corporate finance Q
found this interview Q on glassdoors... I don't have any formal education in corporate finance/ financial statements etc. but wondering if the below makes any sense:
the interviewer asked :
"what happens if depreciation increases by 10%?"
Interviewee replied:
"Pre-tax operating income on the income statement decreases by 10. As a result of the subsequent tax shield, net income only falls by 6, so retained earnings falls by 6. On the cash flow statement, the depreciation is added back as a non-cash expense, so overall cash from operations increases by 4. On the Balance Sheet, PP&E decreases by 10, so 4-10 = -6 for retained earnings, and the balance sheet balances"
So if an interviewer were to ask you such a question they would need to give you more info in order to provide a response like this? or are you expected to come up with some hypothetical numbers for cost of debt, etc ? and I don't understand why pre-tax income should fall by 10% since (a) percentages are not symmetrical and (b) depreciation is a percentage of expenses and you have no idea what the numbers are.
Can someone provide Q's for corp finance dependent roles?
That is an odd way of laying it out, better to go IS-->CF--->BS (the mentioned of retained earnings i would save for BS).
Generally they'll give you the $ amount (i.e. depreciation increase by $10) and tax rate (40%). I've heard of people being dicks and making it up $15 with a 35% tax rate or something to be annoying but did not experience that myself.
thanks.
o m g
yeah, with just that question, you're expcted to get to that answer. if the tax rate isn't mentioned, assume it's 40% and proceed that way.
start with income statement, a $10 increase in depreciation would make your operating income decrease by $10 as well. Assuming a 40% tax rate, your Net Income would fall by $6 (depreciation is tax-deductable). Now take it to Cash Flow statement. On CF statement, Net Income always shows up first. Net Income has fallen by $6 but since depreciation is a noncash expense, depreciation gets added back. So $10 gets added back. -6 + 10 = +4. Net change in cash is positive 4. Now take this to the Balance sheet. Assets = Liabilities + Shareholder's Equity. know this to make it balance. On theBalance sheet under cash, there is an increase of $4. Also, on the Assets side, there's depreciation so there's a -10. +4 - 10= -6 under Assets. Since Net Income had fallen by $6, Shareholder's Equity also falls by $6 and both sides balance.
Go over it in your head many many times and it should make some sense
Goodluck.
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