I took a case study that I felt was very basic and was rejected afterwards. The feedback I got was that it was solely based on the case study. I'm not sure what went wrong here and was hoping someone from the community could help me figure out what went wrong/how I could have answered more effectively for next time. I can provide the questions here or DM them. Thanks,
| +59 | Is a 3.6 good enough | 39 | 16h | |
| +20 | Dream Job vs Dream Location | 15 | 5d | |
| +18 | Recently Moved, Not Enjoying it and Wondering How Long to Stay | 3 | 1d | |
| +18 | Past employer is jeopardizing job opportunities | 7 | 22h | |
| +18 | conditional offer issues | 6 | 1d | |
| +18 | Should I Rush A Fraternity? | 21 | 34m | |
| +17 | any breaking in advice? | 17 | 1d | |
| +17 | landing a first ib internship with only wealth management experience | 2 | 1d | |
| +16 | Moving from Tech to Finance | 5 | 4h | |
| +15 | French vs German for IB in the EU | 9 | 3d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
If it's nothing too crazy I'd just post it here if you want to get insight
posted below
Agree you could just post here, but happy to take a look if you want to DM
posted below
I can review right now I’m pretty bored lol feel free for dm
posted below
ABC Office REIT decides to buy an office building in Midtown Manhattan for $150 million. The company has an internal required rate of return of 10%. Rental revenues for the first year of operation are projected to be $8 million. Operating expenses are expected to be $3 million in the first year and grow at 3% thereafter. In addition to operating expenses, property maintenance expenses are projected to be $250k in the first year and is expected to grow at 3% per year. Rent in NYC is very cyclical and has sagged for the last few years. With economic growth returning, it is projected that rents will rise significantly before flattening out in later years (see revenue growth expectations below). At the end of ten years, the company expects to be able to sell the asset for $275 million
.
A.) Is this purchase good for ABC (Yes or No)? Using a discounted cash flow model, calculate the IRR and net present value (NPV) of the investment to help explain your answer.
Answer- Yes, this investment is over the minimum IRR threshold of 10% and is profitable for the company with an NPV of roughly $21.8 million. For the purpose of the exercise, yes the purchase is good for ABC. Realistically, we would need more information to determine quality of the asset and location and if this investment makes sense from a risk adjusted return as well as how accurate our assumptions/forecasts are.
Answer- Probably not. It depends on how desperate the situation is for the company. The deal isnt that profitable by year 5, with an NPV of roughly 3.3 mil, it may not be enough to sell the property now. It's more profitable to hold the property and take scenario A. But again, it depends on how badly the company needs liquidity to pay off its creditors.
Didnt come out right but in green are rent and expense growth forecasts they give. Required IRR for company is 10% Company buys at 150 mil, rental revenue for first year is 8 mil. Operating expenses to be 3 mill in year 1. Property maintenance is 250k in year 1 and expected to grow 3%, At end of 10 years, company can sell property for 275 mil.
1. Is this purchase good for the company? Use a simple DCF and NPV and IRR to explain your answer
Yes, this investment is over the minimum IRR threshold of 10% and is profitable for the company with an NPV of roughly $21.8 million. For the purpose of the exercise, yes the purchase is good for ABC. Realistically, we would need more information to determine quality of the asset and location and if this investment makes sense from a risk adjusted return as well as how accurate our assumptions/forecasts are.
2. After 5 years, company receives and offer for 200 mil. The company is strapped for cash and needs liquidity to pay off its creditors. Should the company accept the offer?
Probably not. It depends on how desperate the situation is for the company. The deal isnt that profitable by year 5, with an NPV of roughly 3.3 mil, it may not be enough to sell the property now. It's more profitable to hold the property and take scenario A. But again, it depends on how badly the company needs liquidity to pay off its creditors.
I'm a bit confused maybe because of the formatting and I'm not seeing everything but it looks like after year 6, rent growth turns negative. Unless they assumed some significant cap rate compression it doesn't make sense that the value of the office is worth more later.
From my standpoint I would probably sell off the asset as the diminishing rental growth and assumed exit cap rates don't jive / seem quite risky, plus their capacity to service debt will be harder given negative growth.
How much would you pay for an income stream of $10,000/yr into perpetuity (assume payment is from the U.S. government) at a discount rate of 8%?
125,000
What is the present value of a ten-payment annuity of $1,000 at 8% interest? The first of the ten payments is to be received today.
