MN50412 Investment Banking

Section A

Please answer ALL questions

Q1.

Identify three areas of potential conflict of interest in investment banking and discuss how regulation over the last century has attempted to manage these potential conflicts. [15 marks]

Q2.

In the next financial year, Basenji plc is expected to have an EBITDA of £270 million, total debt of £100 million and £40 million in cash and cash equivalents. There are 28m shares outstanding.

Malamute Ventures has identified Basenji plc as a potential firm of interest for acquisition. They believe there are three comparable firms for Basenji plc and have calculated EV/EBITDA multiples for those firms, as presented in the table below.

Required:

a) Using the multiples above, find the implied share price range for Basenji plc. [3 marks]

b) What other information should Malamute Ventures consider in order to decide whether or not Basenji represents a good investment? [5 marks]

c) Using the Hertz case study studied on this unit, or other examples, illustrate some of the key features that makes a company an ideal Leveraged Buyout (LBO) target. [12 marks]

[Total 20 marks]

Q3.

The company Afador floated on the NYSE yesterday. The offer price was $28. After a buoyant first day of trading, the price closed at $38.80. 250 million shares were sold initially, and a 10% over-allotment option was granted to Akita Bank, the underwriter. The agreed fee was 4.5%. Required:

a) Explain why over-allotment options are used and how the decision would be made about whether or not to exercise the option. What would have happened in the case of Afador? [5 marks]

b) How much capital did Afador raise, net of fees? [5 marks]

c) Calculate the level of underpricing and the ‘money left on the table’. [5 marks] d) Discuss the reasons why some companies are keen to undertake direct listings instead of employing an investment bank. With reference to theories covered in this unit, comment on whether you believe it would be in the best interests of companies to pursue this option. [10 marks]

[Total 25 marks]

Q4.

The syllabus for MN50412 covers a number of topics in Investment Banking, but does not cover everything that investment banks do.

a) Propose an additional topic you would like to see added into the unit, with your reasoning for doing so and what you would remove from the course in order to accommodate this.

[Total 10 marks]

Section B

Please answer ONE of the following TWO questions. Answers should be limited to 1,000 words.

Q5.

Evaluate the current opportunities and challenges for investment banks in a country or region of your choice.

[30 marks]

Q6.

The following is a quote from the Financial Times on February 18th 2020: “HSBC has said it plans to slash about 35,000 jobs as part of a radical downsizing of its operations in Europe and the US, as it warned of the threat to its business from social unrest in Hong Kong and the coronavirus outbreak.”

Explain why it is common for investment banks to use redundancies to control costs and discuss the implications for the investment banking industry.

[30 marks]