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Beyond the guide: a list of real interview technical questions

LES's picture
Rank: Orangutan | banana points 294

Over the past few years, this forum has helped me a lot, so I thought I'd give back. The following questions are all from interviews and superdays I've had at various BB/EBs. I only posted technical questions that are not in the traditional guides. I come from a target b-school and did not go through diversity (gender/URM) recruiting, so my experience may differ from many of you. Regardless, I hope these help.

1. Rank EV/EBITDA, P/E, and EV/EBIT for the "general" company.
2. How would you value NOLs?
3. You sell a subscription that is $12 per year, delivered monthly.
3a. Walk me through the 3 statements right after you sell the subscription (the $12 is delivered at the beginning of the year all at once).
3b. Walk me through the 3 statements after one month.
4. What kind of company would have the same EBITDA and Net Income.
5. A company acquires $200 worth of PP&E.
5a. Walk me through the 3 statements for each of the following variations: 1) 100% cash purchase; 2) Operating Lease; 3) Capital Lease
5b. Rank each of the aforementioned variations in terms of EBITDA, Net Income and EBIT.
6. Why might two companies with the same financial profile have different EV/EBITDA multiples?
7. What's the relationship between the D/E ratio and WACC?
7a. What's the relationship between the D/E ratio and the value of a company?
8. How does an increase in the tax rate affect the value of a company?
9. A company has an EV of $100, no cash and $400 of debt. How is this possible?
10. How much would you pay for an asset that pays you $100 a year, guaranteed?
11a. There is a company that manufactures pots from steel. The company purchases $500 of manufacturing equipment and $500 of steel financed by $1000 of debt. The company has a 10% cost of debt with no debt amortization and depreciates its manufacturing equipment using straight line depreciation over 5 years with no residual value. Walk me through the 3 statements right after the purchase.
11b. Say the company sells $900 of pots and uses $300 of its steel. It has $200 in SG&A expense and has a 40% tax rate. Walk me through the 3 statements at the end of Year 1.
11c. Say the company switches to FIFO accounting from LIFO and that the price of steel is declining. What happens to the company's free cash flows and what happens to the value of the company?
12. A company has a $100 market capitalization. There are 100 options with strike price of $5. Current share price is $10. What's the fully diluted market capitalization?
13. If you buy a company trading at 20x P/E and the deal is financed 100% with debt at 5% interest, is the deal accretive or dilutive?
14. Does mid-year convention result in a higher or lower valuation?
15. What are some pros/cons of a strategic and financial acquirer from the perspective of the target company?

Comments (229)

Feb 13, 2018
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Feb 18, 2018

Is anyone here capable of answering these questions?

Feb 18, 2018

Les,

Perhaps you mentioned this already, but for my own edification, what type of position(s) are you interviewing for where you were asked these technical questions?

There were several questions you listed that are pretty nebulous in nature and would seem to require additional information to be able to answer the question properly. For instance, 11c asks about changing accounting methods from FIFO to LIFO and asks about the impact of the companies FCF. Perhaps I'm oversimplifying this, but doesn't the valuation of the shares purchased by the company at specific intervals throughout the fiscal year have an impact as to whether the shares liquidated (regardless of FIFO or LIFO) increase/decrease FCF?

Feb 18, 2018

These were interviews/superdays for investment banking SA positions.

You are right--some of the questions require some assumptions to be made. Like for #5, you would probably need to make an assumption about the depreciation rate, but that is something you can ask the interviewer for. Many of my interviewers intentionally left out some piece of key information to test whether or not I would ask for it or make an assumption.

By "shares" do you mean inventory of steel? Not sure what you're asking here.

Best Response
Feb 23, 2018

I'll bite. Feel free to correct me if I'm wrong on any of these...

  1. From highest to lowest: P/E, EV/EBIT, EV/EBITDA (generally, obviously depends on amount of debt of the company and differences between EBITDA and net income)
  2. This one is iffy. I've heard 30 different ways to value an NOL. Generally you value it separately from the operations of the firm. So you would look at your projections, and offset taxable income from your projections with the NOL balance. Do this until the NOL has run out, and then discount the tax savings to PV. Again, discount rate differs depending on who you ask, but you could argue Cost of Equity as the discount rate since the NOL savings offset taxable income, which is after interest in the payment priority (i.e. tax savings flow directly to equity holders).

