Investment banking technical interview questions
Would anyone be able to post up difficult technical, accounting and valuation questions that they have heard of or have been asked?
Would anyone be able to post up difficult technical, accounting and valuation questions that they have heard of or have been asked?
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Here's a great thread on a similar topic.
https://www.wallstreetoasis.com/forums/hardest-technicals-ever
IB Interview Question (Originally Posted: 04/28/2017)
Wso,
Got a question for everyone: How would you value a stream of cash flows: $100 in year 1, $200 in year 2, $300 in year three, etc. forever with a 10% discount rate?
If it was just $100, I would value it at $100/10%. If I had a fixed growth rate, I would value it at $100(1+g)/(10%-g), but the growth rate is different every year, so this wouldnt work.
Any info helps, thanks.
$11,000
Requires a bit of math: The stream of cash flows can written as Sum of [$100 * t / (1+10%)^t] as t goes from 0 (or 1) to infinity. The sum of the sum of the series t / (1+x) ^t = (1+x)/(1+x - 1)^2 = (1+x)/(x^2) = 1.1/(0.1^2) = 110 -> see example 5 of this for the mathematics behind this formula http://www.tricki.org/article/If_you_want_to_calculate_an_infinite_sum_…
So the answer is $100 * 110 = $11,000.
Weird interview question, if I have this correct.
Call your sum S. Then S/(1+r)-S=S(1/(1+r)-1) =-100/1+r-100/(1+r)^2-...=-100/r. Hence S= -(100/r)/(1/(1+r)-1) (on my phone so might have made a mistake, look up arithmetico-geometric series).
Thanks!
What kinda IB is teching you with calculus? And second semester calculus at that.
A bit late to the party, but I thought of it like so:
$100 perpetuity at 10% disc. rate = $1,000, so it's basically just one more $100 perpetuity pa.
hence it'll just be $1000 + $1,000 perpetuity = $11,000.
This might be the easier way to think of it without using any advanced maths.
IB Interview Questions (Originally Posted: 05/28/2013)
Hi guys I am new to the forum. I was watching the mock interview library questions and there were two questions that came up that I could not figure out the answer to. Can anyone help?
(1) What is the difference between a good company and a good stock.
(2) If we are looking at a transaction and are thinking about doing the deal one of two ways, either using 100% cash with debt or using stock, which one is most likely the most Accretive?
Does anyone know the answers? Thanks in advance
1) A good company is what it sound like, a solid company. A good stock is undervalued for some reason. This can be because the company has more potential to grow than what has been baked into the share price, or because a competitor has recently come out with a product that you think has depressed the company's value further than it should have (these are just a couple of examples illustrating why a stock might be good. the key point is that it is undervalued)
I'm not in banking, so I don't know about (2)
[quote=aspiringderivativestrader
(2) If we are looking at a transaction and are thinking about doing the deal one of two ways, either using 100% cash with debt or using stock, which one is most likely the most accretive?
Does anyone know the answers? Thanks in advance
[/quote]
Google some accretion/dilution analysis on mergers. An accretive deal is when your earnings per share (EPS) increases.
The short answer is that all-cash deals will likely be more accretive, because the acquiring company doesn't have to shell out any stock to pay for the deal. So earnings increase (from the merger) while shares outstanding stays constant. In a stock deal, earnings also increase, but shares outstanding also increase, as the company needs to issue more stock for the deal.
That being said, stock deals have their advantages, so make sure to look up those.
The movements of a stock depends on more than just a company’s balance sheet, business model and valuations. It also has to do with market sentiment and in/out-of-favor trends that can be short term.
http://www.youtube.com/embed/1pE7a9tKxPY
The above answer for #2 doesn't answer the question. The question asks debt vs stock. All cash would usually be accretive since you're only foregoing the interest on cash which is ~ 1% in return for earnings per share in excess of 1%.
It's also important to understand what P/E really is. If you take the inverse of a P/E of 8 that equates to 12.5% meaning that every dollar you spend on purchasing a company gets you 12.5 cents of earnings. That is why a buying a company with a smaller P/E in an all stock deal is accretive, a larger P/E is dilutive. ONLY in an all stock deal.
In an ALL DEBT deal you need to look at the interest rate you're paying on the debt versus the inverse of the P/E. So if you pay 15% on the debt and the P/E of the acquisition is 8, it is dilutive to the acquirer. Meaning that the acquirer purchased 12.5% earnings on each dollar vs paying 15% on each dollar to purchase the entire co.
In an all stock deal - What happens if you are paying a 1billion premium on a 500million company? The rule thats higher EPS buying smaller EPS is accretive (all stock) doesn't hold up
That is correct.
1) A good company generates cash flow for its equity investors. A good stock, from the perspective of the investor, is probably one that is undervalued (for longing).
2) Its hard to know. Typically, cash is cheaper than debt (debt is roughly upwards of 5%). Stock, intuitively, tends to be the most expensive. So, I'd say cash with debt will most likely be accretive
IBD Interview Questions: real life examples of two companies and characteristics of potential buyers (Originally Posted: 10/14/2016)
Two companies: one low growth, low margin, low CAPEX; the other high growth, high margin, high CAPEX. Give real world examples for each kind of companies. Who will buy these company and why?
