Answering your technical questions

WACC right? Shouldn't change anything

I’m basing my answer on your clarification that this section 338 simply lets buyers treat targets as asset purchases when performing purchase price allocation 

In short I’d use a rate between risk-free rate and cost of debt. Tax benefit from such step-up will be virtually “risk free” and based on Corp Fin 101, discount rates which we use to discount cash flows should reflect the risk inherent in respective cash flows

Case solved, next question

Where tf did you get this question? Might as well be a different language

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holy shit what firm is this?

People actually ask shit like this in interviews? And for an SA? Wtf.

You got this question on a SA super day??? Please disclose which bank so I know to not even apply.

Not OP but you start at EV and subtract net debt. Is it wrong to say it the other way around though? Is it wrong to say add net debt to equity value? I ask because some of the guides frame it that second way, but I was under the impression that additional debt doesn't actually change enterprise value but rather lowers equity value. 

Absolutely no idea what this is

In an M&A deal, through Section 382 limitations, the use of the target's NOLs are restricted to prevent buyers from acquiring companies for their NOLs. Section 382 decides how much of the NOLs can be utilized based on the difference between book value and acquisition value (with some adjustments, can't remember the full formula). Don't know fully how NUBIG's work, but they provide a way to increase that NOL utilization...but this added benefit only lasts for 5 years. So Section 382 + NUBIG = total NOL allowance. I'm pretty rusty from that point on, but that's the basic idea.

Pls note that I never played in a casino so although a slot machine rings a bell, I wouldn’t necessarily remember how it looks or works.
 

Having said that I am not sure I’d agree 100%. Theoretically speaking if we assume that the way markets are changing, that’s a reflection of a state of the economy then I’d expect slot machines to make more money when economy is doing well and markets are growing just because there will be more people coming to play. So perhaps not exactly beta of 0 but close to 0. 
 

Even if the payout ratio stays the same, you’d still make more money.

Lets say buying one slot machine costs $100. You make $1,000 of it in a week and you pay-out 10%. That’s 800% return. 
 

Let’s assume the economy heats up (markets make crazy gains) so people have more money to spend so you make $2,000 but the pay-out of 10% stays the same. You now make 1,700% return. You see where this is going if economy breaks down (so markets go down)..

Again that’s based on my limited understanding how casinos and pay-outs in that industry work

This is why these questions often suck. Beta of zero just isn't correct. The utilization of a slot machine is going to depend on market cyclicality, which implies some non-zero beta (unclear whether it would he greater or less than 1).

Imo, just explain your thought process here, so your interviewer gives you credit.

This is one of those questions with a simple answer but the finance nerd interviewees made this question have a different answer.

If you're at a very technical bank like a top EB, I feel like you have to go with the market cyclicality approach. If you're at any other bank including BBs and MMs, the answer is the simple 0. 

Source: I've been asked this question several times in interviews and the answer varies based on how technical the bank is. As you know, EBs love to go deep into this stuff. Oh and if this were Qatalyst, they'd expect you to go above and beyond what even the Associate answered cuz they're that technical lol. 

That sounds like a simple bond question? I would say something about it depending on the discount rate you use, but you make it sound like an investment with very low risk, which would imply a low discount rate, which would imply a high price 

Conceptually, the value you pay for any asset is the present value of it's future cash flows. In other words, the present value of all discounted future cash flows. 
Mechanically, if there is a series of cash flows that aren't growing, then the present value is CF/(Discount rate). 

For your question, the present value would be 100/(Discount rate). You'll probably learn this in your Intro Finance class or in a couple guides. 

If I understood the question correctly, this is more of a conceptual thing. The answer will really depend on your risk tolerance and investment goals.

I’m personally a risk-averse investor so I know that my opportunity cost of capital is ~5% as this is the most that “safe” investments such as real estate or investment grade debt will return. However I also know that where I live the minimum I can do is ~3.5-4% return on investments in real estate. 
 

So I’d be willing to pay between $2,000 and $2,800 assuming no growth. Otherwise I’ll invest somewhere else.

My guess is to just do a simple DCF. Assuming the company has 0 debt, use CAPM as the discount rate. I would also assume that beta is 1 if hypothetically the $100 is guaranteed every year with no systematic risk associated with it. 

how is this a good or broad? there's nothing more to it than the PV of Perpetuity.

DTL is used to plug the gap between accrual accounting and cash change on the balance sheet. 
 

If a company paid 20m cash tax but on the books tax expense was 10m, accounting stipulates that the company “owes” 10m, which is why DTL is created

In M&A, you have to separate book (GAAP) and tax (IRS) accounting statements. Otherwise you'll mix things up and come up with wrong answers.

GAAP: always adjust assets to FMV. In fact, you can't calculate goodwill without adjusting assets to FMV. Must always be done.

IRS: only adjust assets to FMV if it's an asset deal, which would mean no DTA/DTLs. But in a stock deal, you don't write up assets to FMV on IRS statements, so you end up with DTA/DTLs. 

So if you write-up an asset by $100 and depreciate straight-line over 5 years, you'll owe more on IRS taxes than GAAP taxes, so you make a DTL (=$100*21%). Then each year you record GAAP D&A, you lower DTL (=$100*21%/5) until eventually it reaches 0.

