Investment Banking terms

96
terms

Recruiting21

Bulge bracket: The largest global investment banks, which do every product at scale: Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America, and Citi, with Barclays, UBS, and Deutsche Bank often included.ExampleAn analyst in a bulge bracket industrials group might work on a bond issue, a $2bn acquisition, and a share buyback for the same client in one year, with the bank's lending and trading desks involved.See also Elite boutique, Middle market, Sell side
Coffee chat (informational interview): A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview
Diversity program: An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst
Elite boutique: Independent advisory banks focused on M&A and restructuring, with no lending or trading: Evercore, Lazard, Centerview, PJT, Moelis, Perella Weinberg, and Qatalyst. Deal teams are lean, so analysts often see more of each deal.ExampleOn a $5bn sale, an elite boutique team might be one MD, one VP, one associate, and two analysts, so an analyst builds the model and sits in on the board calls.See also Bulge bracket, Middle market
Exploding offer: An offer with a short deadline, sometimes only days, meant to get you to decide before you hear from other firms. Asking politely for more time is normal; the worst answer is usually just no.ExampleA bank makes an offer on Monday with a Friday deadline, and another bank's superday is next Tuesday. Telling the second bank about the deadline often gets its process moved up.See also Return offer, On-cycle
Fit interview (behavioral interview): The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue
Front office: Revenue-generating roles that face clients or take risk: bankers, traders, salespeople, research analysts, and investors. Most recruiting conversations are about front office seats.ExampleA trader on the rates desk is front office. The product controller who reconciles her P&L each night is middle office, and the engineer running the settlement system is back office.See also Middle office, Sell side, Buy side
Generalist pool: A setup where junior bankers are not assigned to one group and get staffed on deals across industries and products. Some banks place interns in a pool and match them to groups later.ExampleA pool analyst spends the fall on a healthcare sale and the spring on an industrials debt raise, then joins a group after a year based on the deals she liked.See also Staffer, Coverage group, Summer analyst
HireVue: A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday
Middle market: Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending
Networking: Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting
On-campus recruiting (OCR): The process where firms post jobs and interview through your school's career center. Schools where firms recruit heavily get the most slots; elsewhere, networking and direct applications carry more weight.ExampleAt a school with OCR, a bank posts its role on the career portal, collects resumes, and runs first rounds in campus interview rooms. At a school without it, you apply online and lean on referrals.See also Networking, Summer analyst
Online assessment (OA): A timed online test sent after you apply: numerical reasoning, logic games, or personality questions for banks, and math or coding problems for quant roles.ExampleA bank's online assessment gives you 20 minutes for 18 numerical questions, such as working out a company's year-on-year revenue growth from a bar chart.See also HireVue, Superday
Return offer: A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer
Rolling admissions (rolling applications, rolling basis): Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment
Sell side: Firms that sell services and securities to companies and investors: investment banks, sales and trading desks, and equity research. Many people start here and later move to the buy side.ExampleAn equity research analyst at a bank raises her price target on a retailer from $80 to $95. Her readers are buy-side investors, and her bank earns when they trade through its desks.See also Buy side, Bulge bracket, Front office
Sophomore program: An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst
Staffer: The person at a bank, often a senior associate or VP, who assigns analysts and associates to deals. A good relationship with the staffer affects which deals you get and how busy you are.ExampleAn analyst on two live deals tells the staffer she is at capacity. The staffer gives the new pitch to someone else, and remembers who was honest about their load.See also Generalist pool
Summer analyst: The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday
Superday: The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue
Technical interview: Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting18

Accounts receivable: Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement
Accrual accounting: Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue
Amortization: The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA
Balance sheet: A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill
Capital expenditures (capex, CapEx): Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement
Cash flow statement: Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital
Deferred revenue: Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, Net working capital
Deferred tax liability (DTL): Taxes a company will owe later because it reported more income on its financial statements than on its tax return, usually because it depreciates assets faster for tax. It also appears in acquisitions when assets are written up in a stock deal, since the extra book depreciation is not tax deductible.ExampleA $100m asset is depreciated over 5 years for tax and 10 years on the books. In year one, tax depreciation is $20m versus $10m on the books, so at a 25% rate a $2.5m deferred tax liability builds.See also Depreciation, Balance sheet
Depreciation: Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA
EBITDA: Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio
Goodwill: What an acquirer pays above the fair value of the target's identifiable net assets. It sits on the balance sheet, is not amortized by US public companies, and is tested at least once a year for impairment.ExampleA buyer pays $500m for a company whose identifiable assets are worth $400m at fair value and whose liabilities are $150m. Net assets are $250m, so goodwill is $250m.See also Amortization, Balance sheet
Gross margin: Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics
Income statement: Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet
Levered free cash flow (LFCF, free cash flow to equity, FCFE): Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout
Net income: The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement
Net working capital (NWC): Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue
Operating income (EBIT): Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow
Stock-based compensation (SBC): Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