I didn't come up with answers for the first part. For the second part of the question, I said a strategic buyer will buy the one with high growth, high margin, high CAPEX. A financial buyer will buy low growth, low margin, low CAPEX because an ideal candidate would be the one which requires little CAPEX. I am pretty sure the interviewer is not happy with my answer.
Is there a systematic way to think about these kinds of questions? How differently will you answer if some variants of the question come up, say low growth, high margin, low CAPEX vs. high growth, low margin, high CAPEX.
Thx guys.
I can't think of these exact characteristics but I can think of close proxies.
Most early stage biotech companies are, in theory, high growth, high (gross) margin, and have high fixed costs (not capex, but instead R&D, so a bit different). Think guys like Stemcentrx (bought by Abbvie) or Sarepta. Most early stage tech companies also fit this bill, although capex is usually not that high. Certain newer consumer companies, like Shake Shack, kind of also work here, as they require a lot of investment to expand. The buyer is interested in the growth profile and potentially management if they are good; for pharma buyer is interested in the drug the startup is producing.
Most older companies in mature industries have low margins, growth, & low growth capex (not necessarily maintenance capex). I honestly think your answer was fine.
Are financial buyers also interested in buying high growth, high margin even though the company requires a high CAPEX? That also makes sense to me as a lot of PE funds do invest in this kind of companies. I am a little bit confused about the exact type of investors who will be interested in buying these two kinds of companies.
IB Interview Question - AR Turnover (Originally Posted: 06/07/2015)
Anyone have any idea how to answer this? I'm a bit confused.
What happens to a company’s Enterprise Value if its Accounts Receivable turnover increases from 60 days to 90 days?
Thanks!
Let's think about this.
If AR days increase, it takes longer for the company to collect its outstanding invoices. As a result (assuming revenue and everything else remain consistent), AR balance will be greater than it was at 60 days. We know that an increase in AR (or any other asset) is a "use" of cash, which implies our free cash flow will be lower than it otherwise would have been if the company collected in 60 days. Lower FCF translates to lower TEV.
Thank!
This isn't correct. You are right in saying that an A/R balance increasing means cash goes down. But TEV on a simplified basis is equal to Market Cap + Debt + Non-controlling Interest - Cash & Cash Equivalents. Given this, when cash balance goes down, enterprise value increases.
Use these formulas:
Receivables Turnover=Sales/Avg. Receivables
DSO=365/Receivables Turnover
If your DSO increases, then you are slower at collecting cash, so you cash balance decreases.
Just to be clear, as most of the above comments are incorrect. If your cash balance decreases, all else being equal, your EV will increase. This isn't intuitive because of the all else being equal condition. In practice, the company's market value should decrease to account for the worse cash collecting ability. The net impact on EV is not clear cut. But this topic can go on forever. My personal view is if DSO increases, then your free cash flow will be lower in the near term and the net impact should be negative on EV.
laugh in his face and tell him AR turnover is not measured in days lol
yes technically your formula is correct, however from a PE / LBO stance, iRX is 100% correct. if the company stays the same, assume your customers have collectively negotiated new AR terms from 60 to 90 days, so therefore your WC eats up more cash.
One of the ways to generate value in a LBO is to paydown debt as much as possible and as quickly as possible. If WC is eating % more cash, do you think a PE firm will have the same valuation on the business? AR change from 60-90 days is a material change and as such, valuation will change materially, downwards.
Doesn't this impact CF via a NWC change? Can someone clarify?
IBD Interview Question: Pay Dividend or Buy Back Shares? (Originally Posted: 10/27/2016)
From the standpoint of an equity investor, is paying dividend better or buying back his/her shares better? On the flip side, from the standpoint of the management, which one is more desirable? Which one will increase EV and which one will increase equity value?
Why won't A buyback increase EV in the short term? I know the equation and that it essentially cancels out, but won't the market value of equity would rise in the short term. A dividend could have a similar effect.
This is wrong
May I ask why this is the case?
also interested in why?
In theory there shouldn't be a difference between buybacks and dividends. At the end of the day, it just comes down to investor preferences. If your company is a consistent dividend payer and your investors own your stock for the income, pay a dividend. If you've historically not payed a large dividend but find yourself with a big cash balance, it probably makes more sense to go buybacks as a chunk of your investor base has likely bought in for pending repurchases.
The result is the same irregardless of whether you pay dividends or buy back stock. Subsequent to the transaction, equity value falls by the value of the dividend/buyback as the cash balance has become smaller. Enterprise Value would stay the same though as decreases in Eq.V and Cash cancel each other out. See formulas:
Equity Value = PV CFe + Cash Enterprise Value = Equity Value - Cash + ...
Cash (down) + PVCfe = Equity Value (down) Equity Value (down) - Cash (down) = Enterprise Value (unchanged)
Theoretically, there is no difference in value between share buybacks and dividends.
Management would prefer share buybacks because dividends tend to be sticky. That is, a firm that begins a dividend program is not likely to discontinue it because that would be a negative signal to investors.
IBD Interview Question: how do you value an international company? (Originally Posted: 11/10/2016)
how do you value an international company which has operations in different countries? How to adjust for the cash flows in foreign currencies? How to calculate wacc?
This isn't tough, but why not you state your thinking and how you would answer to provide some colour?