6710
The estimated betas for Meta and Boeing are 2.5, and 0.8, respectively. The risk-free rate of return is 4.35% and the equity market return is 8.0%. Calculate the required rates of return for these two stocks using CAPM.
13.48%, 7.27%
There is a Class A office property located in the Seattle Central Business District that recently traded at a 10% capitalization rate. There is also a new industrial warehouse with 40 foot clear heights located just outside the Port of LA/Long Beach that recently traded at a 4% capitalization rate. Which asset would you rather own and why?
The decision comes down to risk tolerance, investment goals, and potential for each asset individually as well as the overall market forecast for that asset class in the market & submarket. Structural demand has changed in the office space since the pandemic. I would want to know what the market cap rate is for Seattle Class A office as well as what the stabilized yield could potentially be down the road. If I saw the potential for large NOI growth and or I thought cap rates would stabilize or compress, then this investment could be promising. I would also want to know sq ft of the property and the exact asset to determine how well positioned each asset is compared to its peers in the submarket and market. I've seen trends of mid sized office faring better in Seattle currently. Additionally, I would want to take a look at the leases to see when the they end, if they are below or above market rent, and if the tenant is likely to renew. It looks like there have been recent Seattle office transactions in the range of 9.5-10 percent cap rates. I would need to see detailed submarket/market forecasts to help guide my decision. The market data that I have seen is mixed in Seattle. There's been a large uptick in leasing activity in the first quarter of 2024. While Seattle's asking rent increased 3.4%, net effective rents have decreased, as landlords have offered more concessions. Seattle has seen a sublease decline as there has been a decrease in sublease space down from Q3 2023. However, Seattle is seeing an increase in vacancy, negative net absorption, and large office supply that will be delivered over the next year or so. I wouldn't be surprised if we saw more tech layoffs and with Amazon recently announcing they are reducing office space, we may see more leases not get renewed, continued negative absorption, and more job losses across most industries ( especially if rates remain high as corporations will be forced to refinance their debt at much higher rates than they forecasted). But as i mentioned before, I would need more data to make an informed investment decision. I would want to know similar things for the industrial warehouse in Long Beach such as the market cap rate, rent forecast for the submarket/market, supply/demand forecast and is there a way to improve the asset and increase efficiencies and improve NOI. Long beach has recently seen cap rates expand from roughly 4 to close to 4.5%. Vacancy has increased to 3.9% and year over year leases have declined by 3.2% as current leasing prices are 1.79 per sq ft NNN. Landlords have had to give concession to tenants. Although we are starting to see slight weakness in Long beach industrial, outside of 18 months there is little supply on the horizon. Long beach industrial is poised to do well over the next decade. If I had extreme confidence in the Seattle Office Asset's location, extreme desireability among its Class A office competition, long term leases with strong tenants, punitive damages for lease breakage, I might lean towards investing in the Seattle Office. It's a great yield assuming you can collect on it, and you could have outsized returns if cap rates compress over the next decade in office. If I didn't have extreme confidence in the those metrics, I would lean towards the industrial property in Long beach as I believe it's a safer bet, even with its lower cap rate. It's biggest risk is the weaknesses of the specific asset and if a higher for longer interest rate environment causes cap rates to keep expanding.
Don't have time to reply to everything but to the last question you had, your answer isn't direct enough IMO. Of course, every deal-making decision is going to come down to a lot of different assumptions - and there is no wrong answer - but this is a question where they are basically asking what would you choose given limited information. Rather than go back and forth, I would stick to a lane and provide the most compelling arguments, stating your assumptions, as to why you would choose an asset class over the other.
And don't say things like "if I thought cap rates would compress." Do you actually think they will and can you back up that prediction legitimately?
Sorry to hear things didn't go your way, it is a pretty rough market out there, but good luck on your next one!
Thanks for the advice, I'll make sure to commit more to one decision if a scenario like this ever arises. I'm still surprised that my answers weren't enough to get me to the next round. Would have been great to receive some feedback from whoever reviewed it, but ah well.
Would OP mind disclosing city and type of firm? For ex: Top REPE in LA/SF/NY or reputable owner/operator in SE.
LA
Think about the little things. Did you properly color code your cells? Did you leave an extra decimal point/letter by accident somewhere?
These little things matter a lot.
Nesciunt ut placeat soluta harum et. Nostrum dolor voluptas sed eum quis sunt voluptatem. Distinctio doloremque porro maxime quis incidunt doloribus ut ipsum. Iusto dolor ipsa corporis dolore.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...