Matt Krantz is the personal finance and management editor at Investor's Business Daily. Matt's recent books include Online Investing For Dummies and Fundamental Analysis For Dummies.

Robert R. Johnson, PhD, CFA, CAIA, is a Professor of Finance at Creighton University, where he teaches in the Master of Security Analysis and Portfolio Management Program.

Introduction 1

About This Book 1

Foolish Assumptions 3

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part 1: Getting Started With Investment Banking 5

Chapter 1: Introducing Investment Banking 7

What Investment Banking Is 8

The role investment banking plays 8

How investment banking differs from traditional banking 10

The services investment banks provide 11

How investment banks are organized 12

The current lay of the investment banking land 14

Types of investment banking operations 15

How investment banks get paid 15

How Investment Banking Is Done 17

Finding the financial statements 18

Understanding the importance of financial statements and ratios 18

Zeroing in on past transactions 18

Seeing the value of fixed income 19

Turning Into an Investment Banking Pro 19

Putting the discounted cash flow analysis to work 19

Seeing how leverage becomes a force in investment banking 20

Pinpointing buyout targets 20

Putting Investment Banking to Work 21

Staying in compliance with the rules 21

Looking beyond the published financial statements 21

Making adjustments to financial statements for comparability 22

Chapter 2: The Purpose of Investment Banking: What Investment Bankers Do 23

Putting the For-Sale Sign on Corporate America 24

Mergers and acquisitions 25

Leveraged buyouts 27

Private business sales 29

Initial public offerings 32

Helping Investors Decide Whether to Buy or Sell 36

The importance of research 36

What do the analysts do? 37

Digging Into the Role of the Trading Desk 38

Why investment banks are into trading 39

How investment banks turn pennies into billions 40

The type of analysis used in trading operations 40

Chapter 3: How Investment Bankers Sell Companies 43

Getting Companies Ready for Sale on Public Markets 44

Meeting the requirements to make an IPO happen 45

Writing the prospectus 47

Supporting the IPO: Making success last 51

Seeing What Sell-Side Analysts Do 53

The goals of the sell-side analyst 54

What investors look to sell-side analysts for 55

Spreading the word: Disseminating sell-side research 55

Examining a Sample Research Report 57

What to look for in the document 57

The main sections of a research report 58

Ways to look beyond the "buy" or "sell" 59

Chapter 4: How Investment Banking Is Used in Mergers and Acquisitions 61

Come Here Often? The Basics of Mergers and Acquisitions 62

Kinds of mergers 62

Why companies merge instead of simply growing organically 63

Firms that make attractive acquisition targets 66

How companies identify firms to merge with 67

The nature of the merger: Friendly or hostile? 68

Tools Used to Analyze the M&A Deal 70

The role of the buy-side M&A advisor 70

The role of the sell-side M&A advisor 75

Why Many M&A Deals Go Wrong 76

Misplaced incentives 76

Faulty analysis 77

Overstated synergies 78

Culture wars 78

The winner's curse: Overpaying 78

Chapter 5: How Investment Banking Is Used in Leveraged Buyouts 81

In This Corner: Introducing the Players 82

Investment banks 83

Big institutions 84

Management 85

Stock and bond investors 86

Aiming for the Right Targets in a Leveraged Buyout 87

Identifying companies that can work in a leveraged buyout 88

Appreciating the power of cash flow 89

Coming to terms with the return analysis: Internal rate of return 90

Finding the Exit 91

Setting a target for exit in time 92

Considering how the exit will happen 92

Part 2: Digging In: Performing Investment Banking 95

Chapter 6: Finding the Data: Documents and Reports 97

Finding What You Need on the Securities and Exchange Commission's Website 98

What types of information you can find 98

The key types of documents 99

How to use EDGAR to pinpoint information 100

Getting Data in a Format You Can Work With 105

Assembling the tools you need 105

Importing financial information into Excel 107

Getting in tune with interactive data 109

Paying Attention to the Non-Financial Information 110

Monitoring news streams for investment banking ideas 110

Quickly processing information with aggregators 112