I would project out the exchange rate at which the cash flow will be converted in the future, depending on whether or not the company decides to hedge by buying forward, the projected future exchange rate will be forward the company buys if the company chooses to hedge, or just the projected future floating exchange rate if the company does not choose to hedge (not sure if my assumption about the hedging decision that affects the exchange rate is valid or not). I am actually not sure about wacc calculation, do we treat the divisions which are operating overseas as single entities and calculate the division's wacc on individual basis, and then calculate a weighted average of all the waccs that we get to represent the entire company's wacc? (plz correct me if i am wrong).
Accounting Question for IBD Interviews (Originally Posted: 02/04/2013)
Hey guys, I just have a quick question regarding the treatment of inventory on the three financial statements:
When there is a decrease in inventory, how does this affect the three statements? From what I gathered, there can be two scenarios. Scenario 1: if this decrease is due to selling the inventory, Sales and COGS would go up, leading to a higher Net Income, which would flow to the CF statement. But I was confused how to approach the change in NWC, since this is a decrease in inventory. If I add back cash in CFO, would this double count the change?
Scenario 2: if the inventory was simply destroyed, would you just decrease inventory and retained earnings on balance sheet, or would this also affect income statement and CF statement?
Any help would be appreciated.
This is what I see from your scenarios.
Scenario 1. Let's say inventory is sold for 200 cash, and cost 150.
So Sales +200, Cash +200, COGS +150, Inv -150 I/S: 200 Sales - 150 COGS = 50 NI SCF: NI = 50, add back in 150 for decrease in Inv = 200 CFO B/S: Cash +200, Inv -150, RE +50
If you substitute cash for AR, NI stays the same, CFO = -150, and the B/S stays the same (AR switched for cash)
Scenario 2: If an inventory is destroyed, it has to be revalued. Inventories are valued at the lower of cost or market. Therefore, you would have to readjust the inventory to cost or market. In this case, market would be the lower (since the resale value of the inventory has gone down). There are a couple of ways to do it, but the easiest to explain is the COGS method.
So Inv @ cost = 200, inv @ market = 0 (since it was destroyed). Inv -200, COGS +200 I/S: 0 Sales - 200 COGS = -200 NI SCF: NI = -200, Inv decreases so add back in 200, CFO = 0 B/S: Inv -200, RE -200
You could also have a change in your inventory valuation method (i.e. FIFO to LIFO) which would decrease your inventory without any substantial (meaningful) change to inventory levels.
ibanking interview question (Originally Posted: 03/28/2007)
can someone please explain the question and give the answer? thanks in advance.
I think its the high yield bonds because they would be last of the three to be paid in a liquidation scenario. I would imagine that the order of payment would be bank loans, secured credit lines and then high yield bonds. Anyone feel free to correct me if I'm wrong.
high yield bonds are generally "unsecured" by any collateral so they would devlaue first...if you think of a stack of secuirities as the capital structure then the most "secure" is at the top and the most "unsecure" is at the bottom.
Example: Bank Loans / 1st lien Secured Credit lines / 2nd lien Subordinated Notes / High Yield Debt Mezzanine Security (typically debt with equity component (warrants)) Preferred Equity Common Equity
So the common would get wiped out first in a restructuring or if the company was headed toward insolvency
thanks for the answers. why is it called "devalue" though instead of just saying which is riskier?
it's riskier insomuch as the likelihood and magnitude of a decrease in its value is higher than that of other forms of debt
And the market value of those high-yield bonds would go down dramatically...
alright i didnt quite understand the term devalue.
what exactly do u mean when u say common equity is wiped out in a restructuring? the equity holders are auto assumed to have no claim when a company does a financial restructure occurs?
Actually, you need to be precise in your language. The question is not only one of "security" (which implies collateral) but also one of "seniority".
The secured credit lines stand first in line because they have a perfected legal claim upon specific assets. That is, if the debt is secured and perfected versus the company's receivables or real estate, for example, the creditor may seize those specific assets free and clear of claim by unsecured creditors.
The bank loans are the next in line because they are the most senior of the unsecured creditors. Next come the high yield bonds, which are generally senior subordinated notes/debs/etc. "Subordinated" in that they are subordinate in seniority to the bank debt.
The last claim in line is the equity, hence that is why in a bankruptcy the equity tends to get wiped out, or at least most heavily impacted.
Think of it this way: a company has $30 million of secured debt under a revolver, $100 million of TLB senior bank, $300 million of bonds and $200 million in market value of equity. They go chapter 11 and rather than restructure, they liquidate. The total liquidation value of the Company is $300mm when the assets are sold.
What happens?
Well, the first to get paid are actually the trade creditors, employee payrolls, and fees to the Ch11 trustee, so let's say that takes $20 million. The revolver holders seize the assets and take their $30 between the sale of the collateral and their most senior position. Then the bank takes the next $100. This leaves $150 million. The bondholders get $0.50 on the dollar for the face value of their bonds. Usually, they've already sold their position to the vultures because they wanted to limit their downside (say at $0.25 on the dollar), so it's really the vultures making the money.
The stockholders are shit out of luck, and can use their certificates to wallpaper their bathroom.
um, Genghis, does Yoda sound familiar to you? just wondering. this just sounds a lot like you if you're who i think you are.
