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  • Prospect in IB-M&A

i've only done two interviews so far this season but i'm gonna tell you that it doesn't matter how "right" you are about the composition of a debt-paydown model or how to consolidate majority stakes on the financial statements.

if you can tie the question into something relevant going on in current affairs - how and why Credit Suisse's levered beta is higher than their unlevered beta and what that means - you show that you "get it" a little more than the next squid that buried his nose in Brian DeChesare's balls for 3 months.

Tsemaye1, what's your opinion? Comment below:

If you can (as someone planning an Msc), clear CFA Level 1 or 2 before recruitment season. That way, BIWS or any prep material would be adding flesh to a skeleton of solid technical understanding. That way, you have high chances of getting a question right no matter how it's twisted. Might even end up being more theoretically vast than your interviewer : ) (especially in areas only indirectly related to banking)-shows soundness & is impressive.

Obviously not always applicable for undergrad students

lamron, what's your opinion? Comment below:

I see what you're saying about tying it to current events (great advice) but in all cases levered beta is higher than unlevered beta - unless leverage is zero (they would just be equal). Just from looking at the formula and intuitive finance theory. Or did you mean the opposite? 

  • Prospect in IB-M&A

no, you're correct in saying that levered beta is always > unlevered. my point is go beyond intuition and finance theory and tell the interviewer why. CS taking on more debt would be riskier/more expensive than issuing equity because they already have so much debt and are strapped for capital as is. they'd end up paying a very high interest rate (and that's not primarily driven by prevailing rates, that's because it'd be so risky for a bank to issue debt).

lamron, what's your opinion? Comment below:

ok I see what you mean - that's clear to me. However, I think cost of debt being greater than cost of equity relates more to discussions about WACC and the fact that you can only decrease WACC up to a certain point using debt due to the increased idiosyncratic risk. In fact in some interviews they may ask you to draw the chart with WACC on the Y axis and proportion of debt on the X axis. Even if cost of debt was less than cost of equity for CS the levered beta would still be greater than the unlevered beta. The impact on the beta from leverage stems from the returns to shareholders being more volatile, i.e. more risky. 

What I mean to say is that Credit Suisse's levered beta is greater than it's unlevered beta not because its cost of debt is greater than its cost of equity, but because in all cases increasing the level of debt will increase the volatility of returns to shareholders. I see what you mean just being nitpicky here. 

Overall good advice on the current events. Another area to tie in I think is SVB and understanding the impact of rising interest rates on the long-term asset collateral, which has a higher duration i.e. sensitivity to rising interest rates, than short-term collateral. From what I read SVB was holding long-term collateral instead of short-term collateral to chase higher yields, but of course that comes with increase duration risk due to that further-out face value at maturity and coupon payments. 

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  • Prospect in IB-M&A

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