Compilation of tough technicals/behaviorals you've experienced so far
Boys,
hope youve all been grinding away during this rough time. remember, tough times dont last, tough people do. Thought it might be a good idea to just make a compilation of what tough interview questions youve faced so far, I've found it helps to isolate the tough questions from the prep guides so that you're not just zoned in for the moment and really have the concepts nailed down at a moment's notice
What I've seen so far:
Whats the beta of a slot machine?
does cost of debt ever exceed the cost of equity?
Shouldn't cost of equity usually exceed cost of debt?
woops, wrote it backwords
Answer is no btw. As the company takes out more and more debt, CoD increases due to risks of bankruptcy. The caveat of this is that while this makes it seem like CoD will soon pass CoE, CoE also feels the effects of debt (found in levered beta) and thus will also start to increase
Beta is based on correlation. What would be the "standard" for a slot machine? I don't think this question can be answered.
What I've seen:
Question can be answered simply. Beta of a slot machine is 0. Beta is essentially the covariance of (x,y) / variance (x). Slot machines and the market are not correlated at all - slot machine outcomes are stochastic and not tied to market performance in any way. Received this question in various froms different EBs during my OCR (one was like beta of a biotech company that's dependent on trial results, similar idea).
You could make an argument that Beta would be positive. Slot machines are meant to make a profit, so the expected value of each pull is positive (for the owner of the slot machine). If the market is doing well (and the economy in general is doing well), more people will use their higher discretionary income on things like gambling, so a slot machine will make more profit.
I think a question like this doesn't necessarily have a right answer as long as you reason appropriately.
Why wouldn't you use an LBO to value a public company? LBOs allow you to figure out what a financial buyer would ostensibly pay - who cares if the target is public or private.
Almost positive @dalailama is correct here. You can use an LBO to value a publicly traded company because you are changing your strategic acquiring firm's (not a PE firm most likely as very few can afford to buy publicly traded companies) debt structure. You also are going to be determining the feasible price per share because even though the share price is public, you will buy at a control premium.
When it comes to questions about valuing random things, would you essentially walk them through each method and address the potential drawbacks of any?
You could also argue that cost of debt can exceed cost of equity in all company forms that are not limited, like partnerships etc.
"How would you value Halal Guys?" - Moelis SA interview.
Lol this is literally how do you value an apple tree (or some other variation) question except a little more complex/specific.
Clearly, the answer is "Over. I would over-value halal guys. Where do I sign?"
Pretty easy once you've thought it through, but caught me off guard in one interview: What's the mathematical condition that has to hold for a dividend recap to increase IRR?
Is it roc > after tax cost of debt? As long as you have no net outflows after the div. recap then IRR increases.
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