Doing research on the key players in a deal 114

Chapter 7: Making Sense of Financial Statements 115

Income Statements 116

Locating the areas of interest to investment bankers 118

Tweaking the statement with different assumptions 119

Finding investment banking opportunities 120

Balance Sheets 121

Finding your way around the key parts 122

Understanding a company's financial strength 124

Locating pitfalls and opportunities 126

Statement of Cash Flows 127

Seeing why the cash flow statement is so important in deal making 127

Understanding the key parts of the document 127

Calculating free cash flow 130

Proxy Statements 131

Learning about the key players in a deal 131

Identifying the management team's incentives 132

Analyzing management pay packages 133

Chapter 8: Perfecting the Financial Ratios for Investment Banking 135

Valuation Multiples: Assessing How Much the Company Is Worth 136

Investors' favorite valuation tool: P/E ratio 137

Going old school with price-to-book 137

Putting a price on profitability 138

Liquidity Multiples: Checking Companies' Staying Power 140

Deciphering debt to equity 141

Getting up to speed with the quick ratio 142

Interpreting interest coverage 142

Profitability Ratios: Seeing How a Company's Bottom Line Measures Up 143

Why gross margin isn't so gross after all 144

Income from continuing operations: Looking at profit with a keen eye 144

Keying into profits with net margin 145

Efficiency Ratios: Knowing How Well the Company Is Using Investors' Money 146

Finding out about return on assets 147

Digging into return on capital 148

Uncovering company secrets with return on equity 149

Calculating a company's growth rate 150

Chapter 9: Sizing Up the Industry 153

Performing an Industry Analysis 154

Understanding why industry analysis is important 154

Creating a comparison universe 155

Adjusting the industry comparison universe 158

Unearthing Company Trends and Common sizing the Financial Statements 159

Comparing growth rates 160

Comparing leverage 163

Comparing various profit margins 165

How a Company Stacks Up: Comparing the Key Ratios 166

Sizing up valuation 167

Comparing total debt-to-equity 169

Sizing up companies on their efficiency 170

Industry ratios 170

Chapter 10: Understanding Stocks and Focusing on Past Transactions 171

Introducing Stock 172

Characteristics of stock 173

Types of stock 174

Understanding stock pricing 175

Finding Past Transactions 176

Tracking the stock market 177

Studying private deals 177

Looking at pre-IPO marketplaces 179

Examining buyouts 179

Analyzing Past Transactions 180

Knowing what the market will bear 180

Knowing when the market is distorted 180

Tabulating key ratios for past deals 182

Understanding the pitfalls 184

Chapter 11: Applying Investment Banking to Fixed Income 185

Introducing Bonds 186

Identifying the Various Types of Bonds 188

Convertible bonds 188

Callable bonds 189

Puttable bonds 189

Floating-rate bonds 189

Zero-coupon bonds 190

Knowing Their Place: The Position of Bondholders 190

Understanding Bond Pricing 192

Introducing the concept of present value 192

Relating yield to maturity and price 195

Playing the spread: How different factors affect bond prices 196

Considering bond sensitivity to changes in interest rates 197

Tracking the Bond Market 200

Debt or Equity: How a Company Chooses 202

Part 3: Taking Investment Banking to the Next Level 205

Chapter 12: Doing a Discounted Free Cash Flow Analysis 207

Gearing Up for Discounted Free Cash Flow 208

Computing free cash flow 210

Forecasting free cash flow 211

Calculating the Weighted Average Cost of Capital 212

Understanding why the weighted average cost of capital is so important 213

Measuring the cost of debt and equity 214

Understanding the capital asset pricing model 217

Going for Terminal Value 220

Knowing the perpetuity growth formula 220

Applying the constant growth formula 221

Applying the two-stage growth model 222

Stress-testing the results 223

Valuing a Share of Stock 224

Chapter 13: Structuring a Leveraged Buyout 227

Seeing How Leveraged Buyouts Are Structured 228

The types of financing 228

Understanding seniority and maturity 235

Building a Leveraged Buyout Model 236

Creating a pro forma model 236

Deciding on methods of financing 238

Seeing how the results work out 239

The importance of taxes in a leveraged buyout 240

What can go...