It's definitely a DTL when you write up an asset because you're going to pay more in IRS taxes than GAAP taxes. But as each year goes by, the DTL goes down until it gets to 0.

I wouldn’t model issue of equity in levered DCF because negative cash flows directly impact equity value accounting for future dilution

I’ll be honest i don’t know because I’d normally look up these types of things in publications such as Dugff & Phelps.

Having said that I have never dealt with truly distressed firms before and if I had to, I don’t know the extent to which I’d want to add additional % on top of CAPM because

(i) this risk will be reflected when re-levering beta because levered beta = unelevered beta * [1 + D/E (1-t) ] 

(ii) if I had to deal with a distressed company, there would probably be enough info for me to adjust cash flows, ie I would probably have an idea which customers won’t pay or which suppliers will want the money sooner 

My knowledge of RX concepts is fuzzy but I’d say equity value can be close to 0 but not necessarily 0. WorldCom’s shares were still worth 9cents if i remember correctly when it filed for chapter 11

I would say that it's very low, but not zero. I would also assume that it would be lower in chapter 7 than 11 because chapel 11 can result in restructuring which could work out in the future, and chapter 7 may result in the equity holders getting some piece of the liquidation, but they are on last lien, which is why I'd say it's lower in 7 than in 11, but not zero in either.

Reasons why it wouldn't be zero

1. Option value
2. Find an acquirer in BK (American airlines / US airways example)
3. Nominal recovery given to equity to make them shut up
4. Equity doesn't really trade, so share price can't go to zero exactly

How is it possible that a senior analyst has never done modeling? Internal lateral?

In all honesty, if I had these two questions in an interview in this form, I would not know how to respond. Most probably I would not bother even trying to come up with a good enough answer because I know that situation #1 is almost unrealistic. In real life there is zero chance you’d pull through if senior analyst who is staffed with you not on one but in two deals doesn’t know how to model at all. Hey, that’s only my personal opinion

situation #2 - again I am yet to see a human being who in real life wouldn’t throw this analyst under the bus. I would obviously try to speak with the analyst first but given workload in IB is high and there isn’t usually a lot of free time, people wouldn’t waste more time and neither would I. 
 

Both situations would show to me that senior management and the staffer are incompetent and i wouldn’t want to work in such a team 

Is this a trap question? Index Match or Pivot tables are some of the least useful tools when you have to create a model. Sure IM can help sometimes but you'd be complicating things for no reason. The guy that mentioned Pivot Tables; what kind of models are you running? In my mind it's be a nice to have last priority feature. It's DCF or an LBO guys not a dashboard. Vlookups are 1 google away. There are far more, different, structural issues one would have to face than vlookup

but maybe my xp is basic and you get massive data dumps from a client to work with.. dunno 

I wouldnt say I know a lot.. I read (i) valuation by mckinsey book, (ii) greenblatt's lectures, (iii) greenblatt's book about his son and investments. I didnt do MBA, I'm also A2A promote. I read finance blogs and did modelling courses by BIWS before I became an analyst + what was provided by my bank

8pm PST, Goldman Sachs, JPM, Citi, Qatalyst, Credit Suisse and Barclays.

Varies from bank to bank. Honestly, modeling as a cash expense probably saves you the most brain damage and is the best approach from an 80/20 perspective.

If you're doing a true, "'fairness opinion", level valuation, then you go with a qatalyst approach of modeling the actual dilution (i.e. treating as non-cash and translating the expense to a share amount)

Treat it as operating expense

Go this question as well this cycle must be pretty popular

Just a freshman trying to take a shot at some of these questions:

2. Wouldn't increasing price and decreasing Opex be the same?

3.

A) I think EBITDA increases by $6, because assuming the variable COGS also grows at 10%, Gross profit is up $6.

B) EBITDA increases $5, because no other expense increases? If its just price increasing, you wouldn't see any change in COGS right?

C) EBITDA increases $8? SG&A is fixed, I assume?

4. Wouldn't the multiple stay the same, because tax is factored after EBIT?

(1) If there is nothing else in the EV-Eqv Value bridge, it seems that the intrinsic value is in line with the market price

(2) Assuming no other changes (or all else equal), I would prefer a 10% increase in sales volume

(3) ok, this is just simple accounting

(4) Should go up

(5) (i) If the two companies are completely identical, I will invest in company that generates $2 EPS. It will give me back 10% yield; (ii) many reasons with P/E multiples.. debt levels, accounting distortions to name a few

Hah, good question. I almost said yes when I remembered one deal I did three years ago. 

Not necessarily. A good example is a vendor note in M&A where an acquirer pays (purchase price) - (amount of vendor note). Effectively the seller finances the purchase in a sense. 

(1) Not all growth is created equal. Companies can have different ROICs. 
 

(2) Different tax levels

(3) Depending which multiple we use, EV/Sales -> different net margins; EV/EBITDA -> different capital intensity

In theory - nothing. EV is not affected by changes in capital structure 

However if there can be some sort of effect if the company raises too much debt increasing risk too much

Deduct interest payments, mandatory debt repayments and add back debt raised