Possible Interview Question - Help (Originally Posted: 12/13/2007)
Company A trades at a P/E of 20. Company B trades at a P/E of 10. Both are considering acquiring Company C, which trades at a P/E of 15. For which of the two acquiring companies would the deal be dilutive. For which would it be accretive? Explain why for each.
Is this easier than I think? I would think that the deal would be dilutive for company B acquiring C because it is a more stable company buying a company that is more risky (in terms of P/E multiples). Would this lead to a P/E ratio lower than 10?
Thoughts?
acquiring company P/E target company P/E = accretive
This should somewhat answer your question:
http://www.ibankingfaq.com/category/interviewing-technical-questions/
I'd like to hear what others have to say though.
yea, makes sense. thanks!
IB interview question, all input is appreciated (Originally Posted: 12/27/2014)
Hey guys this is my first post on here. I have a hand full of first rounds set up with BB's and MM's and I just wanted to see if my method of preparation is adequate to carry me through the technical portion of the whole process (first rounds and superdays). I am focusing on 400 questions guide made by breaking into wallstreet and mergers and inquisitions. I am also using the internet to search any topics that I need to understand at a deeper level. I made it to a superday with a BB and the questions they threw at me were very simple from a technical standpoint. I also had a first round at another BB and they also asked me very simple technical questions. I know 100% that I am not over prepared and that there is a lot that I need to cover. I am just not sure if the simplicity of technical questions they gave me were just a fluke. But from what I am reading on here the technicals can get really difficult. What are your thoughts on this matter? Also what were the hardest technical questions that you were given? Thanks in advance.
Also I am a finance major and I do attend a target school if that helps.
this thread got burried really fast just trying to bump it up
this thread got burried really fast just trying to bump it up
this thread got burried really fast just trying to bump it up
this thread got burried really fast just trying to bump it up
this thread got burried really fast just trying to bump it up
shit no idea how that comment was posted so many times my apologies
Big difference between first round and super day. They will not only make sure you get the answer right but also want to know if you know why and what actually is happening and that you truly understand it all
Superdays can be pretty variable. They will be either very fit-based with little to no technicals, or they will ask some difficult technicals with in-depth follow-up questions. First round technicals usually aren't wildly difficult (they can be though sometimes), as they are mainly just to weed out the kids who have no clue what they're doing. 400 Questions is a good basis, and you'll be pretty set for most technicals if you know the whole thing well. Note: Make sure you understand why the answers to the questions are the way they are, so you can answer modified variants and so on, just memorizing will do you no good.
Thanks guys appreciate the help!
Impossible Interview Question (Originally Posted: 05/01/2015)
Does anyone have any idea on how to solve it?
The correct answer certainly is not jumping off the page and I don't have time at the moment to try to work through it, but I might be able to give it a look this weekend... I like those kinds of questions.
Something else is that it is possible (quite likely actually) that those numbers actually mean nothing and they just wanted to see what kind of thought processes you would go through en route to solving a question that you didn't know the answer to.
This. The question you were given is in the "calculate the number of windows in NYC" group. Odds are, whoever came up with this question didn't actually come up with a sentence, and instead just wants to see how you work through the problem.
nope it's not one of those types of questions. I already went that route thinking that's what he was looking for. Completely wrong. There is a solution somehow
Dewey decimal system?
So if we take the first line, we'd get Ontology, Old Testament, Christian Ethic and 151 isn't used any longer.
Second line would be Historical books of the Old Testament, Analytical Chemistry, Writing System Phonology.
Maybe there is some sort of name or figure from all of this? A few of those numbers correlate to theology, work ethic, economics (1) and chemistry (1) so just find a Chemist/Economist who was tight with Jesus. Done.
hahaha that's a creative solution. The best i have been able to come up with is a modulo cipher. Divide each by 26 and take the remainder and plug in the corresponding number. That isn't right either though.
Plugged anything in to see if it's a shift cipher, as time consuming as that is?
I enjoy these up to a point before frustration kicks in.
the even characters make a shift cipher unlikely. For instance what would 444 be?
a
anyone?
Did you manage to get to a solution or were told what it was?
This is difficult to find an answer. I can't even find the question.
IBD Interview Question - Relevering Beta (Originally Posted: 10/24/2017)
Hi all,
Apologies if this is posted in the wrong forum, but I wanted some advice when it comes to unlevering and then relevering Betas.
I understand when valuing a private company, since it does not have any publicly traded stock, we need to look at a peer group of comparable companies, unlever their respective betas (to remove the effect of debt) and average them out. We then relever this average by applying the target capital structure of the company we wish to value, to it.
However, what do we do in the case of a publicly listed company valuation? Can we just use the given levered beta available to us on Bloomberg? Do we need to unlever anything? I guess maybe if the publicly listed company was not at its target capital structure then we'd still need to unlever and relever its Beta (with the target D/E ratio), but without the need of looking at comparables?
Any input would be great. Thanks!
Hey Daveo, I'm here to break the silence...any of these links help you?:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
5 Common IB interview questions (Originally Posted: 09/29/2009)
I know many of you are interviewing or preparing for IB interviews. Check these out to see good and weak answers to these common questions. On the surface these seem easy, but they get answered poorly most of the time by smart, capable people. Before you start worrying about technical questions, make sure you can nail the obvious questions that will kill you in an interview before they even get to the "tough" questions.
Let me know what questions you're most concerned about answering.
