, yes, but if you can do an executive program at a top-ranked school with a lot of on-campus recruiting e.

When you become very senior it gets somewhat better, but even MDs still work on weekends all the time. So… if your goal is to spend significant time with your kids over the next few years, you should not even target these fields. Cheers from sunny California! Need some of your expert advice. Undergrad in Communications with Accounting minor.

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I have only been able to land interviews at PE and HF as an accountant and no offers yet. I know what is holding me back but unsure which path to take. Seems like MBA and access to recruiters would help. However, I am getting conflicting messages. However, MBA employment reports show that on-campus recruitment, internships, school resources are real. What are your thoughts? Are my friends assessments of MBA correct or is it more skewed based on their own experiences?

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Will MBA provide more opportunities to get in front of employers? The problem is that you have too much work experience to be hired as an Analyst, but not enough to be hired as an Associate i. Please read and take note of everything here:. I heard that once I move to Finance Division, it becomes extremely difficult to make a shift to FO, and I got worried about it due to low probability and prospect of Finance Division.

I once thought about joining Big 4, but due to very low salaries to afford the living expenses in the big city, I initially did not prefer the second option over the other two choices. Despite the brand value and networking that I have done, I am not sure whether joining the Finance Division of BB would be a better choice in terms of career development.

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It will be so grateful if you could share your views. Hi Brian. Not a target at all. I will probably stay there for the following 10 months. I will probably attend Tier 2 uni in GB. Perpetrating a mistake is not an option; I am going to make a genuine commitment to get all the technicals, which will be asked for during potential interviews anyway, and to get the distinction grade.

Therefore, questions appear. Should I restrain from networking till I graduate? Is it worth the effort to network with low undergrad GPA? You might do better with high test scores and then start networking once you get in. Thank you for your answer. Erasmus Uni Rotterdam may be an option for me; it is not located in the UK, though. Brian, the last question. If you were me, would you switch to the valuation team for few months to learn DCF? Not specifically to learn a DCF because it should not take you months to learn it… but it might be useful to get something more relevant-looking on your CV.

May I ask what you consider as a low polish GPA? Cheers, Matt. I would like to get into IB. I have no degree, but my current employer offers ACA. Please advise me on what you think my next steps should be. It is assumed that most people are already familiar with the analysis that usually leads to major capital use decisions in various companies. However, highlighted are some of these points throughout the book, since company backgrounds differ and what is considered "major capital use decisions" varies with the size of businesses. Obviously, this does not all have to be owned capital.

Evaluation of successful businesses has found that many of them operate with 50 percent or more rented or borrowed capital. The pressure on businesses to grow is likely to continue, and these businesses are likely to grow faster than will be permitted by each reinvesting its own annual savings from net income alone. Thus, because demand for credit will continue to expand, careful credit planning and credit use decisions are of paramount importance to marketing companies in any country.

Credit and types of loans Credit is the capacity to borrow. Credit provision to a company means that the business is allowed the use of a productive good while it is being paid for. The process of using borrowed, leased or "joint venture" resources from someone else is called leverage. Using the leverage provided by someone else's capital helps the user business go farther than it otherwise would.

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The objective is to increase total net income and the return on a company's own equity capital. Borrowed funds are generally referred to as loans. On the basis of the above classification, there are twelve common types of loans, namely: short-term loans, intermediate-term loans, long-term loans, unsecured loans, secured loans, instalment loans, single payment loans, simple-interest loans, add-on interest loans, discount or front-end loans, balloon loans and amortised loans. Short-term loans are credit that is usually paid back in one year or less. Usually lenders expect short-term loans to be repaid after their purposes have been served, e.

Loans for operating production inputs e. In other words, although the inputs are used up in the production, the added returns from their use will repay the money borrowed to purchase the inputs, plus interest. Astute managers are also expected to have figured in a risk premium and a return to labour management. On the other hand, loans for investment capital items like machinery are not likely to be self-liquidating in the short term.

Loans for family living expenses are not at all self-liquidating and must come out of net cash income after all cash obligations are paid.

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Intermediate-term IT loans are credit extended for several years, usually one to five years. This type of credit is normally used for purchases of buildings, equipment and other production inputs that require longer than one year to generate sufficient returns to repay the loan. Long-term loans are those loans for which repayment exceeds five to seven years and may extend to 40 years. This type of credit is usually extended on assets such as land which have a long productive life in the business. Some land improvement programmes like land levelling, reforestation, land clearing and drainage-way construction are usually financed with long-term credit.

Unsecured loans are credit given out by lenders on no other basis than a promise by the borrower to repay.

