Weekly Reader Q&A: Diluted Shares Outstanding In A DCF, IT To Investment Banking And Fortune 500 Corporate Finance
Weekly (or maybe this should be bi-weekly?) Reader Q&A continues this week, and I prove that I can indeed answer technical/finance questions as well (one of the benefits of working in an M&A group is that I know all sorts of obscure finance/tax trivia you never use 99% of the time), so if you have them send them over.
Diluted Shares Outstanding In A DCF
“I’m confused about how shares outstanding work in a DCF. When calculating the fully diluted shares outstanding using the Treasury Stock Method, we need the current share price. But shouldn’t we use the “intrinsic share price” obtained from the DCF to calculate diluted shares?
I realize this would create a circular reference because the DCF depends on the diluted shares outstanding, but the diluted shares outstanding depend on the share price in the DCF.
Can you clarify?”
Inquisitor:
You’re talking about 2 separate issues here - what a company actually costs to acquire and what a DCF tells you it’s worth.
When you calculate a company’s fully diluted shares at a given share price, you take the basic shares outstanding and factor in the dilution from options (and warrants/convertibles) at that share price. Then you multiply that number by the share price to get the company’s fully dluted market cap.
A DCF, or any other valuation technique like public comps or M&A comps, is used to tell you what a company should be worth, not what it would actually cost to acquire it today.
In other words, you would never use the implied per share value from a DCF to determine how much it would cost to buy a company.
If you’re doing a DCF the correct way, you do get a circular reference because the per-share price output depends on the fully diluted share count - but the fully diluted share count depends on the per-share price.
To do this correctly, calculate the fully diluted shares using the Treasury Stock Method and use the per-share price in the DCF as the input for fully diluted shares, then use the fully diluted shares output as input in the DCF. Make sure iterations are turned on in Excel (Alt T + O + C + Alt M + Alt I) and let it iterate (F9) to calculate the correct number.
Career Switch: IT To Investment Banking
“I am looking for advice on how to proceed with my career, and am hoping you might point me in the right direction. I am currently working in the IT department of a top 5 investment bank after having graduated from a top 10 university with a Computer Science degree 2 years ago.
The IT role hasn’t met my expectations at all and I have decided I would rather go into an investment banking front-office role.
For someone with my background, can I realistically switch over? Would recruiters look favorably upon my experience?”
Inquisitor:
Generally it is quite difficult to transition from a back-office role (IT, for example) into a front-office role at an investment bank. Since the firms are so large you tend to get pigeonholed into one area, and no matter how much interest/aptitude you have for front-office work, your requests to transfer will usually fall on deaf ears.
As I wrote in my article on how to get a finance job with an engineering background, there are typically 2 viable options:
- Take advantage of your quantitative background and go to a hedge fund. They like recruiting Computer Science graduates and other quantitative majors, and your experience at a bank gives you an edge here. They understand that if you’re smart and quantitative you can pick up anything finance-related along the way.
- Go to an MBA program and come into banking as an Associate. The only issue is that with just the IT role at the bank on your resume, you will probably need more experience to get into business school/get into a bank afterward.
I don’t mean to discourage you, but from what I’ve seen it is just incredibly difficult to “lateral” into banking from a field that isn’t closely related (e.g. consulting). Going outside banking to the hedge fund world or going back for an MBA are higher-probability ways of getting in, especially in a bear market.
Corporate Finance At A Fortune 500 Company
“I was wondering what you thought of Corporate Finance training programs at Fortune 500 companies, such as GE’s Financial Management Program. Are these at all useful for breaking into investment banking? If I have the opportunity to do something similar this summer, should I take it?”
Inquisitor:
Corporate Finance at a large company can be one path you take to get into banking, but I would recommend only doing a summer internship rather than a full 2-year program if you do not want to ultimately work at a Fortune 500 company.
Although you do learn lot and will gain a useful skillset, recruiters do not view these programs in the same way they would view experience at an investment bank, private equity firm or hedge fund. Those 3 are all seen as more “rigorous” - in other words you work a lot more, (perhaps) learn more finance and you’ll be better-prepared for the non-existent work/life balance of investment banking.
If you don’t have or can’t get an internship in one of those 3, it is definitely better to do Corporate Finance at a Fortune 500 than to do something in a completely unrelated field.
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Tags: Career Change, Corporate Finance, DCF, Hedge Funds, understanding investment banking, Valuation
Coming Soon: Breaking Into Wall StreetRelated Articles:
- A Week In The Life Of An Investment Banking Analyst: Tuesday
- How to Achieve an 8-Figure Net Worth, Banking in Asia vs. NY, Business School, and More Questions… and Answers
- A Week In The Life Of An Investment Banking Analyst: Sunday & Monday
- Weekly Reader Q&A: Nonprofit To Private Equity, The Role Of Accounting Firms And Startup vs. Marketing Internship
I know this sounds like a stupid question, but what would you consider Front Office (Investment Banking, Corporate Banking, Transaction Services, Sales & Trading, Private Banking…are there more?) In addition, I have a friend who signed on for a summer internship with a BB in as a corporate banking summer analyst and he is looking to convert this into IBD, how easy is this to convert into investment banking? Also what is the real main difference between corporate bankers and investment bankers in terms of exits opportunities, etc.?
Hi there,
Definitions differ but I would consider Investment Banking and Sales & Trading to be the most typical “front office” roles. In reality, anything that deals with clients rather than internal functions at a bank could be considered front office, that’s just my view.
Corporate banking to IBD is not as difficult as, say, IT to IBD and it’s easier if you have an internship. Still, it’s not nearly as easy as S&T to IBD for example. If your friend wants to make the switch, he needs to push for it and make sure he knows lots of people in IBD who are pulling for him.
Corporate banking exit opps - people tend to go onto more finance/accounting type jobs rather than private equity or hedge funds since it’s not really about investing or doing large transactions (http://news.efinancialcareers.com/SECTOR_PROFILE_ITEM/newsItemId-5499). Overall IBD exit opps are more lucrative/viewed as more prestigious.
I’m trying to do the IT switchout too, but I’m looking for portfolio mgmt. I’m doing my CFA L2 in a couple of weeks, and I’ll start a part-time MBA after that. It’s not going to be easy, especially for a guy who is, er, not-in-his-20’s.
Thanks for all your articles, Inquisitor. I’ll let you know how it goes in 3 years
Good luck Andrew - let me know how it goes!
It’s definitely not easy but not impossible either, especially if and when the market improves.
you are right — a switch from consulting to i banking is hard…but with an MBA, it can indeed be done.
I would suggest that the IT guy go get an MBA and maintain his contacts at the bank, then touch base with them early in his first year of school so that he can maybe get an internship seat…….
how do i banks view a part time MBA? always wondered?
Generally part-time MBAs are not viewed too favorably and most banks only recruit out of the top 10 full-time programs. That is starting to change a bit and more banks are going to part-time programs, but you still face an uphill battle coming from there.