INSANE GOLDMAN Superday Question MEGATHREAD
Question 3
A company is evaluating a new project that requires an initial investment of $1,000,000 and is expected to generate $300,000 per year for 5 years.
The firm has the following capital structure:
• Market value of equity: $4 million
• Market value of debt: $1 million
• Cost of equity: 12%
• Cost of debt: 6%
• Corporate tax rate: 25%
Assume the project has average risk.
Requirements:
1. Calculate the company’s WACC (5 Points)
2. Compute the project’s NPV (3 Points)
3. Should the firm accept the project? (2 Points)
Wells SD but with former Goldman banker:
You have an industrial company with volatile cashflows and there is a predicted downturn in the economy in six months. The company is spending 200 million on dividend payouts and 200 million on share buybacks.
My answers:
That’s cool but if you could answer my superday questions that’d be great. Ideally before Sunday 11:59pm
Yes sir, second year Asso! I dream of exiting to your LMM group so please put in a good word for me
Why would you spend money trying to lower floating rate debt? Rates typically decrease in a recession
Yea I assumed that the economy would be more volatile rather than a clear recession, causing rates to potentially fluctuate both up and down. I'm also not too familiar with the frequency of rate changes and the timing of refinances so I made a lot of assumptions. I guess he was satisfied with my answer because I got the offer.
It's a trick question; the answer is not enough information. We need to know the location of the company. If it is in Anchorage they have a 10% deduction in profits to account for employees over eating on the clock
how do u discount the cfs mid interview w no calculator or anything? is there some kind of rule/trick?
I'd recommend approximating based on common discount factors if you're expected to provide an answer.
If you're laying out the formula and you don't have a calculator, consider something like this for 10% and then advise that you're considering this approach.
Just adding on FinnesseGod's suggestion, I'd recommend familiarizing yourself with annuity factors for common discount rates at 5 years, 10, and perpetuity. It's not strictly necessary but can help especially in what may be a stressful environment like a technical interview.
For example, for 5 year annuity:
Discount Rate | Annuity Factor (PV of $1 each year for 5 years).
5% --> 4.3
6% --> 4.2
8% --> 3.99 (~4)
10% --> 3.8
11% --> 3.7
12% --> 3.6
15% --> 3.4
So for your example, we know that WACC is 10.5%, and the CF is annual for 5 years. CF is 300k, and since WACC of 10.5% we can apply average of corresponding factors of 10% and 11%: 3.75.
3.75 * 300k = 1.125mm, which is a reasonable approximation.
guiding wallstreet has this question recorded too
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