RX IB Interview - Investment Banking
Walk me through what happens on the 3 statements when there’s an Asset Write-Down of $100.
A company decides to issue $100 in Dividends – how do the 3 statements change?
. If you own over 50% but less than 100% of another company, what happens on the financial statements
when you record the acquisition?
How do you calculate Beta in the Cost of Equity calculation?
The “cost” of Debt and Preferred Stock make intuitive sense because the company is paying for interest or for the Preferred Dividends. But what about the Cost of Equity? What is the company really paying?
, First off, note that you don’t have to calculate anything – you could just take the company’s Historical Beta,
based on its stock performance vs. the relevant index. Investment Banking Normally, however, you come up
with a new estimate for Beta based on the set of Public Comps you’re using to value the company elsewhere in
the Valuation, under the assumption that your estimate will be more accurate.
You look up the Beta for each Comparable Company (usually on Bloomberg), un-lever each one, take the
median of the set and then lever that median based on the company’s capital structure. Then you use this
Levered Beta in the Cost of Equity calculation.
The formulas for un-levering and re-levering Beta are below (see the Rules section above for explanations).
• Unlevered Beta = Levered Beta / (1 + ((1 - Tax Rate) x (Total Debt/Equity)))
• Levered Beta = Unlevered Beta x (1 + ((1 - Tax Rate) x (Total Debt/Equity)))
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