Gotta Mentor www.GottaMentor.com Connect to the Advice & People You Need to Achieve Your Career Goals
Thanks, always helpful advice as always.
"Why do you want to go into investment banking" Do they really ask that? Holy shit, this is gold! In a million years, I would have never guessed that! Will you be my mentor? I'll pay you anything.
thanks formerMD!
I love the strong answer for "Where did the DOW close today?"
Interviewers will often ask "why do you want to go into I-banking" of people whose resumes don't bleed finance, and there are a lot of folks like this. You'll never get asked this question if you've had finance related internships, are a member of the finance club and list 47 finance classes you've taken.
Gotta Mentor www.GottaMentor.com Connect to the Advice & People You Need to Achieve Your Career Goals
I've never been asked those first 3 questions. I was also never asked to pitch a stock, or to even describe a recent M&A deal. Here are the 5 most common questions:
1) Tell me about yourself. 2) Why investment banking? 3) What do you know about our firm / Why are you interested in our firm? 4) Walk me through a DCF (with follow up questions). 5) Strengths / Weaknesses.
I agree with banker88. With "tell me about yourself/walk me through your resume" as the CLEAR number one. You will get it in every interview.
Possible interview question (Originally Posted: 12/05/2013)
You have a die with 10 sides, number ranging from 1 to 10. Each number comes up with equal possibility. You sum the numbers you get until the sum is greater than 100. What's the expected value of your sum?
I would be very grateful for solution and explanation of this problem.
I could be way off, but I would answer 104.5. The reasoning: 1+2+3....+10 = 55. 55/10 = 5.5. I.e. Expected value per roll is 5.5. So if you keep adding 5.5 as your value for each role, the first value you reach over 100 is 104.5.
I think the only flaw here is that this assumes you basically have a ten sided die with every side having a value of 5.5. This will guarantee you will eventually reach 99 and then wind up at 104.5 as you stated. But in reality, because we have values ranging 1-10, we could have sum=99, then roll a 1 to have a sum = 100, then still have to roll one more time (problem states sum>100). Your EV would be correct if we had the option of stopping once sum>=100 (where our possibilities now range 100-109).
"Between 100 and 110." then drop your pen on the table and walk out.
I retract my answer. This is right.
Not sure if I'm interpreting the questions correctly but here we go:
The final value of your sum must be greater than 100 based on the definition in the problem. Because there are 10 possible outcomes on the die, You have equal possibilities of ending up at any number between (and including) 101 and 110 (based on the question, the sum must be greater than 100. So even if you land exactly on 100, you must roll at least one more time. This yields the possibility of rolling any of the numbers 1-10).
(101+102+103+104+105+106+107+108+109+110)/10 = Expected value of 105.5
I agree its not realistic but I still think it is a necessary assumption. I feel that your answer of assuming the second last roll falls on exactly 100 is quite arbitrary as there is not statistical basis for it to be 100. Why not 99/98/97 etc? If your 2nd last role is 97 then the expected value you proposed of 105.5 is completely different since 110/109 etc are not achievable. As the 2nd last role is really the EV of all prior roles, you could continue to back step until you arrive back at the initial role. For this reason I feel assuming a roll value 5.5 is probably a more grounded assumption.
If you modelled this on binomial tree I'm quite sure the answer is 104.5. I may be missing the point though.
The fact that 100 is an arbitrary number is kind of the point. I think we could just as easily ask the question stop rolling once your sum>98. In which case, you have possible 'winning' numbers of 99,100,101,102,103,104,105,106,107,108. (99+100+101+102+103+104+105+106+107+108)/10 = 103.5 The expected value of any 1 roll is 5.5, but you have to add this EV to your abitrary number.
Put even more simply, imagine the question was stop rolling once your sum>1. In which case, we have possible outcomes of 2,3,4,5,6,7,8,9,10, and 11. (2+3+4+5+6+7+8+9+10+11)/10 = 6.5 where 1+5.5 = EV of 6.5.
For sum>1, 1/10th of the time we will roll a 1 and have to roll again. From there, we have the probability of 1/10 for rolling any number 1-10. Therefore, whenever a 1 is rolled first, we have the same probability of stopping at any sum 2 through 11. Yes, it would be rare (1/100) to roll a 1 two times in a row (sum=2), but it would be equally rare (1/100) to roll a 1 and then an 8 (sum=9).
Remember EV is just the average value**. The average value of all the rolls must be the sum of the average values for one roll.
I'm not saying this is realistic model of the outcome if the experiment is performed, I'm just saying it is by definition the average/expected value. Due to the large variance it is really an impractical model in practice.
EDIT: ** I should say probability weighted average to be clear. But since probabilities are all equal, average is still correct.
104.2656. Idk how u'd do this by paper. I'm assuming uniform probability of reaching 91 - 100 which could be wrong. It's basically 0.1 * EV100 + 0.1 * EV[99] + ... + 0.1 * EV[91] where EV[98] = 0.8 * E[98] + 0.1 * EV[99] + 0.1 * EV100
Where Ex = Average of numbers > 100 assuming starting from X and EVx = Expected value of result starting from X
E100 = EV100 = 105.5 E[99] = 105 EV[99] = 105.05 etc.
If not assuming uniform 91 - 100 (which is probably right) then the answer probably converges around 104.25 or 104 somehow. That's too much of an exercise for me in the morning though lol.