Valuation17

Beta: How much a stock tends to move relative to the market. A beta of 1.2 means the stock has historically moved about 1.2% for each 1% move in the market. It feeds the cost of equity through CAPM.ExampleA stock with a beta of 0.8 would be expected to rise about 4% when the market rises 5%. Utilities often sit below 1; fast-growing tech names often sit above it.See also Capital asset pricing model, Cost of equity, Alpha
Capital asset pricing model (CAPM): A formula for the return equity investors require: cost of equity = risk-free rate + beta x equity risk premium. With a 4% risk-free rate, a beta of 1.2, and a 5% premium, the cost of equity is 4% + 6% = 10%.ExampleWith a 4.5% risk-free rate, a beta of 0.9, and a 5.5% equity risk premium, cost of equity = 4.5% + 0.9 x 5.5% = 4.5% + 4.95% = 9.45%.See also Beta, Cost of equity, Weighted average cost of capital
Comparable companies analysis (trading comps, comps): Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field
Cost of equity: The annual return shareholders expect for owning a company's stock, usually estimated with CAPM. It is higher than the cost of debt because shareholders are paid last and dividends, unlike interest, are not tax deductible.ExampleA company borrows at 6%, or 4.5% after a 25% tax rate, while its cost of equity is 10%. Shareholders take more risk, get paid last, and give the company no tax deduction.See also Capital asset pricing model, Weighted average cost of capital, Beta
Discounted cash flow (DCF): Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value
Enterprise value (EV, TEV): The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow
Equity value (market capitalization, market cap): The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio
EV/EBITDA multiple (EV/EBITDA): Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis
Exit multiple method: Estimating a DCF's terminal value by applying a multiple to the last projected year, such as 10x final-year EBITDA. It is quick and grounded in market pricing, but it assumes today's multiples still hold years from now.ExampleFinal-year EBITDA of $80m at a 9x exit multiple gives a terminal value of $720m. Discounted five years at a 10% WACC, that is $720m / 1.61, about $447m today.See also Terminal value, Perpetuity growth method, Discounted cash flow
Football field: A horizontal bar chart showing the valuation range from each method, such as trading comps, precedents, DCF, and the 52-week share price range, side by side. It is usually the summary page of a valuation in a pitch book.ExampleA sell-side summary page shows trading comps at $18 to $24 a share, precedents at $22 to $28, a DCF at $20 to $27, and the 52-week range of $15 to $21, with a line at today's $19 price.See also Comparable companies analysis, Precedent transactions, Discounted cash flow, Pitch book
Perpetuity growth method (Gordon growth method): Estimating terminal value by assuming cash flow grows at a constant rate forever: TV = final-year FCF x (1 + g) / (WACC - g). The growth rate should be at or below long-run economic growth, often 2% to 3%.ExampleFinal-year FCF of $100m, 2% growth, and a 9% WACC: TV = $100m x 1.02 / (0.09 - 0.02) = $102m / 0.07, about $1,457m.See also Terminal value, Exit multiple method, Weighted average cost of capital
Precedent transactions (transaction comps, precedents): Valuing a company by the multiples buyers paid in past acquisitions of similar businesses. The values usually come out higher than trading comps because acquirers pay a control premium.ExamplePeers trade at 10x EBITDA, but past acquisitions in the sector were done at 12x. A target with $50m of EBITDA is worth about $500m on comps and $600m on precedents.See also Comparable companies analysis, Football field, Take-private
Price-to-earnings ratio (P/E, P/E ratio): Share price divided by earnings per share, or equally equity value divided by net income. A $50 stock with $2.50 of EPS trades at 20x. Leverage and tax rates affect it, so it compares best across similar companies.ExampleNet income of $200m on 100m shares is EPS of $2.00. At a $36 share price the P/E is 18x, and equity value of $3.6bn over $200m of net income gives the same 18x.See also Equity value, Net income, Comparable companies analysis
Terminal value: The value of all cash flows after the projection period in a DCF, calculated with the perpetuity growth or exit multiple method. It often makes up more than half of a DCF's total value, so its assumptions deserve the hardest look.ExampleA DCF with $400m of discounted projection-period cash flows and $600m of discounted terminal value gets 60% of its $1bn enterprise value from the terminal value.See also Discounted cash flow, Perpetuity growth method, Exit multiple method
Treasury stock method (TSM): How diluted shares are counted: assume in-the-money options are exercised and the company uses the exercise cash to buy back shares at the current price. 100 options with a $10 strike and a $20 share price add 100 - (1,000 / 20) = 50 net new shares.ExampleA $40 stock with 1m options struck at $25: exercise brings in $25m, which buys back 625,000 shares at $40, so net dilution is 1,000,000 - 625,000 = 375,000 shares.See also Equity value, Stock-based compensation
Unlevered free cash flow (UFCF, free cash flow to firm, FCFF): Cash the business generates before paying lenders or shareholders: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. It is the cash flow a DCF discounts at WACC.ExampleEBIT of $100m at a 25% tax rate gives $75m, plus $20m of D&A, minus $30m of capex and a $5m increase in NWC: unlevered free cash flow is $60m.See also Discounted cash flow, Weighted average cost of capital, Capital expenditures, Net working capital
Weighted average cost of capital (WACC): The blended return required by all of a company's capital providers: WACC = E/(D+E) x cost of equity + D/(D+E) x cost of debt x (1 - tax rate). It is the discount rate for unlevered free cash flow in a DCF.Example70% equity at a 10% cost and 30% debt at 6% pre-tax with a 25% tax rate: WACC = 0.7 x 10% + 0.3 x 4.5% = 7.0% + 1.35% = 8.35%.See also Cost of equity, Capital asset pricing model, Discounted cash flow, Unlevered free cash flow

M&A and deals16

Accretion/dilution analysis (merger model, accretion dilution): A test of whether an acquisition raises (accretive) or lowers (dilutive) the buyer's earnings per share. Before synergies, an all-stock deal is accretive when the buyer's P/E is higher than the P/E it pays for the target.ExampleBuyer: $100m net income, 100m shares, $20 stock (20x). It buys a target earning $15m for $225m (15x) with 11.25m new shares. Pro forma EPS is $115m / 111.25m = $1.034, about 3% accretive before fees.See also Price-to-earnings ratio, Synergies
Confidential information memorandum (CIM): The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room
Coverage group: A banking team organized by industry, such as healthcare, technology, or industrials. Coverage bankers own the client relationships and pitch ideas, then bring in product groups to execute.ExampleA healthcare coverage MD hears a hospital client wants to buy a rival. She brings in M&A to run the valuation and leveraged finance to line up the debt, and keeps the client relationship.See also Product group, Pitch book
Data room (virtual data room, VDR): A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process
Due diligence: The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent
Fairness opinion: A letter from a bank to a company's board saying the price in a deal is fair, from a financial point of view, to shareholders. It rests on a valuation analysis and helps the board show it did its homework.ExampleA board agrees to sell at $45 a share. Its bank shows the board that $45 sits above the DCF range of $38 to $44 and inside the precedents range, then delivers a letter saying the price is fair.See also Football field, Sell-side process
Follow-on offering: A sale of shares by a company that is already public. If the company issues new shares it raises cash but dilutes existing holders; if existing holders sell their own shares, no new shares are created.ExampleA public company with 100m shares sells 10m new shares at $50, raising $500m and diluting existing holders by about 9% (10m of 110m). If its PE owner sells 10m of its own shares instead, the company raises nothing.See also Initial public offering, Underwriting
Indication of interest (IOI): A non-binding first-round bid in an auction, usually a valuation range with the key assumptions behind it. The seller uses IOIs to decide which buyers move on to the second round.ExampleTen buyers send IOIs for a software company, ranging from $350m to $500m. The seller invites the five highest, all above $425m, to management meetings and the data room.See also Letter of intent, Sell-side process
Initial public offering (IPO): A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering
Letter of intent (LOI): A document in which a buyer states the price and main terms it intends to sign on, usually after the final round of diligence. Most of it is non-binding, though exclusivity and confidentiality clauses often bind.ExampleAfter diligence, a buyer signs an LOI at $420m with 45 days of exclusivity. The price is not binding, but the exclusivity is: the seller cannot talk to other buyers for those 45 days.See also Indication of interest, Sell-side process, Due diligence
Pitch book: The slide deck bankers bring to a client meeting to win business or present ideas: a market update, valuation, likely buyers or targets, and why this bank. Analysts build most of the pages.ExampleThe tech group hears a mid-sized software client is weighing a sale. By Thursday the analyst has a 30-page pitch book: market update, valuation range, 15 likely buyers, and the bank's recent software deals.See also Coverage group, Football field
Product group: A banking team organized by type of transaction, such as M&A, leveraged finance, equity capital markets, or restructuring. It brings execution expertise that cuts across industries.ExampleA consumer coverage team wins a sale mandate. The M&A group runs the auction, and the leveraged finance group arranges financing that bidders can use to fund their offers.See also Coverage group, Underwriting
Sell-side process (auction process): A bank running the sale of a company for its owner. A typical auction goes teaser and NDA, CIM, first-round IOIs, management meetings and data room access, final bids with LOIs, then a signed purchase agreement.ExampleWeek 1: teasers go to 60 buyers, 30 sign NDAs and get the CIM. Week 6: 12 IOIs arrive and 5 get the data room. Week 14: 3 final bids come in and the best one signs a purchase agreement.See also Teaser, Confidential information memorandum, Indication of interest, Letter of intent
Synergies: Extra value created by combining two companies. Cost synergies come from removing overlap, like duplicate offices; revenue synergies come from selling more together and are harder to deliver, so buyers discount them.ExampleTwo merging companies close a duplicate headquarters and save $30m a year. At a 10x multiple those cost synergies are worth about $300m, which is how a buyer justifies paying a premium.See also Accretion/dilution analysis, Due diligence
Teaser: A one or two-page anonymous summary of a company for sale, sent to a long list of potential buyers to test interest before anyone signs an NDA.ExampleA two-page teaser for Project Atlas describes a Midwest packaging business with $250m of revenue and 18% EBITDA margins, and goes to 80 buyers without naming the company.See also Confidential information memorandum, Sell-side process
Underwriting: A bank's role in a securities offering: it commits to buy or sell the shares or bonds, markets them to investors, and takes on risk in exchange for a fee called the underwriting spread.ExampleBanks agree to buy $1bn of bonds at 99.0 and sell them to investors at 100.0. The 1 point is a $10m spread; if demand is weak and they have to sell below 99.0, they take the loss.See also Initial public offering, Follow-on offering, High-yield bond

