Tough Interview Questions
Had a hard interview last week and still not sure what the answers to these questions are... Hope I have a few more coming up so curious if anyone can help just so I'm ready next time. I mixed up the actual numbers in the questions but still don't understand how to approach these
1. At what tax rate are you indifferent between raising debt or equity if you are a publicly traded company with debt at 115 and a 12% coupon and a stock with a P/E ratio of 12x?
2. What happens to your TEV if you raise $500M of debt at 7% to fund a project expected to yield 8% a year? Does this change if your WACC is 10%?
3. What happens to the TEV of a company that pays 10% annual dividends when it repurchases its shares using cash from its balance sheet? Does it matter if the shares are purchased before or after the dividend is declared? Does it matter if the shares are purchased before or after the dividend is paid? What if you use debt with an 8% yield to fund the purchases instead of balance sheet cash?
4. A company was founded and purchased 100M of Land and 900M of equipment with a 30 year life and 300M salvage value. At the end of 10 years the company capitalizes improvements to equipment for $200M, which extends the useful life by 5 years. What is the PP&E balance at the end of year 11 assuming no salvage value change?
5. Two companies are in the same industry and are direct competitors making an identical product. The companies trade at different EBITDA multiples, what are two possible reasons why (I gave a few answers but the only one she took was working capital differences and can't think of another)
(1) 35%. Your equity yield is ~8% so if you issue debt at 12%, you will dilute your eps. 1-8/12 = ~35%
(2) your EV will go up because IRR of your project is greater than the IRR of the debt used to fund it
(3)
(3) on the surface don’t see why changing capital structure should change TEV. I guess you can argue that % debt goes up so theoretical or calculated TEV should follow the usual up and down curve (up first then down due to increased risk of bankruptcy etc)
(4) can’t be bothered to calculate atm
(5) it’s a stupid open ended question. If she accepted WC and since we know that growth = net investment rate * ROIC that means that all else equal growth rates of these two firms are already different. Therefore you may have as well added (i) capital intensity but then this whole question ultimately carries no meaning because how firms can be identical and produce identical products if they have different levels of capital intensity unless they are at different levels of business lifecycle
I think you're overthinking that last one. Been asked this question a few times and the right answer is usually anything that constitutes one off fees. 1. Working Capital 2. Legal fees 3. Capital Expenditures. That should be enough for this question (it's based on the cash flows).
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