Edit: Using excel copy paste I come out to 104 final answer. It converges there. I'm basically solving for EV[90] down to... EV1 where EV1 is your solution.
Note: EV[90] = Average(EV[91]...EV100) Edit 2: Simulation confirms 104. I'm such a dork.
Good job, floppity. Just wrote a python script and I am getting 104 as well.
Think about the scenario where you stop rolling if it is over 1. 90% of the time you get 2-10. So 10%[2,3,...,10]. 10% of the time you roll 1 and have to roll again. So now you have 10%10%[2,3,4,....,11]. 6.05 is your expected outcome. 11 only has a 1% of happening while the others have an 11% each. 11%[2,3,...,10]+1%*11 = 6.05
edit: Fixed #'s
This makes sense. Didn't mean to sound like I knew I was absolutely right. Part of me knew I was oversimplifying the question to try to make it fit into an interview answer.
105
I think part of the reason why the problem states that you keep rolling until you reach 100, is so that you can assume that 91 - 100 will be reached with an approximately uniform distribution.
100 is absolutely NOT an arbitrary number for this problem. If the game was such that you rolled until you got a number greater than 1, would you just assume that you rolled a 1 on the first roll? Of course not. So why is it acceptable to do so with 100?
The correct answer to the problem is a recursive one, as follows:
First, let's suppose that you have rolled a sum of 100 so far. Then, obviously the game will end on the next roll. You have a 1/10 chance of getting a 101, a 1/10 chance of getting a 102, ect. all the way through 110. Clearly, the expected value of your final number, given that you've rolled a 100 so far is 105.5 [(101+102+103+...+110)/10].
Now, let's suppose you have rolled a 99 so far. You have a 1/10 chance of rolling a 2, which would give you 101. You have a 1/10 chance of rolling a 3, which would give you a 102, and so forth. You also have a 1/10 chance of rolling a 1, which would give you a 100, and we know that the expectation given that you rolled a 100 is 105.5. Therefore, by the law of total probability, the expectation given that you've rolled a 99 so far is [(105.5+101+102+...+109)/10]=105.5.
For notation, let's call E(x) the expectation of this game given that you've rolled a sum of x so far. Then, by similar logic E(98) = [E(99) + E(100) + E(101) + ... + E(108)]/10, where E(99) and E(100) are solved as above. Once we solve for E(98) we can continue to work backwards to solve E(97), E(96) and so forth, using the general recursion that E(x) = [E(x+1) + E(x+2) + E(x+3) + ... + E(x+10)] / 10, and E(101)=101, E(102)=102... and E(110)=110.
Starting from E(0), we obtain the answer that the expectation of this game is pretty much exactly 104.
Admittedly, solving the problem in this way would take a long time (I used excel personally), but this is a correct approach.
IB interview question about EV and market cap (Originally Posted: 01/11/2015)
Hi, if I want to acquire a company, do I pay the enterprise value or the market cap?
I thought I'd pay the market cap, because let's think about a public company. When I own all shares outstanding, I own the company. Right?
nah bro, securities allow you to secure future cashflows, not own the actual assets. stock = ownership is a common misconception, the legal structure is subtle.
But if you own all the equity, don't you own net assets?
To purchase the company's equity, you are correct, you pay a premium to the company's market cap which is the equity value of the transaction. As a buyer, you are assuming the company's net debt in a stock transaction so when you're thinking about the total transaction value, you have to account for the company's debt, cash and MI which is the company's EV.
owning all the shares of the company does not mean you own the whole company because you are forgetting creditors/debtors. unless the company has 0 debt, then you would pay equity value because it equals to enterprise value. simply put, if the company has debt, you can't just ignore that and only buy equity
I could be wrong but don't debt holders have a claim on the company's assets only when in default? So technically while the company is solvent they are not owners. But SSits explanation above clears it up really well why you would pay EV and not just market cap.
Normally you pay the enterprise value, as (inter alia):
The existing debt often is not portable and has mandatory repayment triggered by change of control, meaning you need to pay out the old debt as well as buying the equity.
You're normally using leverage (ie debt) to fund part of your purchase price, with that new debt structured in a way which is consistent with your holding strategy.
For example, if you're a PE fund, you'll often do a high levered LBO deal (eg the Petsmart deal) with the aim of taking the company private and using free cash flow for capex and to pay down debt, leveraging a higher equity IRR for yourself as equity owner, where the IRR is driven mainly by EBITDA and/or multiple expansion when you sell in 5-6 years, maybe a dividend recap along the way as well. Your new debt for funding the acquisition will often have cash sweeps and dividend blocks that prevent you extracting cash as dividends while the debt is in place.
In contrast, the company's existing debt will often be more appropriate for a listed structure eg lower leverage which is more "sustainable" in the long term, hence lower debt service and lower lender pressure to reduce leverage, with the debt package allowing the company to pay some free cash flow out as dividends. That's not what you're after as a purchaser.
If you're a strategic buyer and even if existing debt is portable, you'll probably want to use new debt that is priced against your overall company's credit risk, which is (arguably) better than the target company's standalone risk due to bigger scale, more diversity (not always true).
Hence you're normally looking at paying enterprise value in total and you'll look at that as the total price.