LBOs and private equity11

Dividend recapitalization (dividend recap): A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout
Internal rate of return (IRR): The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO
Leveraged buyout (LBO, buyout): Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO
Multiple expansion: Selling a company at a higher valuation multiple than you paid, such as buying at 10x EBITDA and exiting at 12x. Careful LBO models assume the exit multiple equals the entry multiple so returns do not depend on it.ExampleBuy at 10x $50m of EBITDA for $500m; sell at 12x the same $50m for $600m. The $100m gain came from the multiple alone, with no growth in the business.See also Leveraged buyout, EV/EBITDA multiple, Add-on acquisition
Multiple of invested capital (MOIC, cash-on-cash): Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout
Paper LBO: A simplified LBO done with pen and paper in an interview, in a few minutes. You get the purchase price, leverage, growth, and exit assumptions, then estimate the equity value at exit and the IRR by hand.Example$50m EBITDA at 10x is $500m, half debt. EBITDA grows to $70m, exit at 10x is $700m, and $150m of debt repaid leaves $100m. Equity goes from $250m to $600m: 2.4x in five years, about 19% IRR.See also Leveraged buyout, Internal rate of return, Multiple of invested capital, Technical interview
Rollover equity: Equity that sellers, often the founder or management, reinvest in the company under its new owner instead of taking all cash. It keeps them aligned with the buyer and reduces the cash the buyer has to put in.ExampleA founder sells for $300m and rolls 20%, or $60m, into the new company. The sponsor needs $60m less cash, and the founder keeps a stake in the next exit.See also Sources and uses, Leveraged buyout
Secondary buyout: One PE firm selling a portfolio company to another PE firm. It is a common exit route, especially when the IPO market is slow.ExampleFund A bought a business at 8x EBITDA and grew it for five years. It sells to Fund B at 11x, and Fund B starts its own plan with new debt and a new management incentive pool.See also Leveraged buyout, Portfolio company
Sources and uses: The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity
Sponsor (financial sponsor): A private equity firm or similar investor that buys companies with its funds' capital plus debt. Banks run sponsor coverage groups because PE firms are among their largest fee payers.ExampleA sponsor buying a $1.5bn company calls three banks for the debt financing. Those leveraged finance fees, plus the sale fee when it exits years later, are why banks staff sponsor coverage teams.See also Private equity, Leveraged buyout, Coverage group
Take-private: A buyout of a public company, after which its shares stop trading. The buyer usually pays a premium to the share price before the deal was announced, often 20% to 40%.ExampleA public company trades at $20 before the news. A sponsor offers $26, a 30% premium; with 50m shares outstanding, the equity purchase price is $1.3bn.See also Leveraged buyout, Precedent transactions

Credit and restructuring10

Absolute priority rule: In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing
Chapter 11: The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt
Covenant: A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio
Credit rating (investment grade): A grade from an agency such as S&P, Moody's, or Fitch on how likely a borrower is to default. BBB- at S&P (Baa3 at Moody's) and above is investment grade; anything lower is high yield.ExampleAn issuer cut from BBB- to BB+ falls out of investment grade. Funds that may hold only investment grade bonds have to sell, and its spread can widen sharply in days.See also High-yield bond, Credit spread
Debtor-in-possession financing (DIP financing, DIP loan): A loan that funds a company through its Chapter 11 case. The court gives it priority over most existing debt, which is why lenders are willing to lend to a company that is already bankrupt.ExampleA bankrupt manufacturer needs $150m to pay suppliers and staff during its case. A DIP lender provides it at SOFR + 7%, ahead of the old unsecured bonds, so its repayment is close to certain.See also Chapter 11, Absolute priority rule
Distressed debt: Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity
High-yield bond (junk bond, HY): A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout
Interest coverage ratio: EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA
Leverage ratio (debt/EBITDA): Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA
Revolving credit facility (revolver, RCF): A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital

Markets and macro1

Basis point (bps): One hundredth of a percentage point, or 0.01%. A rate that moves from 4.25% to 4.50% has risen 25 basis points.ExampleA loan priced at SOFR + 350 bps with SOFR at 4.30% pays 7.80%. On a $100m loan, each basis point is worth $10,000 a year.See also DV01, Credit spread

Consulting1

Up or out: A promotion system in which people either move up to the next level within an expected window or are encouraged to leave. Common at consulting firms and some banks, it keeps the pyramid shaped and moves people along quickly.ExampleA consultant expected to make engagement manager within about three years who is passed over twice is counseled to look for an outside role, often with help from the firm.See also Engagement manager, MBB

Venture and startups1

Dilution: The drop in an existing holder's ownership percentage when new shares are issued, in a funding round, an option grant, or a stock-funded acquisition. The holder keeps the same shares but owns a smaller slice.ExampleA founder owns 60% before a round that sells 20% of the company to new investors. Afterward the founder owns 60% x 0.80 = 48%.See also Cap table, Option pool, Accretion/dilution analysis

Recruiting21

Bulge bracket

The largest global investment banks, which do every product at scale: Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America, and Citi, with Barclays, UBS, and Deutsche Bank often included.ExampleAn analyst in a bulge bracket industrials group might work on a bond issue, a $2bn acquisition, and a share buyback for the same client in one year, with the bank's lending and trading desks involved.See also Elite boutique, Middle market, Sell side

Coffee chat (informational interview)

A short call or meeting, usually 15 to 30 minutes, with someone at a firm to learn about their job. It is the core of networking, and a good one ends with a referral or another name to contact.ExampleA sophomore emails a second-year analyst from her school, gets 20 minutes on Thursday, asks three questions about the group, sends a thank-you that night, and is introduced to a VP the next week.See also Networking, Fit interview

Diversity program

An early insight program or internship track for students from underrepresented groups. Many open earlier than the main summer analyst program, some to freshmen and sophomores, and some lead straight to an internship offer.ExampleA bank's sophomore diversity program takes applications in the fall, runs a two-day event in spring, and gives strong participants an early interview for the junior summer analyst class.See also Sophomore program, Summer analyst

Elite boutique

Independent advisory banks focused on M&A and restructuring, with no lending or trading: Evercore, Lazard, Centerview, PJT, Moelis, Perella Weinberg, and Qatalyst. Deal teams are lean, so analysts often see more of each deal.ExampleOn a $5bn sale, an elite boutique team might be one MD, one VP, one associate, and two analysts, so an analyst builds the model and sits in on the board calls.See also Bulge bracket, Middle market