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The borrower does not have to put up collateral and the lender relies on credit reputation. Unsecured loans usually carry a higher interest rate than secured loans and may be difficult or impossible to arrange for businesses with a poor credit record. Secured loans are those loans that involve a pledge of some or all of a business's assets. The lender requires security as protection for its depositors against the risks involved in the use planned for the borrowed funds.

The borrower may be able to bargain for better terms by putting up collateral, which is a way of backing one's promise to repay. Instalment loans are those loans in which the borrower or credit customer repays a set amount each period week, month, year until the borrowed amount is cleared. Instalment credit is similar to charge account credit, but usually involves a formal legal contract for a predetermined period with specific payments. With this plan, the borrower usually knows precisely how much will be paid and when. Single payment loans are those loans in which the borrower pays no principal until the amount is due.

Because the company must eventually pay the debt in full, it is important to have the self-discipline and professional integrity to set aside money to be able to do so. This type of loan is sometimes called the "lump sum" loan, and is generally repaid in less than a year.

Simple interest loans are those loans in which interest is paid on the unpaid loan balance. Thus, the borrower is required to pay interest only on the actual amount of money outstanding and only for the actual time the money is used e. Add-on interest loans are credit in which the borrower pays interest on the full amount of the loan for the entire loan period. Interest is charged on the face amount of the loan at the time it is made and then "added on". The resulting sum of the principal and interest is then divided equally by the number of payments to be made. The company is thus paying interest on the face value of the note although it has use of only a part of the initial balance once principal payments begin.

This type of loan is sometimes called the "flat rate" loan and usually results in an interest rate higher than the one specified. Discount or front-end loans are loans in which the interest is calculated and then subtracted from the principal first. On a discount loan, the lender discounts or deducts the interest in advance. Thus, the effective interest rates on discount loans are usually much higher than in fact, more than double the specified interest rates. Balloon loans are loans that normally require only interest payments each period, until the final payment, when all principal is due at once.

They are sometimes referred to as the "last payment due", and have a concept that is the same as the single payment loan, but the due date for repaying principal may be five years or more in the future rather than the customary 90 days or 6 months for the single payment loan. In some cases a principal payment is made each time interest is paid, but because the principal payments do not amortise pay off the loan, a large sum is due at the loan maturity date.

Amortised loans are a partial payment plan where part of the loan principal and interest on the unpaid principal are repaid each year.

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The standard plan of amortisation, used in many intermediate and long-term loans, calls for equal payments each period, with a larger proportion of each succeeding payment representing principal and a small amount representing interest. The constant annual payment feature of the amortised loan is similar to the "add on" loan described above, but involves less interest because it is paid only on the outstanding loan balance, as with simple interest. Amortisation tables are used to determine the regular payment for an amortised loan.

The proper procedure for deriving a schedule as in table 3. Repeat the procedure for each of the years involved.

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Table 3. Obtain an amortisation schedule to show how the Dairiboard of Zimbabwe Ltd will pay off the resulting amortised loan. Hint: the AF is 0. Cost of funds The cost of funds capital is crucial to investment analysis. Usually, the present value measures of an investment's economic worth depend on the use of an appropriate discount rate or rate of return. The most appropriate rate is the firm's cost of capital. This rate, when determined, provides a yardstick for testing the acceptability of any investment; those that have a high probability of achieving a rate of return in excess of the firm's cost of capital are acceptable.

A firm's cost of capital may be estimated through: a the use of the interest rate attainable by "investing" in lending institutions deposits or securities before taxes as an estimate of opportunity cost of capital and b the determination of the weighted average after-tax cost of capital, which reflects the cost of all forms of capital the firm uses. The two basic sources of capital are borrowed funds from lending institutions and ownership or internal capital representing profits reinvested in the business. To estimate the weighted average cost of capital, one needs to determine: a the present cost of borrowed or leased funds from each source b an average cost of internal capital as reflected by the percentage of equity in business and risks being taken and c an adjustment for income tax effect.

Cost of borrowed capital Lenders' interest rates vary by type of lender. And since many of these lenders' rates are keyed to money market conditions, predicting costs of borrowed capital through time is imprecise. Less difficulty exists when borrowers have considerable long-term borrowings at fixed rates.

Normally, a rough idea of the average cost of borrowed capital for a firm is obtained by dividing the total interest paid by the company by the capital borrowed by the same company. Cost of ownership Equity capital Cost of ownership capital is more difficult to determine than that of borrowed capital. Theoretically, one knows that the cost of ownership capital is the opportunity cost of placing the owner's funds elsewhere in comparable risk situations. Generally, the guide for selecting an appropriate ownership cost of capital is to use the condition that the cost of equity or ownership capital should be equal to or greater than the cost of borrowed capital.

Average cost of capital Using a balance sheet or other information, one can estimate the percentage of the sources of capital in a business.