Given that total purchase price (along with adviser fees), you then decide how you want to fund that price from equity and debt sources and how willing lenders are to lend you money for the purchase.
The result is a sources and uses table and a capitalisation table that IB analysts everywhere become highly familiar with. Consistent with using enterprise value as your purchase price, those tables show each part of the funding as a multiple of EBITDA, reflecting that deals are conceptualised on a EV/EBITDA basis. equity value and PE multiples are a secondary consideration derived from those tables which you consider when you think about how your offer price looks to shareholders, as shareholders (as sellers) are more fixated on the price they receive relative to what they paid to get into the stock.
Hate to be nitpicky but that's not completely right. You obviously wouldn't pay for the minority interest which is typically part of EV calc.
IBD Interview Question: when to invest in a project? (Originally Posted: 10/28/2016)
IBD interview Question: when to invest in a project? The interviewer told me that ROE needs to be greater than cost of equity and ROC needs to be greater than cost of capital. What do ROE and ROC refer to in this case and is cost of equity in this case the levered return in WACC equation?
Was this for a summer internship or full time? Jeez...I wouldve gotten an automatic ding lol Is this a BB or small boutique?
BB Summer
ROE = return on equity. ROE > cost of equity, or else you're losing more on your source of funds than you are earning.
ROC = return on capital. Same concept ie ROC > cost of capital, or else you are investing $1 in capital and only getting, say 95c total return on it, so losing money.
Do we use levered return (Re in WACC equation) for cost of equity?
ib interview questions (Originally Posted: 03/06/2007)
I am an accountant with master degree in corp fin. 6 years experience in financial modelling with excel. I have an interview in a few hours with a corp fin boutique. I need help with the sort of question I hould expect and ones I should ask them. Please help.
I will appreciate possible answers with the questions. Thank you
u got all that experience and u have to resort to a message board with a bunch of college fucks who think they are all the shit and jerk off to ibanking?
http://www.getibjob.com/site/IB_InterviewQuestions.htm
Thank you very much I will check out the site
Quad, with your experience I think you should be prepared to have people grill you on your accounting technicals, as well as probe you for areas that would be outside your area of expertise to see if you can smoothly make the transition to banking.
Also, depending on the rank you are interviewing for, be prepared to answer questions on how an "older" candidate like you will respond to being lower on the totem pole than you were at your previous job, and how well you'll deal with taking directions from bankers who may be younger than you are.
Interview Questions - Mathematical questions asked in IB? (Originally Posted: 01/03/2008)
this might be a retarded question, as i'm sure it's been answered before. unfortunately, i am incompetent at utilizing the search function and thus am unable to locate a thread that could help me out here... but i was wondering what type of mathematical questions are asked for IB summer analyst positions... i've heard the checkerboards one, but what other crap would they expect you to calculate on the spot?
i got asked the over/under-stated depreciation question, and the effects on all three statements. pretty standard, i think. also, just some baby-finance like how do you calculate the CAPM & WACC, FCF, etc. i got asked to explain exactly what is beta, the difference between levered and unlevered, how to get from one to another. i know there's some more, but that's all i can think of off the top of my head.
one piece of advice, though, is to not try to come off as a stud who knows this stuff inside out--because you don't. answer the questions confidently, but dont come off as someone who thinks "the easy stuff" is beneath him. not saying that's what you do, just fyi. your interviewer can tromp any knowledge you have. obviously don't downplay anything you know, just don't venture out into areas you know a little about just to impress the guys on the other side of the table.
You might be asked some basic probability and statistics questions, too, but pretty elementary. Basically, the only "math" questions that I ever got in interviews were simple arithmatic and basic probability -- stuff that you could answer with high school math. Maybe you've taken linear algebra, differential equations or some other elementary college-level math class...but that stuff likely won't come into play unless you're a math student and you're being interviewed by a math major.
However, if you claim any knowledge of accounting (versus math), you'll probably get questions like what WACC_attack described. I got a lot of those questions too -- most cases a qualitative answer (higher vs. lower, increase vs. decrease) would suffice, but a couple times I had to walk through some basic calculations. Again, mental math though, because if you're given numbers, they'll generally be round. An example might be, say D&A increases by $100M; how does that affect the three financial statements? Or, if you're interviewing for PE/LBO, a company decides to issue $100M in PIK - how does that impact the three financial statements? And the only thing you really need to inquire about is tax rate (and if they don't give you one, you can just assume a corporate tax rate of 35% for the sake of argument).
I hope this helps...though probably the most useful piece of advice given here is the one from WACC_attack in terms of being humble. Even if the math questions are very easy (which they probably will be), don't act like they're beneath you - just walk them through your thoughts, arrive at the right answer and move on.
I-Banking Analyst Interview Questions (Originally Posted: 08/30/2010)
Interviewing for an analyst (entry level) I-banking job. (Not NYC). dont have a working history in accounting or finance, but do posess an BA degree in business and MBA, and have taken necessary classes to give me a decent understanding of the skills I need.
As a side note i do have three years in retail banking and retail lending experience.
What are some sample interview questions i should expect.
Thank You.
know how to build and defend a dcf, know the capm, be well versed in the recent closing prices of various indicies, etc
investment banking interviews follow a script. you should also expect to have to answer 1) why investment banking and 2) why you are interested in that firm. also maybe a 3) why are you just looking at banking now after you already got your mba and did something else.
outside of nyc i'm not sure if this advice will hold.
there must be a ton of data on this topic somewhere online. the vault guide to finance/banking interviews used to be pretty good.