Exploding offer

An offer with a short deadline, sometimes only days, meant to get you to decide before you hear from other firms. Asking politely for more time is normal; the worst answer is usually just no.ExampleA bank makes an offer on Monday with a Friday deadline, and another bank's superday is next Tuesday. Telling the second bank about the deadline often gets its process moved up.See also Return offer, On-cycle

Fit interview (behavioral interview)

The questions about you: walk me through your resume, why this firm, why this path, a time you led or failed. Every finance process has them, and weak answers sink otherwise strong technical candidates.ExampleWhy investment banking? A strong answer names something you did (a valuation for your investment club), what you liked about the work, and why this seat gives you more of it.See also Technical interview, Superday, HireVue

Front office

Revenue-generating roles that face clients or take risk: bankers, traders, salespeople, research analysts, and investors. Most recruiting conversations are about front office seats.ExampleA trader on the rates desk is front office. The product controller who reconciles her P&L each night is middle office, and the engineer running the settlement system is back office.See also Middle office, Sell side, Buy side

Generalist pool

A setup where junior bankers are not assigned to one group and get staffed on deals across industries and products. Some banks place interns in a pool and match them to groups later.ExampleA pool analyst spends the fall on a healthcare sale and the spring on an industrials debt raise, then joins a group after a year based on the deals she liked.See also Staffer, Coverage group, Summer analyst

HireVue

A recorded video interview platform. You see a question, get a short time to prepare, often about 30 seconds, then answer on camera within a time limit. Many banks use it as the first screen after the application.ExampleTell me about a time your team disagreed. You get 30 seconds to think, two minutes to answer, and one take before the next question appears.See also Fit interview, Online assessment, Superday

Middle market

Banks and funds that work on smaller deals, often for companies worth under roughly $1 billion. Upper middle market banks, such as Houlihan Lokey, William Blair, and Baird, sit between them and the bulge brackets.ExampleA middle-market bank advises the founder of an HVAC business with $40m of EBITDA on a sale to a PE firm at about 10x, a $400m deal too small for most bulge bracket teams.See also Bulge bracket, Elite boutique, Direct lending

Networking

Building relationships with people at firms through emails, coffee chats, and events, so someone knows your name when applications open. It matters more in finance than in most industries, especially from schools where banks do not recruit on campus.ExampleTwenty emails in September lead to eight calls, and two of those turn into referrals. When the program opens in January, two people at the firm can put your name forward.See also Coffee chat, On-campus recruiting

On-campus recruiting (OCR)

The process where firms post jobs and interview through your school's career center. Schools where firms recruit heavily get the most slots; elsewhere, networking and direct applications carry more weight.ExampleAt a school with OCR, a bank posts its role on the career portal, collects resumes, and runs first rounds in campus interview rooms. At a school without it, you apply online and lean on referrals.See also Networking, Summer analyst

Online assessment (OA)

A timed online test sent after you apply: numerical reasoning, logic games, or personality questions for banks, and math or coding problems for quant roles.ExampleA bank's online assessment gives you 20 minutes for 18 numerical questions, such as working out a company's year-on-year revenue growth from a bar chart.See also HireVue, Superday

Return offer

A full-time job offer given to an intern at the end of the summer. At most banks it is the main path into a full-time analyst job, so the internship works like a ten-week interview.ExampleA class of 80 summer analysts is reviewed in August. 65 return offers is an 81% rate, and the 15 without one recruit again in the fall.See also Summer analyst, Exploding offer

Rolling admissions (rolling applications, rolling basis)

Reviewing applications as they arrive and filling seats before the posted deadline. Applying in the first week or two after a program opens can matter more than the deadline itself.ExampleA program opens January 10 with a March 1 deadline. If most interview slots fill by mid-February, an application sent February 20 arrives after most of the decisions are made.See also Summer analyst, Online assessment

Sell side

Firms that sell services and securities to companies and investors: investment banks, sales and trading desks, and equity research. Many people start here and later move to the buy side.ExampleAn equity research analyst at a bank raises her price target on a retailer from $80 to $95. Her readers are buy-side investors, and her bank earns when they trade through its desks.See also Buy side, Bulge bracket, Front office

Sophomore program

An early program for second-year students, such as an insight week, a spring program, or a sophomore internship. Some feed directly into the junior summer analyst process, which now recruits a year or more ahead.ExampleA bank runs a three-day spring insight program for 60 sophomores. Strong participants get fast-tracked into interviews for the junior summer analyst class.See also Diversity program, Summer analyst

Staffer

The person at a bank, often a senior associate or VP, who assigns analysts and associates to deals. A good relationship with the staffer affects which deals you get and how busy you are.ExampleAn analyst on two live deals tells the staffer she is at capacity. The staffer gives the new pitch to someone else, and remembers who was honest about their load.See also Generalist pool

Summer analyst

The standard 10-week internship at banks and many funds, held the summer between junior and senior year. Recruiting for it now starts during sophomore year.ExampleA student in the class of 2029 interns as a summer analyst in summer 2028, between junior and senior year, after applying during sophomore year.See also Return offer, Sophomore program, Superday

Superday

The final round: several back-to-back interviews in one day, in person or virtual, mixing fit and technical questions. Offers often come within a few days.ExampleFour 30-minute interviews back to back: an MD on fit, a VP on a DCF walk-through, an associate on accounting, and an analyst on why this group. The offer call comes two days later.See also Fit interview, Technical interview, HireVue

Technical interview

Questions that test finance knowledge: accounting, valuation, DCF, and LBO for banking and PE; markets for trading; probability and mental math for quant. Expect prompts like walk me through a DCF, or how does $10 of depreciation flow through the three statements.ExampleDepreciation rises $10 at a 25% tax rate. Net income falls $7.50; cash rises $2.50 after adding back the $10; PP&E falls $10; assets fall $7.50 and so does retained earnings.See also Fit interview, Discounted cash flow, Paper LBO

Accounting18

Accounts receivable

Money customers owe the company for products or services already delivered and billed. It sits in current assets. When it rises, revenue was booked but the cash has not arrived yet, so operating cash flow falls by the increase.ExampleA company books $40m of December sales but collects only $30m by year end. Receivables rise $10m, so cash from operations comes in $10m below the profit those sales produced.See also Net working capital, Accrual accounting, Cash flow statement

Accrual accounting

Recording revenue when it is earned and expenses when they are incurred, not when cash changes hands. It is the reason net income and cash flow differ, and the reason the cash flow statement exists to reconcile them.ExampleA consultant finishes a $50k project in December and is paid in February. The $50k is December revenue; the cash arrives in February, when receivables fall by the same amount.See also Net income, Cash flow statement, Deferred revenue

Amortization

The charge that spreads the cost of an intangible asset, such as an acquired customer list or patent, over its useful life. Like depreciation, it lowers net income but uses no cash, so it is added back on the cash flow statement.ExampleAn acquirer books a $50m customer list with a 10-year life. Each year it records $5m of amortization: pre-tax income falls $5m, and the $5m is added back on the cash flow statement.See also Depreciation, Goodwill, EBITDA

Balance sheet

A snapshot of what a company owns (assets), what it owes (liabilities), and what is left for shareholders (equity) on one date. It always balances: assets = liabilities + shareholders' equity.ExampleA company with $500m of assets and $300m of liabilities has $200m of shareholders' equity. Borrow $50m of cash and assets go to $550m, liabilities to $350m, and equity stays at $200m.See also Income statement, Cash flow statement, Goodwill

