Buy-Side Interview Questions
Hey guys,
just had an interview for a firm and was asked a series of technicals, most of which i got right except for one. My mind went blank, but looking in hindsight, I think I could've answered it right. Here it is:
You have an investment in 2 restaurants, one pays you a royalty and you own the other one. The 2 restaurants have the same revenue and expenses, which investment would pay you a higher cash flow in a year in which revenues decline by 10%?
No other information was provided. Any insight on the correct answer would help. Thanks
Someone correct me if I am wrong, but I would answer that the owned investment would pay higher CFs. Assuming you can cut costs proportionately, your cash flow might not change. Most royalties - at least what I am aware of - are revenue royalties, which take a % cut of the top line, so if revenue decreases, so does your cut.
Depends what kind of leasing agreement they have for the restaurants/whether they own the restaurants. The greatest cost for a restaurant is usually the place. Under a capital lease/ownership, there would be D&A which would cushion your cash flow as D&A is non cash but lowers your taxes. Now under rent your expenses would stay the same, but revenue would fall hurting your bottom line further especially if your margin is only 10%. Franchise is just a cut of revenue so cash flow would only fall by 10%.
Thus I would say for a rented restaurant, cash flow is better for franchise. Under a capital lease/ownership where you already paid that capex earlier, cash flow is better under owned. Just my $0.02
Yeah, I could be wrong, but I think the question needs some further assumptions for a definite answer. The lack of assumptions makes me think this is a question to gauge the respondent's ability to think outside the box and to think of unique ideas.
mind posting any other questions? I will hopefully be having a few buy side internship interviews later this month. Thanks
Royalty should produce stronger CF stream here, no? Lot of fixed costs in the restaurant biz, so revs down 10% could completely hammer your CF as an owner. E.g. let's say your operating margin used to be 11% and you just lost 10% of revs. Now you're CF (rough approx) is down 90%. Meanwhile the royalty-holder only sees a 10% haircut in royalty stream.
Buy Side Final Round (Advice Please) (Originally Posted: 01/24/2013)
So basically I've made it the final round with a large asset manager and have found out that for one of the exercises they give you four different companies and a booklet with information on the sector and recent news stories. Then after 45 minutes you have to recommend one of the companies to a portfolio manager.
I'm comfortable doing stock pitches but I just think that trying to analyze 4 companies in 45 minutes is a bit ridiculous.
Has anyone else done exercises like this before? What do you think are the best ways to cut through the noise and get to the most useful information?
I'm thinking of maybe spending 5 minutes on each company, choosing the one I think is best and spending the rest of the time on that...
http://www.mebanefaber.com/2011/01/20/hedge-fund-analyst-checklist/
You have the right approach. You need to show your knowledge of various industries, understanding of what makes a good investment, and common sense Cut out companies that you wont be able to get a grasp of in a short period of time (like a UTX). Tackle the ones that lend to your industry strengths. Least amount of segments. Understandable end-markets. Use the porters 5 forces if you have to
OP said book on the sector, so they are all in the same industry.
Hopefully you'll have some basic understanding of the sector and the news stories will point you towards the key question of "what drives value".
Use the stories to build a thesis and find the company that best fits that thesis. I wouldn't spend much time on computations until you know what you are looking for (e.g., don't calculate Days of Inventory for each company if that isn't relevant to what drives value).
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