Check out the WSO guides... both behavioral and technical. They will give you a good overview of what you should be expecting in interviews.
Wait, you've already received an MBA, and you're interviewing for an Analyst position? What city is this in?
thanks
Of course there was a test, but i did ok. Thanks all.
Investment Banking Interview - Websites with interview questions? (Originally Posted: 10/02/2010)
So I have my first investment banking interviews coming up. I was wondering if anyone could point me to some websites that could help with interview questions and such. Also anyone know what interviews at PNC for investment banking are like or know how their ibanking is like etc? Thanks.
They own Harris Williams so I would figure maybe you're interviewing for DCM or ECM?
I want to say they do a lot of industrials work. Probably a lot of financing.
.
Check out these articles for some help getting started:
http://www.bankonbanking.com/2010/02/15/navigating-the-sa-interviews/
http://www.bankonbanking.com/2009/11/23/interview-202-the-art-of-articu…
and if you make it to the superday,
http://www.bankonbanking.com/2009/10/22/maneuvering-the-superday-gauntl…
Possible Good Interview Question: One of my friends got asked this (Originally Posted: 01/11/2011)
One of my good friends was recently interviewing for SA position at Credit Suisse, and she got asked how do you feel that European Sovereign Debt crisis affects IB industry, and how can banks protect themselves against the consequences? She had no concrete answer, and neither do I lol..Any ideas guys?
Sure does create a lot of opportunities for restructurings...
The debt crisis has dealt a harsh blow to consumer confidence, and could slow growth in the medium term even as the financial crisis unravels. Premia on interest rates due to high possibility of government default also make leveraging a more expensive structuring option. To protect themselves, banks with lev fin should aim to bolster liquidity, whilst looking for clients in markets that are already in markets with cash to spare. Either that or you could gun to help restructure the whole government.
afroman23
Help on this IB interview question? (Originally Posted: 03/12/2012)
Hi, I came across this technical question in the book “running with the bulls” and had no idea how to solve it so I figured this was the best place to ask. Forgive me if this is not the right place
Q: Say you were a computer company and you jut bought $5mil in equipment. Would you rather pay $5mil today or $1.5mil over the next five years? With continuous compounding , is it less or more than twently percent?
The answer is apparently 16.6%.
I barely know how to solve for i for discrete compounding. How do you do it for an annuity when using continuous compounding?
Anyone?
Thanks
PV with continuous compounding is PV = FV / (e^rt)
barely know compounding? graduated from high school yet? wtf?
Yeah but isn't that the formula for PV of a single sum? The question seems to be an annuity (1.5 each year from t1-t5) that has PV of 5, and solving for i. I can do it using discrete but the answer's slightly off since it's not continuous.
Possible Interview Questions for IB Analyst Internship (Originally Posted: 07/22/2013)
Hi guys, I am looking into interning for an IB firm as an analyst intern and I know this is a competitive position so I want to prepare in advance. I was just wondering what kind of questions would they ask me during the interview process. Also, what kind of hypothetical situation questions would they give me to solve? Please share your experiences, it would really help me out. Thanks!
Love WSO - wealth of new and original questions/requests. Keep them coming! :)
I think the search function still works
ibankingfaq.com
Vault guide, WSO interview guide... Those should be a good start.
Thanks, I will check out the sites!
More technical IBD questions (Originally Posted: 04/28/2010)
I understand that EBITDA for banks is useless. So, what is the Enterprise Value of a bank? Or do we usually not consider EV for banks in any of our analyses at all?
I read somewhere that an acquiring company pays premium in a deal because of: (a) Control premium - the fact they are able to control the target's Assets / Cash Flows, they need to pay the current equity holders for this "control (b) Synergies - acquirers expect to get some synergies from the deal, hence they pay
My question is that so far I was under the assumption that (a) and (b) above were same. As in the acquirer pays control premium because they are expecting to gain synergies but the book consider them separate. Any views?
When a company changes LIFO to FIFO for inventory, what'll be the impact on the 3 financial statements? Someone mentioned this question in a thread somewhere but never gave the answer! (Also, as I understand LIFO is not legal at all)
When doing a DCF, the current year's income statement would need to be stripped off non-recurring items right?
if a company's depreciation increases by 100 and the tax rate is 30%, then if you go through the various financial
Which valuation methodology will give the highest value - Trading comps, transaction comps, DCF or LBO? I think it must be transaction comps as that's the only one including the premium. Is that correct? How about DCF vs trading comps? LBO vs DCF? LBO vs trading comps?
What does the term "value drivers" mean in a DCF context? Are they basically all the things that impact the FCF, Terminal Value and the WACC or is it something else?
(not really a technical question, but there you go) How to respond to stress interviews? Bad cop / good cop kinds? Any other stories people have so that they don't catch me off-guard? Interesting stories?
Depreciation expense increases by 100 and tax expense decrease by 30 (income statement). This ultimately affects NI, which moves to RE. At the end of the year depreciation expense is transferred to accumulated depreciation as a contra asset (balance sheet).
DCF because of management optimism. transaction comps second because of the control premium.
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