Capital expenditures (capex, CapEx)

Cash spent buying or upgrading long-lived assets like plants, equipment, or servers. It shows up in investing activities on the cash flow statement and as PP&E on the balance sheet, then reaches the income statement slowly through depreciation.ExampleA manufacturer spends $30m on a new production line with a 10-year life. Investing cash flow shows -$30m this year, PP&E rises $30m, and the income statement takes $3m of depreciation a year for ten years.See also Depreciation, Unlevered free cash flow, Cash flow statement

Cash flow statement

Shows how cash actually moved during a period, split into operating, investing, and financing activities. It starts from net income, adds back non-cash charges like depreciation, adjusts for working capital, and ends with the change in cash.ExampleNet income of $80m, plus $20m of D&A, minus a $15m increase in working capital, gives $85m of operating cash flow. Subtract $40m of capex and $10m of debt repaid, and cash rises $35m.See also Income statement, Balance sheet, Net working capital

Deferred revenue

Cash a customer paid before the company delivered, like an annual software subscription billed up front. It starts as a liability and becomes revenue month by month as the service is provided.ExampleA customer prepays $1,200 in January for a year of software. Deferred revenue starts at $1,200, and $100 moves to revenue each month, so $600 is left on the balance sheet after June.See also Accrual accounting, Net working capital

Deferred tax liability (DTL)

Taxes a company will owe later because it reported more income on its financial statements than on its tax return, usually because it depreciates assets faster for tax. It also appears in acquisitions when assets are written up in a stock deal, since the extra book depreciation is not tax deductible.ExampleA $100m asset is depreciated over 5 years for tax and 10 years on the books. In year one, tax depreciation is $20m versus $10m on the books, so at a 25% rate a $2.5m deferred tax liability builds.See also Depreciation, Balance sheet

Depreciation

Spreading the cost of a physical asset over its useful life. A $1,000 machine with a five-year life and no salvage value creates $200 of straight-line depreciation a year, which reduces taxable income without using any cash.ExampleA $10m truck fleet with a four-year life and $2m of salvage value creates ($10m - $2m) / 4 = $2m of straight-line depreciation a year. At a 25% tax rate, that saves $0.5m of cash taxes each year.See also Capital expenditures, Amortization, EBITDA

EBITDA

Earnings before interest, taxes, depreciation, and amortization: operating income with D&A added back. It is a rough proxy for operating cash flow that ignores how the company is financed, and the denominator in most valuation and leverage multiples. It ignores capex and working capital, so it is not free cash flow.ExampleRevenue of $100m and operating costs of $60m, including $10m of D&A, give operating income of $40m. Add back the $10m of D&A and EBITDA is $50m.See also Operating income, EV/EBITDA multiple, Leverage ratio

Goodwill

What an acquirer pays above the fair value of the target's identifiable net assets. It sits on the balance sheet, is not amortized by US public companies, and is tested at least once a year for impairment.ExampleA buyer pays $500m for a company whose identifiable assets are worth $400m at fair value and whose liabilities are $150m. Net assets are $250m, so goodwill is $250m.See also Amortization, Balance sheet

Gross margin

Revenue minus the direct cost of making or delivering what was sold (cost of goods sold), as a share of revenue. It shows how much each sale leaves to pay for everything else: sales, research, overhead, interest, and tax.ExampleRevenue of $100m and cost of goods sold of $60m leave $40m of gross profit, a 40% gross margin. A software business might run 75%; a grocer nearer 25%.See also Income statement, Operating income, Unit economics

Income statement

Revenue minus expenses over a period. The usual order runs revenue, cost of goods sold, gross profit, operating expenses, operating income, interest, taxes, and finally net income.ExampleRevenue $200m, COGS $120m, gross profit $80m. Less $40m of operating expenses leaves $40m of operating income; less $10m of interest and 25% tax on the $30m left, net income is $22.5m.See also Net income, Operating income, Balance sheet

Levered free cash flow (LFCF, free cash flow to equity, FCFE)

Cash left for shareholders after operating costs, taxes, interest, reinvestment, and required debt repayment. It drives an LBO's debt paydown and a dividend's safety. Unlevered free cash flow is the same idea before interest and debt payments.ExampleCash from operations of $50m (already after interest), $15m of capex, and $10m of required debt repayment leave $25m of levered free cash flow.See also Unlevered free cash flow, Cash flow statement, Leveraged buyout

Net income

The bottom line: what is left for shareholders after every expense, interest payment, and tax. It flows into retained earnings on the balance sheet and is the first line of the cash flow statement.ExampleA company earns $30m of net income and pays $10m of dividends, so retained earnings rise $20m. Its cash flow statement still starts from the full $30m.See also Income statement, Price-to-earnings ratio, Cash flow statement

Net working capital (NWC)

Operating current assets minus operating current liabilities, usually receivables plus inventory minus payables and accrued expenses, with cash and debt left out. When it grows, cash gets tied up in the business, so free cash flow falls by the increase.ExampleReceivables of $50m plus inventory of $30m minus payables of $35m gives NWC of $45m. If it grows to $55m next year, the $10m increase comes out of free cash flow.See also Accounts receivable, Unlevered free cash flow, Deferred revenue

Operating income (EBIT)

Revenue minus all operating expenses, including depreciation and amortization, before interest and taxes. It measures what the core business earns regardless of how it is financed.ExampleTwo companies each earn $60m of operating income. One has no debt and the other pays $20m of interest, so their net income differs, but their businesses earned the same.See also EBITDA, Income statement, Unlevered free cash flow

Stock-based compensation (SBC)

Pay given to employees in shares or options instead of cash. It is an expense on the income statement but added back on the cash flow statement as non-cash. Many investors still treat it as a real cost because it dilutes shareholders.ExampleA software company grants $40m of stock to employees in a year. Operating income falls $40m, cash from operations adds the $40m back, and existing shareholders are diluted by the new shares.See also Cash flow statement, Treasury stock method

Valuation17

Beta

How much a stock tends to move relative to the market. A beta of 1.2 means the stock has historically moved about 1.2% for each 1% move in the market. It feeds the cost of equity through CAPM.ExampleA stock with a beta of 0.8 would be expected to rise about 4% when the market rises 5%. Utilities often sit below 1; fast-growing tech names often sit above it.See also Capital asset pricing model, Cost of equity, Alpha

Capital asset pricing model (CAPM)

A formula for the return equity investors require: cost of equity = risk-free rate + beta x equity risk premium. With a 4% risk-free rate, a beta of 1.2, and a 5% premium, the cost of equity is 4% + 6% = 10%.ExampleWith a 4.5% risk-free rate, a beta of 0.9, and a 5.5% equity risk premium, cost of equity = 4.5% + 0.9 x 5.5% = 4.5% + 4.95% = 9.45%.See also Beta, Cost of equity, Weighted average cost of capital

Comparable companies analysis (trading comps, comps)

Valuing a company by how the market prices similar public companies, using multiples like EV/EBITDA or P/E. You pick peers by industry, size, and growth, take a range of their multiples, and apply it to the target's numbers.ExampleFive software peers trade at 12x to 16x EV/EBITDA. Applied to a target with $40m of EBITDA, that range implies an enterprise value of $480m to $640m.See also Precedent transactions, EV/EBITDA multiple, Price-to-earnings ratio, Football field

