In Investment Banking, professionals advise companies on capital-raising, such as initial public offerings (IPOs), and mergers & acquisitions (M&A). During this advisory process, financial models are built to help value the companies, to assess credit quality and to understand the impact of M&A.
For example, during an IPO, a financial model is needed to forecast the company’s income statement and cash flows in order to support the valuation that the IPO price implies. The price that the stock IPOs at can also be supported by performing comparables analysis, which is looking at what multiples similar companies are trading at in the market, such as analyzing price / earnings (P / E) or enterprise value / EBITDA (EV / EBITDA).
During an M&A transaction, an investment bank may also build a financial model to analyze how accretive or dilutive a potential acquisition may be for the acquiror. If the bank is advising the seller, they may build a discounted cash flow (DCF) model to value the company and arrive at a fair price.
When advising companies on transactions involving private equity, the bank may build a leveraged buyout (LBO) model which focuses on credit quality and returns to investors.
