Glossary

Plain-English definitions of the 49 terms that come up most in investment-banking interviews. Jump to a topic:

Accounting

EBITDA: Earnings before interest, taxes, depreciation, and amortization. A proxy for a company's core operating cash generation that strips out capital structure, tax jurisdiction, and non-cash charges, which makes it useful for comparing operating performance across companies.
EBIT: Earnings before interest and taxes, also called operating income. It reflects operating profit after depreciation and amortization but before financing and tax effects.
Working capital: Current assets minus current liabilities. In modeling, the focus is the operating portion — receivables, inventory, and payables — whose period-over-period change consumes or releases cash.
Depreciation: The gradual expensing of a tangible asset's cost over its useful life. It is a non-cash charge that lowers taxable income and is added back on the cash flow statement.
Amortization: The equivalent of depreciation applied to intangible assets, or the scheduled paydown of a loan's principal. When it refers to intangibles it is a non-cash charge.
Accrual accounting: Recording revenue when it is earned and expenses when they are incurred, regardless of when cash actually moves. It is the main reason net income and cash flow differ.
Deferred revenue: Cash collected before the good or service is delivered. It sits on the balance sheet as a liability until the obligation is met and the revenue can be recognized.
Goodwill: An intangible asset created when an acquirer pays more than the fair value of a target's identifiable net assets. It is tested periodically for impairment rather than amortized.
Deferred tax liability: Taxes expected to be paid in the future because book income currently exceeds taxable income, often the result of using different depreciation methods for books and taxes.
Net income: The bottom-line profit left after all operating costs, interest, and taxes. It is the starting point for the cash flow statement and the numerator in earnings per share.

Valuation

Enterprise value: The value of a company's core operations available to all capital providers. It equals equity value plus net debt (and preferred stock and minority interest), which makes it independent of capital structure.
Equity value: The value attributable to common shareholders — market capitalization for a public company, or enterprise value less net debt and other senior claims.
Discounted cash flow (DCF): An intrinsic valuation that projects a company's future free cash flows and discounts them to the present at a rate reflecting their risk, then adds a terminal value.
WACC: Weighted average cost of capital: the blended after-tax return demanded by all of a company's investors. It is the rate used to discount unlevered free cash flow in a DCF.
Cost of equity: The return equity investors require to hold a stock, commonly estimated with CAPM as the risk-free rate plus beta times the equity risk premium.
CAPM: The capital asset pricing model, which estimates cost of equity from the risk-free rate, a company's beta, and the market risk premium.
Beta: A measure of how much a stock's returns move relative to the overall market. A beta above one implies the stock is more volatile than the market.
Terminal value: The value of a company's cash flows beyond the explicit forecast period in a DCF, estimated with either a perpetuity growth rate or an exit multiple.
Unlevered free cash flow (UFCF): Cash flow available to all capital providers before the effect of debt. It is the cash flow discounted at WACC in a DCF.
Levered free cash flow (LFCF): Cash flow left for equity holders after interest and mandatory debt repayments. It is discounted at the cost of equity rather than WACC.
Comparable companies: A relative valuation that applies the trading multiples of similar public companies to the subject company's metrics to imply a value.
Precedent transactions: A relative valuation based on the multiples paid in past acquisitions of similar companies. These multiples typically embed a control premium.

Enterprise value & capital structure

Net debt: Total debt minus cash and cash equivalents. It is the figure that bridges equity value and enterprise value.
Capital structure: The mix of debt, equity, and hybrid instruments a company uses to finance its assets and operations.
Minority interest: Also called noncontrolling interest, this is the portion of a consolidated subsidiary the parent does not own. It is added in the enterprise value bridge because the financials are fully consolidated.
Preferred stock: A hybrid security that ranks senior to common equity and usually pays a fixed dividend. In the enterprise value bridge it is generally treated like debt.
Treasury stock method: A way to estimate the net new shares from in-the-money options and warrants, assuming the proceeds from exercise are used to repurchase shares at the current price.
Fully diluted shares: Basic shares outstanding plus the net dilution from options, warrants, and convertible securities. This is the share count used to calculate equity value.
Convertible debt: A bond that can convert into a set number of shares. It becomes dilutive when the stock trades above the conversion price.
Operating lease: A lease that, under current accounting standards, is recognized on the balance sheet as a right-of-use asset with a corresponding lease liability.
Net operating losses (NOLs): Accumulated tax losses that can offset future taxable income. They create a deferred tax asset that carries real value into an acquisition.

LBO

Leveraged buyout (LBO): The acquisition of a company financed largely with borrowed money, where the target's own cash flows repay the debt and its assets often serve as collateral.
MOIC: Multiple on invested capital: total value returned to the sponsor divided by the equity invested. It is a gross measure of how many times the money was multiplied.
IRR: Internal rate of return: the annualized discount rate that sets the net present value of an investment's cash flows to zero. It is the sponsor's headline return metric.
Financial sponsor: A private equity firm that acquires companies, improves them over a holding period, and sells them to generate returns for its fund's investors.
Leverage: The use of debt to finance an acquisition. Higher leverage amplifies equity returns when the deal performs and magnifies losses when it does not.
Cash sweep: A provision that directs a company's excess free cash flow toward paying down debt ahead of the required schedule.
Sources and uses: A table showing where a deal's money comes from (debt and equity) and where it goes (buying the equity, refinancing existing debt, and fees).
Entry and exit multiple: The valuation multiple paid to acquire a company versus the multiple assumed at sale. Expansion between entry and exit is a key driver of LBO returns.
PIK: Payment-in-kind: interest that accrues to the loan balance instead of being paid in cash, preserving near-term liquidity at the cost of a growing principal.
Dividend recapitalization: Raising new debt to fund a dividend back to the sponsor, returning capital to investors without selling the company.

M&A

Accretion / dilution: Whether a deal raises (accretive) or lowers (dilutive) the acquirer's earnings per share. It is a first-pass test of a transaction's financial impact.
Synergies: The incremental value from combining two companies, whether cost synergies (removing duplicate expenses) or revenue synergies (cross-selling and pricing power).
Purchase price allocation (PPA): The process of assigning the price paid to a target's assets and liabilities at fair value, with any excess over identifiable net assets recorded as goodwill.
Control premium: The amount an acquirer pays above a target's unaffected trading price in order to gain control of the company.
Stock vs cash consideration: Whether an acquirer pays with its own shares, cash, or a mix. The choice affects dilution, pro forma leverage, and how deal risk is shared.
Exchange ratio: In a stock deal, the number of acquirer shares each target shareholder receives for every target share held.
Pro forma: Financial statements that present the combined company as if the deal had already closed, incorporating the financing and purchase accounting adjustments.
338(h)(10) election: A US tax election that treats a qualifying stock purchase as an asset purchase, giving the buyer a stepped-up tax basis in the target's assets.