Cost of equity

The annual return shareholders expect for owning a company's stock, usually estimated with CAPM. It is higher than the cost of debt because shareholders are paid last and dividends, unlike interest, are not tax deductible.ExampleA company borrows at 6%, or 4.5% after a 25% tax rate, while its cost of equity is 10%. Shareholders take more risk, get paid last, and give the company no tax deduction.See also Capital asset pricing model, Weighted average cost of capital, Beta

Discounted cash flow (DCF)

Valuing a business as the present value of the cash it will generate. You project unlevered free cash flow for about five to ten years, estimate a terminal value, and discount both back at WACC to get enterprise value.ExampleFive years of free cash flow worth $200m today plus a terminal value worth $300m today give an enterprise value of $500m. Subtract $100m of net debt for an equity value of $400m.See also Unlevered free cash flow, Terminal value, Weighted average cost of capital, Enterprise value

Enterprise value (EV, TEV)

The value of the whole operating business to every capital provider. Simplified: EV = equity value + debt + preferred stock + noncontrolling (minority) interest - cash. It pairs with metrics that belong to all investors, like revenue and EBITDA.ExampleEquity value of $800m, plus $300m of debt, plus $50m of preferred stock, minus $150m of cash gives an enterprise value of $1,000m.See also Equity value, EV/EBITDA multiple, Discounted cash flow

Equity value (market capitalization, market cap)

The value of a company that belongs to common shareholders. For a public company it is the share price times diluted shares outstanding. It pairs with metrics measured after interest, like net income and earnings per share.ExampleA company with 50m diluted shares at $30 has an equity value of $1.5bn. With $40m of net income, it trades at 37.5x earnings.See also Enterprise value, Treasury stock method, Price-to-earnings ratio

EV/EBITDA multiple (EV/EBITDA)

Enterprise value divided by EBITDA, the most common multiple in banking. A company with $500 million of EV and $50 million of EBITDA trades at 10.0x. Because both sides ignore capital structure, companies with different debt levels compare cleanly.ExampleTwo peers each have $100m of EBITDA. One has $900m of equity and no debt, the other $500m of equity and $400m of net debt. Both have an EV of $900m and trade at 9.0x.See also Enterprise value, EBITDA, Comparable companies analysis

Exit multiple method

Estimating a DCF's terminal value by applying a multiple to the last projected year, such as 10x final-year EBITDA. It is quick and grounded in market pricing, but it assumes today's multiples still hold years from now.ExampleFinal-year EBITDA of $80m at a 9x exit multiple gives a terminal value of $720m. Discounted five years at a 10% WACC, that is $720m / 1.61, about $447m today.See also Terminal value, Perpetuity growth method, Discounted cash flow

Football field

A horizontal bar chart showing the valuation range from each method, such as trading comps, precedents, DCF, and the 52-week share price range, side by side. It is usually the summary page of a valuation in a pitch book.ExampleA sell-side summary page shows trading comps at $18 to $24 a share, precedents at $22 to $28, a DCF at $20 to $27, and the 52-week range of $15 to $21, with a line at today's $19 price.See also Comparable companies analysis, Precedent transactions, Discounted cash flow, Pitch book

Perpetuity growth method (Gordon growth method)

Estimating terminal value by assuming cash flow grows at a constant rate forever: TV = final-year FCF x (1 + g) / (WACC - g). The growth rate should be at or below long-run economic growth, often 2% to 3%.ExampleFinal-year FCF of $100m, 2% growth, and a 9% WACC: TV = $100m x 1.02 / (0.09 - 0.02) = $102m / 0.07, about $1,457m.See also Terminal value, Exit multiple method, Weighted average cost of capital

Precedent transactions (transaction comps, precedents)

Valuing a company by the multiples buyers paid in past acquisitions of similar businesses. The values usually come out higher than trading comps because acquirers pay a control premium.ExamplePeers trade at 10x EBITDA, but past acquisitions in the sector were done at 12x. A target with $50m of EBITDA is worth about $500m on comps and $600m on precedents.See also Comparable companies analysis, Football field, Take-private

Price-to-earnings ratio (P/E, P/E ratio)

Share price divided by earnings per share, or equally equity value divided by net income. A $50 stock with $2.50 of EPS trades at 20x. Leverage and tax rates affect it, so it compares best across similar companies.ExampleNet income of $200m on 100m shares is EPS of $2.00. At a $36 share price the P/E is 18x, and equity value of $3.6bn over $200m of net income gives the same 18x.See also Equity value, Net income, Comparable companies analysis

Terminal value

The value of all cash flows after the projection period in a DCF, calculated with the perpetuity growth or exit multiple method. It often makes up more than half of a DCF's total value, so its assumptions deserve the hardest look.ExampleA DCF with $400m of discounted projection-period cash flows and $600m of discounted terminal value gets 60% of its $1bn enterprise value from the terminal value.See also Discounted cash flow, Perpetuity growth method, Exit multiple method

Treasury stock method (TSM)

How diluted shares are counted: assume in-the-money options are exercised and the company uses the exercise cash to buy back shares at the current price. 100 options with a $10 strike and a $20 share price add 100 - (1,000 / 20) = 50 net new shares.ExampleA $40 stock with 1m options struck at $25: exercise brings in $25m, which buys back 625,000 shares at $40, so net dilution is 1,000,000 - 625,000 = 375,000 shares.See also Equity value, Stock-based compensation

Unlevered free cash flow (UFCF, free cash flow to firm, FCFF)

Cash the business generates before paying lenders or shareholders: EBIT x (1 - tax rate) + D&A - capex - increase in net working capital. It is the cash flow a DCF discounts at WACC.ExampleEBIT of $100m at a 25% tax rate gives $75m, plus $20m of D&A, minus $30m of capex and a $5m increase in NWC: unlevered free cash flow is $60m.See also Discounted cash flow, Weighted average cost of capital, Capital expenditures, Net working capital

Weighted average cost of capital (WACC)

The blended return required by all of a company's capital providers: WACC = E/(D+E) x cost of equity + D/(D+E) x cost of debt x (1 - tax rate). It is the discount rate for unlevered free cash flow in a DCF.Example70% equity at a 10% cost and 30% debt at 6% pre-tax with a 25% tax rate: WACC = 0.7 x 10% + 0.3 x 4.5% = 7.0% + 1.35% = 8.35%.See also Cost of equity, Capital asset pricing model, Discounted cash flow, Unlevered free cash flow

M&A and deals16

Accretion/dilution analysis (merger model, accretion dilution)

A test of whether an acquisition raises (accretive) or lowers (dilutive) the buyer's earnings per share. Before synergies, an all-stock deal is accretive when the buyer's P/E is higher than the P/E it pays for the target.ExampleBuyer: $100m net income, 100m shares, $20 stock (20x). It buys a target earning $15m for $225m (15x) with 11.25m new shares. Pro forma EPS is $115m / 111.25m = $1.034, about 3% accretive before fees.See also Price-to-earnings ratio, Synergies

Confidential information memorandum (CIM)

The detailed marketing book a sell-side banker writes about a company for sale, covering the business, its market, management, and financials. Buyers receive it after signing a nondisclosure agreement.ExampleOn the sale of a $300m packaging company, the analyst spends three weeks on a 60-page CIM: business overview, customer mix, five years of historical financials, and management's projections.See also Teaser, Sell-side process, Data room