3.a. No change to the income statement; Cash goes up 12 on the balance sheet, Liabilities go up 12 from unearned revenue; Cash flow statement increases CFO by 12 from the increase in NWC (the liability increase from the unearned revenue)

3.b. Revenue increases by 1 (I'm just going to ignore COGS since no detail was given), Net Income increases by .6 (assuming 40% tax rate) on Income Statement; Balance Sheet: Cash decreases by .4 from the taxes you paid (Assets down .4), unearned revenue liability decreases by 1 (Liabilities down 1), Net Income increases by .6 (Equity up .6); Cash Flow: Net Income up .6, NWC change down 1 (the decrease in the unearned revenue liability), so CFO down .4

  1. This is a weird question. I suppose a company without debt (so no interest), no owned PPE (so no D&A), and has no taxable income. So some type of services company (i.e. consulting?) that isn't doing well so their EBT is 0?

5.a.1 No change to income statement; PPE increases 200, cash decreases 200, so assets net to no change; Cash Flow Statement: CFI decreases by 200
5.a.2 No change to income statement initially (although you will record rent expense during the lease period and the associated tax savings); No change to B/S initially (but will decrease cash as payments are made and change Equity as NI decreases); No change to CFS initially, but CFO will decrease as payments are made
5.a.3 No change initially to I/S or CFS; Balance sheet Asset will increase by PV of the lease payments, Liability will increase by the PV of the lease payments. As payments are made, you record depreciation and interest on the I/S, decrease the asset by depreciation, and decrease the liability as payments are made. CFS changes for CFO as interest payments are made (CFO), add back depreciation (CFO since non-cash).
5.b. EBITDA: Cash, Capital Lease, Operating Lease
Net Income: Cash, Capital Lease, Operating Lease (In the early years, interest is higher, so Operating Lease and Capital Lease should be switched, but in the out years it looks like this)
EBIT: Cash, Capital Lease, Operating Lease

  1. Different growth profiles, one uses operating vs. capital lease, one is an industry leader and deserves higher multiple
  2. As D/E increases, generally WACC will decrease since debt is cheaper than equity
    7.a. As D/E increases and WACC decreases, value should increase
    *NOTE: If D/E gets too high, then debt becomes expensive/risky, so the above answers only hold true to a point.
  3. Generally decreases value, since the increased tax payments means less unlevered free cash flow. However, this can be mitigated by a lower WACC, but generally speaking value should decrease as a whole.
  4. Company is balance sheet insolvent. Debt will likely trade at a huge discount--company is distressed (theoretically speaking, equity is negative $300m, but equity can never trade lower than zero)
  5. Formula for a perpetuity is 100/discount rate. So assuming a current interest rate of 1%, I would pay $10,000. Theoretically I could take $10,000 and invest it at 1% interest to get $100 per year.
    *I'd also note that this assumes I live forever, but in reality I wouldn't pay 10,000 since I won't get cash flow infinitely

11.a. No change to I/S. CFS: CFI down 1,000, CFF up 1,000; B/S: Assets up 1,000, Liabilities up 1,000
11.b. Rev up $900, $300 of COGS, $200 of SG&A, $100 of dep. expense, $100 of interest exp. So $200 of taxable income, but then $80 of tax (40% tax rate), so net income increases by $120. CFS: NI up $120, add back $100 of depreciation, so CFO up $220 and net cash up $220. B/S: Cash up 220, PPE up 900 (1,000 less 100 of dep.), Liabilities up $1,000, Equity up 120 (net income).
11.c. COGS decreases, so net income increases. That said, I think value will actually decrease, since any increase in Free Cash Flow from lower COGS is tax affected, whereas the corresponding change in NWC (from inventory changes) will change by the same amount, but not tax affected. So therefore free cash flow will actually decrease, as will value. I could be wrong here.

  1. Using treasury stock method, a company will have $500 from the exercised options ($5 per share strike price x 100 options). They can buy back 50 shares ($500 / $10 per share current price). So 50 new shares issued at a current price of $10 per share means $500 of additional market cap. So $600
  2. Accretive. If you reverse the P/E, you get a cost of earnings (earnings yield) of 1/20 or 5%. This is the cost of debt, but you need to take into account the tax shield on debt, which at a 40% tax rate means an effective 3% cost of debt. So therefore you're effectively paying 3% for earnings generating 5%.
  3. Higher valuation, since you now assume cash flows come 6 months into the year instead of 12 (so cash flows coming sooner means less discounting).
  4. Pros of Strategic: Synergies and ability to pay in stock, so upside potential for target, can generally pay more (due to synergies), operational expertise in sector
    Cons of Strategic: Potential regulatory approval (FTC), may only want to pay in stock if its overvalued

Pros of Financial: Higher transaction certainty (financial buyers execute many more transaction), maybe general operational expertise (running businesses in general), will pay in cash
Cons of Financial: Little to no upside for target (other than maybe a MIP), might fire management, generally pay less than strategic.

