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Here’s one I got at a SA 2022 super day last week and still have no fucking clue how to work through:
When valuing the cash flows arising from a Section 338 election (i.e. decreased tax liability due to increased depreciation expense from step-up in basis of assets), what discount rate would you use and why?
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
Why isn't it the cost of cash as we use when doing accretion dilution models?
Don't think it's so simple - you still need to make $ to enjoy your tax benefits; otherwise, it's worth nothing. I'd say it is as risky as the rest of the business.
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.
What’s the difference between EV & Equity Value? How do you get to one from the other? ;)
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.
Yes, in concept that would be "wrong", but not entirely. I can't give the best explanation but please check out the article linked below.
https://www.wallstreetprep.com/knowledge/common-topics-of-confusion-for…
Enterprise value is the value of the core business or as some also say core operations to all investors. On the balance sheet it would be the equivalent of operational assets net of the operational liabilities or net operational assets
Equity value is the value of a company but only to equity investors. As such it recognises other investor groups and other claimants to company assets and excludes them from the enterprise value (eg debt holders, pension obligations, minority investors, restructuring and other liabilities, preferred stock holders)
EV = Equity Value + Debt + Minority investments + Preferred stock + Unfunded pension obligations + Other liabilities such as restructuring etc - Cash & equivalents - Short-term investments - Equity investments
Absolute class answer. SB'd
You forgot to include leases
Explain NUBIG
Absolutely no idea what this is
Neither did I when I was asked about it in a SA interview lmao
.
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Someone I know was asked: "What would you estimate the beta of a slot machine to be?"
He told me he said that it would be 0 because slot machines are not connected to the market and that they have a certain payout ratio for the casino
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.
I think the question is intended to pertain to a single slot machine rather than slot machines in the macro sense.
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.
Good broad one for you - "If a company generated $100 every year, how much are you willing to pay for it? is there a formula or is it conceptual?"
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.
i don't totally get your comment about cash flows that aren't growing. isn't CF/(Discount Rate) the present value of a perpetuity? and a perpetuity, well, grows in perpetuity?
edit: now thinking about this in terms of just a single cash flow on a timeline so i sort of get what you're saying (maybe?) but still confused with your formula
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.
It should depend on the riskiness of the counterparty as well, of course. What kind of "company" is this coming from and where is this $100 outflow in priority? How material is $100 to this company? + considerations about its business model, customers, competition, regulation ... this is why VC investors have a higher discount rate than PE investors, it's not just because the investors are more/less risk averse, it's to do with what they are investing in.
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.
Isn't that a beta of 0?
how is this a good or broad? there's nothing more to it than the PV of Perpetuity.
Alright Mr. Genius sir, how do you calculate PV of perpetuity in this context? It is meant to be a simple question to make people over think (which clearly it is doing given the prior comments)
In the case of M&A, why would asset write-up creates a DTL, not DTA. Asset write-up means more depreciation on book account than tax account and hence paying more tax in actuals than book. shouldn't be it DTA?
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
other way around I think
Okay. Then in normal case of calculating DTL, we use [MACRS dep ( Tax account ) - St line Dep ( Book )]*Tax rate , by this logic, We have paid less tax in cash than book, hence an asset should be created (DTA), but in reality we create a DTL here as well. Sorry little confused here.
.
Would you reflect cash received from an equity issuance in a levered DCF and why?
I wouldn’t model issue of equity in levered DCF because negative cash flows directly impact equity value accounting for future dilution
Wouldn't you add the cash to get EqV though?
What percentage is a distressed equity premium normally in CAPM
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
Is equity value 0 in the case of bankruptcy?
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
Hertz filed for chapter 11 in May of last year shares are not 0.
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.
Call option on equity makes it never 0 I believe. That's the answer I gave in a superday with an EB and got the offer.
Reasons why it wouldn't be zero
Ok, Mr. Associate. Here's 2 questions an Associate got asked for a fit interview.
Situation: Your senior analyst has never done financial modeling and has no experience with data analysis including Index Match or even Vlookup. However, this analyst has been assigned the model for two urgent live deals. How would you work with and advise this analyst so you all can get through these deals together and have the analyst develop a strong foundation financial modeling foundation?
Situation #2: A top bucket analyst has recently been very unresponsive, lazy and unmotivated for the past few weeks. Workstreams are falling behind and you as the associate are getting blamed. How would you navigate this situation such that the senior analyst does not get any backlash and you both come out with the best outcome?
How is it possible that a senior analyst has never done modeling? Internal lateral?
Believe it or not, I've met a fair share of 3rd year analysts who have never used a pivot table or only know the lookup equations rather than Index Match. Also, definitely a good amount of analysts that have just gotten unlucky or were bottom bucket such that the other analyst would always be assigned the model and they would get stuck with the CIM.
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
Both situations happened in our group in recent months due to so many analysts leaving but instead of it being a senior analyst, it's a 1st or 2nd year.
As for the second situation, I'm sure you know this but didn't say it: a top bucket analyst suddenly acting this way is most likely about to put in their 2 weeks' notice or are preparing for upcoming interviews. When I was an analyst, I had a bunch of senior analysts and associates act this way suddenly with me as in they would be completely unreachable some days. After talking with them when they're leaving, I always end up being right as the weeks or months that they tell me they were interviewing, I noticed they were unreachable.