Coverage group

A banking team organized by industry, such as healthcare, technology, or industrials. Coverage bankers own the client relationships and pitch ideas, then bring in product groups to execute.ExampleA healthcare coverage MD hears a hospital client wants to buy a rival. She brings in M&A to run the valuation and leveraged finance to line up the debt, and keeps the client relationship.See also Product group, Pitch book

Data room (virtual data room, VDR)

A secure online folder where a seller posts contracts, financials, and other documents for buyers to diligence. Access is tracked, and it usually opens in the later rounds of a sale.ExampleIn round two of a sale, the buyer's lawyers and accountants get logins to a data room with 2,000 documents: customer contracts, leases, tax returns, monthly financials. The seller sees who opened what.See also Due diligence, Sell-side process

Due diligence

The buyer's investigation of a target before signing: financials, contracts, legal exposure, customers, and management. What turns up can change the price or end the deal.ExampleDiligence finds that one customer is 30% of revenue and its contract renews in six months. The buyer cuts its bid from $400m to $350m or asks for part of the price as an earnout.See also Data room, Commercial due diligence, Letter of intent

Fairness opinion

A letter from a bank to a company's board saying the price in a deal is fair, from a financial point of view, to shareholders. It rests on a valuation analysis and helps the board show it did its homework.ExampleA board agrees to sell at $45 a share. Its bank shows the board that $45 sits above the DCF range of $38 to $44 and inside the precedents range, then delivers a letter saying the price is fair.See also Football field, Sell-side process

Follow-on offering

A sale of shares by a company that is already public. If the company issues new shares it raises cash but dilutes existing holders; if existing holders sell their own shares, no new shares are created.ExampleA public company with 100m shares sells 10m new shares at $50, raising $500m and diluting existing holders by about 9% (10m of 110m). If its PE owner sells 10m of its own shares instead, the company raises nothing.See also Initial public offering, Underwriting

Indication of interest (IOI)

A non-binding first-round bid in an auction, usually a valuation range with the key assumptions behind it. The seller uses IOIs to decide which buyers move on to the second round.ExampleTen buyers send IOIs for a software company, ranging from $350m to $500m. The seller invites the five highest, all above $425m, to management meetings and the data room.See also Letter of intent, Sell-side process

Initial public offering (IPO)

A private company's first sale of shares to the public on a stock exchange. The underwriting banks market the deal to investors, build the order book, set the price, and allocate the shares.ExampleA company sells 20m shares at $25, raising $500m. With a 6% underwriting spread, the banks keep $30m and the company receives $470m before legal and other fees.See also Underwriting, Follow-on offering

Letter of intent (LOI)

A document in which a buyer states the price and main terms it intends to sign on, usually after the final round of diligence. Most of it is non-binding, though exclusivity and confidentiality clauses often bind.ExampleAfter diligence, a buyer signs an LOI at $420m with 45 days of exclusivity. The price is not binding, but the exclusivity is: the seller cannot talk to other buyers for those 45 days.See also Indication of interest, Sell-side process, Due diligence

Pitch book

The slide deck bankers bring to a client meeting to win business or present ideas: a market update, valuation, likely buyers or targets, and why this bank. Analysts build most of the pages.ExampleThe tech group hears a mid-sized software client is weighing a sale. By Thursday the analyst has a 30-page pitch book: market update, valuation range, 15 likely buyers, and the bank's recent software deals.See also Coverage group, Football field

Product group

A banking team organized by type of transaction, such as M&A, leveraged finance, equity capital markets, or restructuring. It brings execution expertise that cuts across industries.ExampleA consumer coverage team wins a sale mandate. The M&A group runs the auction, and the leveraged finance group arranges financing that bidders can use to fund their offers.See also Coverage group, Underwriting

Sell-side process (auction process)

A bank running the sale of a company for its owner. A typical auction goes teaser and NDA, CIM, first-round IOIs, management meetings and data room access, final bids with LOIs, then a signed purchase agreement.ExampleWeek 1: teasers go to 60 buyers, 30 sign NDAs and get the CIM. Week 6: 12 IOIs arrive and 5 get the data room. Week 14: 3 final bids come in and the best one signs a purchase agreement.See also Teaser, Confidential information memorandum, Indication of interest, Letter of intent

Synergies

Extra value created by combining two companies. Cost synergies come from removing overlap, like duplicate offices; revenue synergies come from selling more together and are harder to deliver, so buyers discount them.ExampleTwo merging companies close a duplicate headquarters and save $30m a year. At a 10x multiple those cost synergies are worth about $300m, which is how a buyer justifies paying a premium.See also Accretion/dilution analysis, Due diligence

Teaser

A one or two-page anonymous summary of a company for sale, sent to a long list of potential buyers to test interest before anyone signs an NDA.ExampleA two-page teaser for Project Atlas describes a Midwest packaging business with $250m of revenue and 18% EBITDA margins, and goes to 80 buyers without naming the company.See also Confidential information memorandum, Sell-side process

Underwriting

A bank's role in a securities offering: it commits to buy or sell the shares or bonds, markets them to investors, and takes on risk in exchange for a fee called the underwriting spread.ExampleBanks agree to buy $1bn of bonds at 99.0 and sell them to investors at 100.0. The 1 point is a $10m spread; if demand is weak and they have to sell below 99.0, they take the loss.See also Initial public offering, Follow-on offering, High-yield bond

LBOs and private equity11

Dividend recapitalization (dividend recap)

A PE-owned company borrows new debt and pays the proceeds to its owners as a dividend. It returns cash early and lifts IRR, but leaves the company carrying more leverage.ExampleA company with $100m of EBITDA and $400m of debt borrows $200m more and pays it to its sponsor as a dividend. The sponsor gets cash back early and IRR rises; leverage goes from 4.0x to 6.0x.See also Internal rate of return, Leverage ratio, Leveraged buyout

Internal rate of return (IRR)

The annualized return on an investment: the discount rate at which the present value of all its cash flows equals zero. Doubling your money in five years is about a 15% IRR; tripling it in five years is about 25%.ExampleInvest $100m and get $200m back in five years: the IRR is about 14.9%, since 1.149 to the fifth power is about 2.0. Get the same $200m in three years and the IRR is about 26%.See also Multiple of invested capital, Leveraged buyout, Paper LBO

Leveraged buyout (LBO, buyout)

Buying a company with a large share of borrowed money, often around half the price, and using the company's own cash flow to pay the debt down. Returns come from EBITDA growth, debt paydown, and any multiple expansion.ExampleBuy a company with $100m of EBITDA at 10x, $1bn, with $500m of debt and $500m of equity. Exit in five years at 10x $150m of EBITDA, $1.5bn, with $300m of debt left: equity is $1.2bn, a 2.4x MOIC.See also Sources and uses, Internal rate of return, Sponsor, Paper LBO

Multiple expansion

Selling a company at a higher valuation multiple than you paid, such as buying at 10x EBITDA and exiting at 12x. Careful LBO models assume the exit multiple equals the entry multiple so returns do not depend on it.ExampleBuy at 10x $50m of EBITDA for $500m; sell at 12x the same $50m for $600m. The $100m gain came from the multiple alone, with no growth in the business.See also Leveraged buyout, EV/EBITDA multiple, Add-on acquisition

Multiple of invested capital (MOIC, cash-on-cash)