Feb 18, 2018

I got mostly the same answers, with some exceptions (let me know if you agree/disagree):

For #6: This would probably be something to clarify in the interview, but similar financial profiles also means similar margin and growth profiles. In such a case, EV/EBITDA multiples might differ as a result of one-time events. Perhaps one company just got a bid to be acquired at a 20% premium. Perhaps there was a legal settlement, etc. Agree with the industry/market leader explanation, though.

For #9: We pretty much agree here. Theoretically, market capitalization (market value of equity) can never be lower than zero. Equity value is not negative $300--it is $0. The trick to this question was to recognize enterprise value is the market value of a company's operating assets. The "debt" component of EV is therefore the market value (instead of the face value) of debt. In this case, the company is clearly distressed.

For #11c: Value should be unaffected here. If value is based on a company's fundamentals (ie. real cash flows), then accounting gimmicks should not affect intrinsic value. You are correct that FCF will decrease, but overall value remains unchanged since a deferred tax asset is created, which has a value that offsets the loss in value from lower FCFs. Perhaps the question is poorly worded or unclear, but the change from FIFO to LIFO reflects a change in the company's book statements while its tax statements (what it actually pays the IRS) remains the same.

Feb 18, 2018

Yeah I agree with everything you wrote. I was thinking of the LIFO/FIFO question more from a "I'm going to do a DCF or EBITDA multiple calculation" perspective, but theoretically you're correct in that an accounting gimmick should have no affect on value if it doesn't affect taxes being paid.

As for the cash flows, you're right on the free cash flow not changing--I forgot about the deferred tax component.

Feb 22, 2018

can you explain number 9? Is $400 debt the BV of debt?

Feb 22, 2018

Both responses to 9 are slightly wrong or misleading imho.

It is absolutely possible to have EV=$100 and debt=$400. Just assume the company has
Non operating assets that are $300 greater than the market value of its equity

Feb 22, 2018

In what way were the responses misleading or wrong?

Probably should clarify: the question assumes that there is nothing else other than what is mentioned. Just an EV of $100 and $400 of debt.

Feb 22, 2018

Any reason why on Q11b you didn't include include the effects on inventory given that the steel is a raw material?

For example, did the same as you on the IS but under CFO, inventory is down $300 so it's a source of cash which increases your cash flow alongside depreciation, resulting in an ending cash balance of $520.

Then on the balance sheet, PP&E down $100, inventory down $300 so net assets of $120, which balances with the $120 equity figure.

Feb 22, 2018

I would've assumed it's a raw material, and I had the same math as you.
I wouldn't ding anyone with the above answer though - still showed how the statements connect, there's just a minor misclassification.

Feb 22, 2018

For number 10, wouldn't your discount rate by your WACC? Why would you use an interest rate instead of your WACC?

Feb 22, 2018

Your discount rate is just meant to match the riskiness of the cash flows with which it is associated. So if the cash flows are risky, the discount rate should be higher.

In this case, the cash flows are guaranteed. They are risk-free. Therefore, the appropriate discount rate is the risk-free rate (aka the interest rate mentioned above).

Feb 22, 2018

For number 9, equity value can never be negative. Company likely has equity interests in another company/assets worth $300, which would be treated like cash in terms of calculating EV.

The whole distressed explanation you have above is just overcomplicating it imo

Feb 22, 2018

For number 10....why are you using a 1% interest rate? I would use a 5% interest rate and only pay $2,000 for a $100/yr annuity.

I am assuming that this $100 / year is a true annuity and you can NEVER get your principal back.

30yr US Treasuries are yielding 3.21% right now and you get the principal back after 30 years (with a new issue purchase).

Feb 22, 2018

I don't think there is a specific reason to use a 1% interest rate other than the fact that it makes for easier math in an interview. The interest rate should just be whatever the risk-free rate is. As long as you state your assumptions clearly, there shouldn't be an issue.

Feb 24, 2018

Not that there is a right or wrong answer, but no company will invest at a 1% return into perpetuity regardless of it being risk free. I would think about this more from an opportunity cost perspective.

Feb 23, 2018

Thanks Alt E S ------ very helpful answers.
Would suggest a revision to your NOL. My take is that the Discount Rate would equal WACC because debt-free pre-tax income is used to value NOLs (or it was the last time I completed a valuation of one in 2010 - a lot could have changed, and my experience is with GAAP Fair Value).
At the time (again, ages ago), EITF 02-13 required consideration of stock vs asset sale in a hypothetical sale of the subject when deciding how much of the NOL is acquired.
Hypothetical Summary of the Valuation:
NOLs Acquired = 20,000
Yr 2 Pretax Income = 2,919
Yr 2-Max NOL/Yr = 1,364
Yr 2 NOL Used = 1,555
Then discount Yr 2-x at WACC to estimate FV of NOL.