I got another one: Teach me how to use Index Match as if I were a 5-year-old. Can assume I know the basics of Excel including how to create nested formulas, but note I don't know how to use the lookup formulas.
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
How do you know so much finance on a technical level? I'm an A2A and knew more about finance when I was interviewing and preparing for these technical questions than now. So much of the industry is non-finance based (PPT, admin, etc.) and even the financial modeling is very basic or is mainly data analysis so on a purely technical basis, I haven't really learned much of anything in finance.
Am I alone in thinking this way?
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
Wow, yeah you are definitely interested in finance. I make up for my lack of financial knowledge by just working really hard. Have met hundreds of bankers in my lifetime and know very few who could talk so in depth about finance and answer such questions in the way you have. I seriously mean it. You need to give yourself more credit, man.
We are having a technical prep night tomorrow on clubhouse from top banks. Feel free to listen in
https://www.joinclubhouse.com/event/xoBlOVZK
8pm PST, Goldman Sachs, JPM, Citi, Qatalyst, Credit Suisse and Barclays.
It was too late unfortunately, i dont live in the US
What is the appropriate way to deal with SBC in a DCF?
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
This doesn't answer the question though.
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?
Could be wrong but I’ll take a crack at the lower tax rate question. Despite the fact that EV/EBITDA excludes taxation impact, in reality it is likely that EV/EBITDA will increase as a result of decreased tax expense, which leads to higher cash flow to the firm. Thinking about it from a PublicCo perspective, if say Biden announces some corporate tax decrease today, market is likely to reward that company by bidding up the stock price, hence increasing the Market Cap component of the Enterprise Value formula.
1) correctly
2) increase price
3) too much math in head
4) increases
5) first one
(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
If you raise debt, does it always correspond to a cash payment?
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.
Thank you very much for this one! I have another one. If 2 companies have same PE, why would they have different EV/EBITDA ratios?
Why would 2 similar companies in the same industry with a similar growth trajectory be trading at different multiples?
(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
What happens to EV when a company raises debt to pay dividends?
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
Had this one in a recent interview :
How do you get from Unlevered Free Cashflow to Levered Free Cashflow?
Deduct interest payments, mandatory debt repayments and add back debt raised
What about the tax effects on interest?
Why do you add back debt raised?
The analyst interviewing me tried to tell me that mandatory debt repayment shouldn’t be subtracted from LFCF .....
Hey - another one :)
If you raise a debt but you don't use the amount which was borrowed. What is the impact on the net debt. What is the math formula for the fiscal economy realised when you reimburse debt?
Hey!
Net debt should increase by the amount of cash left on the B/S. Not sure I understand the second part of the question..
I thought Net debt would stay the same. Say they raised 5 million in debt and didn't use the cash, wouldn't the formula be Net Debt = (Debt + 5mil) - (Cash + 5mil)? Generally speaking, I thought financing doesn't impact EV.
Not sure this is a good one. How to calculate EV in 1 min?
just need to know the formula...
EV = FCF / (r - g)
where
- r = discount rate = WACC
- growth rate (g)
also, you need to remember that FCF = operating profit - reinvestment
so EV becomes => [operating profit x (1 - rr) ] / [r - (rr x ROIC)]
where
- Reinvestment rate (rr) = reinvestment/operating profit
- Return on invested capital (ROIC) = return/(profit x rr)
- growth rate (g) = return / operating profit ( or rr x ROIC)
you just need to know the value drivers of the EV or the formula lol. then just plug and chug... :)
I’d just discount cash flows at your desired return and id use either annuity or perpetuity formula depending on the nature of the investment
How do you calculate the share price of a PE fund?
It’s an interesting question and I’ll be honest I can probably take a guess but I’ll have to think a bit and make assumptions, which will take time, and I’m about to go to play golf...
I’ll need to brush up my knowledge how publicly traded PE funds are structured
ahah no worries - I understand it is a NAV (company per company). What I am not sure is if you add a certain discount to the total NAV or a premium and why. thanks!
What does an investor look at before buying a bond?
I would look at:
(1) usual stuff like what industry and it’s characteristics + cash flow profile to assess downside risk and to create ability to pay down debt analysis
(2) existing cap structure to understand who else is in there and how indebted the company is etc
(3) management team
Is the coupon rate on a plain vanilla bond different than a convert?
Definitely yes. Convertible bonds should have lower coupon because owners can convert into equity
2 companies have same EVs same EBITDAs. They produce water from the same source. One has a PE of 12 the other one 14. Can you please explain?
If EVs and EBITDAs are the same in nominal terms, it means size, cost structure, depreciation, ROIC and UFCF growth are all the same. So the difference has got to stem from different capital structures
Thank you! If PE is equity/net income, is it the one which is the more levered that would have a lower NI hence a higher PE? Not sure about that as logically I would say the opposite
This is a good one that over the next few years, will become a common question.
"Explain the Great Financial Recession and the Great Pandemic Recession and point out the differences in each. Additionally, explain your view on how the economy and financial market will shape out following the GPR."
Hmm...this is actually starting to sound more like an essay question on a Finance 101 exam.
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