Total value returned divided by equity invested. Putting in $100 million and getting $250 million back is a 2.5x MOIC. Unlike IRR, it ignores how long the money was tied up.ExampleTwo deals each return 2.0x. One took 3 years, about a 26% IRR; the other took 7 years, about a 10% IRR. Same MOIC, very different results for the fund.See also Internal rate of return, Leveraged buyout

Paper LBO

A simplified LBO done with pen and paper in an interview, in a few minutes. You get the purchase price, leverage, growth, and exit assumptions, then estimate the equity value at exit and the IRR by hand.Example$50m EBITDA at 10x is $500m, half debt. EBITDA grows to $70m, exit at 10x is $700m, and $150m of debt repaid leaves $100m. Equity goes from $250m to $600m: 2.4x in five years, about 19% IRR.See also Leveraged buyout, Internal rate of return, Multiple of invested capital, Technical interview

Rollover equity

Equity that sellers, often the founder or management, reinvest in the company under its new owner instead of taking all cash. It keeps them aligned with the buyer and reduces the cash the buyer has to put in.ExampleA founder sells for $300m and rolls 20%, or $60m, into the new company. The sponsor needs $60m less cash, and the founder keeps a stake in the next exit.See also Sources and uses, Leveraged buyout

Secondary buyout

One PE firm selling a portfolio company to another PE firm. It is a common exit route, especially when the IPO market is slow.ExampleFund A bought a business at 8x EBITDA and grew it for five years. It sells to Fund B at 11x, and Fund B starts its own plan with new debt and a new management incentive pool.See also Leveraged buyout, Portfolio company

Sources and uses

The table at the top of an LBO or merger model. Uses are what the money pays for (the equity purchase price, refinanced debt, fees); sources are where it comes from (new debt, sponsor equity, rollover). The two totals must match.ExampleUses: $800m to buy the equity, $200m to refinance debt, $30m of fees, $1,030m in total. Sources: $550m of new debt, $430m of sponsor equity, $50m of rollover, also $1,030m.See also Leveraged buyout, Rollover equity

Take-private

A buyout of a public company, after which its shares stop trading. The buyer usually pays a premium to the share price before the deal was announced, often 20% to 40%.ExampleA public company trades at $20 before the news. A sponsor offers $26, a 30% premium; with 50m shares outstanding, the equity purchase price is $1.3bn.See also Leveraged buyout, Precedent transactions

Credit and restructuring10

Absolute priority rule

In bankruptcy, each class of claims is paid in full before the next one gets anything: secured debt, then unsecured debt, then preferred stock, then common equity. Negotiated settlements often bend it in practice.ExampleA bankrupt company is worth $500m. Secured lenders owed $400m are paid in full, unsecured holders owed $300m split the remaining $100m, about 33 cents on the dollar, and shareholders get nothing.See also Chapter 11, Distressed debt, Debtor-in-possession financing

Chapter 11

The part of the US Bankruptcy Code that lets a company keep operating while it reorganizes its debts under court supervision. Creditors usually recover less than they are owed, and existing shareholders are often wiped out. Chapter 7 is liquidation.ExampleA retailer with $2bn of debt files Chapter 11 and keeps its stores open. It exits a year later with $800m of debt; the old bondholders own the new equity and the old shareholders get nothing.See also Debtor-in-possession financing, Absolute priority rule, Distressed debt

Covenant

A promise in a loan or bond agreement. Maintenance covenants are tested on a schedule, such as keeping debt/EBITDA under 5.0x every quarter; incurrence covenants are tested only when the borrower does something, like taking on more debt.ExampleA loan requires debt/EBITDA under 5.0x each quarter. With $450m of debt, EBITDA falling from $100m to $85m takes leverage from 4.5x to about 5.3x, and the covenant is breached.See also Covenant-lite, Leverage ratio

Credit rating (investment grade)

A grade from an agency such as S&P, Moody's, or Fitch on how likely a borrower is to default. BBB- at S&P (Baa3 at Moody's) and above is investment grade; anything lower is high yield.ExampleAn issuer cut from BBB- to BB+ falls out of investment grade. Funds that may hold only investment grade bonds have to sell, and its spread can widen sharply in days.See also High-yield bond, Credit spread

Debtor-in-possession financing (DIP financing, DIP loan)

A loan that funds a company through its Chapter 11 case. The court gives it priority over most existing debt, which is why lenders are willing to lend to a company that is already bankrupt.ExampleA bankrupt manufacturer needs $150m to pay suppliers and staff during its case. A DIP lender provides it at SOFR + 7%, ahead of the old unsecured bonds, so its repayment is close to certain.See also Chapter 11, Absolute priority rule

Distressed debt

Bonds or loans of companies in or near default, trading well below face value. Distressed investors buy them to profit from the recovery or to take control of the company through a restructuring.ExampleA bond trades at 40 cents on the dollar, and you think a restructuring recovers 60 cents. Buying $10m of face value for $4m and receiving $6m of value is a 50% gain.See also Chapter 11, Absolute priority rule, Yield to maturity

High-yield bond (junk bond, HY)

A bond rated below investment grade, meaning below BBB- at S&P. It pays more interest because default risk is higher, and it is often issued to fund leveraged buyouts.ExampleA sponsor funds an LBO with $500m of 8-year B-rated bonds at 8.5% while investment grade bonds of similar maturity pay 5.5%. The 300 bp gap is the price of the extra default risk.See also Credit rating, Credit spread, Leveraged buyout

Interest coverage ratio

EBITDA (or EBIT) divided by interest expense. A company with $100 million of EBITDA and $25 million of interest has 4.0x coverage. The lower it gets, the less cushion lenders have if earnings fall.ExampleEBITDA of $60m and $20m of interest is 3.0x coverage. If floating rates rise and interest climbs to $30m, coverage falls to 2.0x.See also Leverage ratio, EBITDA

Leverage ratio (debt/EBITDA)

Total debt divided by EBITDA, the first number a credit investor looks at. $600 million of debt on $100 million of EBITDA is 6.0x. Net leverage subtracts cash from debt first.ExampleA company with $500m of debt, $100m of cash, and $80m of EBITDA has total leverage of 6.25x and net leverage of ($500m - $100m) / $80m = 5.0x.See also Interest coverage ratio, Covenant, EBITDA

Revolving credit facility (revolver, RCF)

A credit line a company can draw, repay, and draw again up to a limit, like a business credit card. It usually ranks senior and covers working capital needs and emergencies.ExampleA retailer has a $200m revolver. It draws $120m in October to buy holiday inventory and repays it in January from holiday sales, so the full $200m is available again.See also Covenant, Net working capital

Consulting1

Up or out

A promotion system in which people either move up to the next level within an expected window or are encouraged to leave. Common at consulting firms and some banks, it keeps the pyramid shaped and moves people along quickly.ExampleA consultant expected to make engagement manager within about three years who is passed over twice is counseled to look for an outside role, often with help from the firm.See also Engagement manager, MBB

Venture and startups1

Dilution

The drop in an existing holder's ownership percentage when new shares are issued, in a funding round, an option grant, or a stock-funded acquisition. The holder keeps the same shares but owns a smaller slice.ExampleA founder owns 60% before a round that sells 20% of the company to new investors. Afterward the founder owns 60% x 0.80 = 48%.See also Cap table, Option pool, Accretion/dilution analysis