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Investment Banking, Operating/Financial Leverage, EBIT-EPS

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1. What is investment banking? How would the investment banker assist an organization in going public? As a CFO, what information would you need to select an investment banker?

2. What is the difference between operating and financial leverage? What is the importance of assessing operating vs. financial leverage?

3. What are the risks of having an excessive amount of financial leverage in an organization? What is the degree of total leverage?

4. What is EBIT-EPS analysis? What is the indifference curve? How is risk factored into the EBIT-EPS analysis? What are the "basic short comings" of EBIT's analyses?

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1. Investment banking is the industry of raising capital through initial public offerings (IPO), mergers and acquisitions, and general securities trading. In addition, these firms offer services involving risk management and compliance. An investment banker would help a firm go public by first assisting in the business valuation process to determine a target price of the IPO. The banker would then assist in the legal aspects of the process including various reporting requirements to the Securities and Exchange Commission. Afterward, the banker would establish interest in the stock through his or her contacts at other investment banks and would commit to selling the shares through contacts and, ...

Solution Summary

The solution defines investment banking and explaines how an investment banker assists during an IPO. In addition, the difference between operating and financial leverage is explained. The solution also explains the risk of having excessive financial leverage, and explains EBIT-EPS analysis.