Resource: Real Interview Technical Questions

Hey guys, hope everyone's staying safe with everything that's going on right now! With some of my extra time I've decided to brush up on techs with some questions a friend sent me. Below are some real questions from interviews that I hope will be useful for others who are also prepping. I'm not sure if all of these are right (especially 1,4,5,& 7), so I would appreciate if you guys could point out any mistakes/explain things in a clearer way for others if you think I overcomplicated something. Thanks!
1. You have a target with an EV of $100 million and a debt/total cap of 60%, a 50% premium on the share price is given - what is the equity value of the firm? Let's say the company had $4 million in net income and the acquirer has a P/E of 15x, if it's an all stock deal, is it accretive or dilutive?
- Need some help with this one please

  1. A company is trading at 10x EV/LTM EBITDA, do you expect it to go up or down in the EV/NTM EBITDA multiple?

- Not sure how to go about this, maybe ask some follow ups about the company or base your answer based on your thoughts on the outlook of the industry/economy?

  1. If I'm an investment banker and you only had time to show your client 3 pages of your deck, what would it be?

- Interested to hear people's opinion on this question

  1. You have LFCF yield of 10% and UFCF yield of 20%. Your interest rate is 10%, tax rate is 50% and you have no cash on your balance sheet. What is your debt/EV multiple?

- LFCF Yield of 10% = LFCF/Equity Value = 10/100 (assume these #s)
- UFCF Yield of 20% = UFCF/EV = 20%
o Calculate UFCF: LFCF + interest rate * debt * (1 – tax rate) = ?
o Calculate EV: Equity Value (100) + debt (?) + MI (assume 0 or ask) + Cash (0) = ?
o Plug in UFCF/EV = 20% to solve for debt
o [10 + 10%debt50%] / [100 + debt] = 20%
o We end up with: 15%(debt) = -10
o So either we need to ask for a MI value to make that positive so we can solve for debt and ultimately get debt/ev OR I made a mistake earlier – could someone clarify for me please?

  1. You have 3 companies - Canadian Tire, Dollarama, and Amazon. You have unknown EV/Sales multiples of 2.4x, 4.7x, and 0.9x, which multiple belongs to which company? I can give you a sales growth or EBITDA margin data - which one do you want?

- I think we want EBITDA margin data because the higher the EV/Sales, the more likely the ebitda margins are stronger – please let me know if there is a better way to think about this

  1. A company experiences $100 million in fines it will have to pay. Before it pays it off, what is the impact to the equity and enterprise values of the company. What about after?

- Before paid off, I think the market will price in the fine, so the equity value will fall by $100m and therefore the EV will fall by $100m
- After the fine is paid off, EV should balance out because the decrease of $100m in cash offsets the decrease in equity value

  1. You have a debt/equity multiple of 1.25x. Common equity of $4 million, with 1.5 million shares and a current share price of $28 per share. You have $1 million in convertible bonds, with par values of $1000 - they can convert into 50 common shares at any time. Are they in the money? How does your debt/equity multiple change once it is exercised?

- If the shares can convert into 50 shares at any time they must be in the money
- So since the shares can be converted at any time shouldn't the d/e multiple be unchanged because the 1.5m shares should be calculate on a FDSO basis?

  1. Your company trades at 10x P/FCF and is buying a company with a 20x P/FCF. With 50% debt and 50% stock financing, what is the breakeven interest rate? What if this changes to 75% debt and 25% stock?

- I think you would approach this like a P/E accretion dilution question
- 1. 10% yield buying 5%yield so with a 50/50 stock, debt deal there is no interest rate that will make the deal b/e because 50% stock * 10% yield = 0, so the rate would need to be 0%
- 2. Cost of debt = (1-tax rate)(interest rate) (ask for the tax, assume 40% here)
o 10% * 25% + (1-40%)(interest rate?)(75%) = 5% (cant exceed the yield of company we are buying)
o Interest rate = 5.55%

  1. You have an empty factory that blows up, what happens to the 3 financial statements? Does change in net income outweigh change in cash flow? Why?
    IS

- There will be an impairment charge causing earnings before tax to fall
- Once we apply tax, net income will ultimately fall
CFS
- Beg cash = net income
- Add back impairment charge since its non-cash
BS
- Starting cash = ending cash from CFS
- Remove building from PPE
- Liabilities are unchanged
- Equity falls due to net income falling from the IS

I think the change in net income doesn't outweigh the change in cash flow since we add back the impairment charge as its non-cash

  1. A company has $100 million in EBITDA and an EV/EBITDA of 10x. Company has $150 million in minority interest, $300 million in debt, and $50 in cash. How much did equity holders receive and what premium does this imply?

- The company is valued at $1B
- EV = Equity Value + Debt + MI – Cash
- Equity Value = $600m (this is what equity holders got)
- Company was valued at 6x ebitda, now 10x, so they got a 66.67% premium

  1. I have a consumer retail client who is about to retire, but wants to make sure his company legacy lives on. What would you suggest and why?
    Some ideas that come to mind include:

- Could have a retirement party with a charity aspect e.g. instead of gifts donate to XYZ charity
- Launch some sort of exclusive product that's related to the client

  1. Where do you find dividends in the financial statements? Dividends according to CFS is different than BS and IS - why?
    IS

- Not an expense, don't show up here
CF
- Show up as an outflow in financing activities
BS
- Could have a dividend payable
- Indirectly show up in net income as dividends lower net income
Not sure what the interviewer would be looking for re the difference in dividends on the CFS vs BS, maybe the fact that there non cash dividends can be issued if they are in the form of stock instead of cash?

  1. A company of 10x P/E buys one of 20x P/E, is it accretive or dilutive? How do you know? What if it's with 50% debt?

- 10x p/e = 10% yield on stock and 20x pe = 5% yield on stock  dilutive IF all s tock
- IF 50% debt, we need to ask for cost of debt and tax to determine after tax cost of debt
o However, in this case if 50% is financed through equity, the cost is already at 5% (50% * 10%), so unless the debt is free I believe we know the deal must be dilutive

  1. Your EV/Sales multiple is 5x and EBITDA margin is 15%, what is your EV/EBITDA multiple?

- EV = 500, Sales = 100 (can use any #s just make sure 5x ratio)
- EBITDA = 100*15% = 15
- EV/EBITDA = 500/15 = 33.33

  1. What's a risk of being benchmarked to the TSX?

- full of banks and energy - not super diversified, more skewed to two sectors

  1. What are some risks of a conglomerate divesting certain subsidiaries?

- unanticipated resources needs, costly TSAs, loss of critical human capital --> ultimately lower rep and team morale

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Mar 30, 2020 - 1:48pm
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