Following is my narrative for the Auditors:
"Issue 1 Requires that management determine if the fair value of the reporting unit should be estimated based on how market participants would structure the hypothetical sales transaction of the GSE Core business. One of our most desirable assets as a Company, to a prospective buyer, would be our net operating loss carryforwards. As of 12/31/10 GSE had $15.9 million of NOL's. Management has indicated that they believe GSE would mostly likely be purchased in a stock sale because the purchaser would acquire all the NOL's. For this reason alone, management believes that a stock sale (nontaxable) would be more likely to occur than an asset sale (taxable). Therefore, it is assumed that the tax attributes of GSE will be carried forward.

According to EITF 02-13, there are three factors to consider in this regard:
1. Is the assumption consistent with what market participants incorporate in their estimates of fair value. Management has indicated that the assumption that a stock sale would occur as a result of the NOL balance is consistent in this regard. Further, our search of public companies acquired with SIC Codes 7372, 73 & 74, in 2010 indicates that 100% of the transactions were stock deals. One problem with looking at market participant transactions is that the review is focused on tax attributes of the potential buyers, not the sellers, nonetheless, we find the MA data to be compelling evidence.
2. Feasibility of the Assumed Structure: Management has indicated that the stock sale structure seems feasible and we have not explored whether there are any laws, regulations or other corporate governance requirements that could limit a non-taxable sale.
3. Whether the assumed structure results in the highest economic value to the seller, including consideration of the tax implications. Our understanding is that this factor was not analyzed by management."

Feb 23, 2018

Wouldn't it make more sense to use the cost of equity to discount NOLs? The cost of equity isn't perfect, but since NOLs have value only if the company has earnings after interest expense, they are more like equity than debt. So my guess is WACC would lead you to overvalue any NPV of NOLs

Feb 23, 2018

Draymond, Yes, I see your point.
Or, I could tax-affect the Debt-Free CF - then use Ke. I don't recall now why the methodology of the time was to use DFCF.
Thanks for your insight.
MK

Feb 23, 2018
Alt E S:

11.
Using treasury stock method, a company will have $500 from the exercised options ($5 per share strike price x 100 options). They can buy back 50 shares ($500 / $10 per share current price). So 50 new shares issued at a current price of $10 per share means $500 of additional market cap. So $150

100 + 500 != 150. The new market cap is $600.

Feb 19, 2018

Saving, thanks

Feb 22, 2018

so i'm fucked because i don't understand a damn word of this

Feb 22, 2018

For 11c, given that prices have declined over the period, the effect of switching from LIFO to FIFO is to reduce Net Income and increase cash flow.

From a valuation perspective, at least theoretically (and assuming no daylight between GAAP and cash taxes), switching to FIFO (ie, increasing COGS) lets you defer paying cash taxes. So this increases value.

but obviously if your cash taxes are unaffected, valuation is unaffected.

Feb 22, 2018

Thanks OP, these will be in the next edition of the WSO technical questions guide :-)

WSO's COO (Chief Operating Orangutan) | My story | My Linkedin

Feb 22, 2018

Thank you for a great contribution to WSO

Feb 23, 2018
  1. Company A has $100m in revenues, Company B has $50m in revenues. Company A acquires Company B and the pro forma company has $400m in revenues. How is this possible?
Feb 24, 2018

Synergies. Maybe they can increase prices substantially, introduce a new product without market competition, etc.

Feb 24, 2018

that is a massive number to assume for synergies. the best answer is probably that A and B together own >50% of Company C, so that pro forma revenues include A, B and C

Feb 24, 2018

Also possible, but I highly doubt any SA interview would test that concept

Mar 5, 2018

Valeant acquires Turing. Raise prices of drug portfolio 167%.

Feb 24, 2018

Hey thanks for this! What sources/guides did you use to prepare? Many thanks.

Mar 5, 2018

Sports teams are valued using revenue multiples. Except for some NFL teams, sports team values reject economic reality. 20 of the NBA teams are losing money, but I doubt they're worthless. Sports teams typically trade between 1x(think Arena Football and Soccer) and 5x(think NFL), NBA, MLB, and NHL are in the middle.

I'm swamped at work but if nobody answers the other questions I'll circle back and chime in.

Mar 5, 2018

1) need to use a multiple thats pre interest payments. so ev/ebitda is one, ev/ebit, etc
4)compare public comps rev multiples to private companys rev and apply higher one depending on growth prospects.
5) could be because of different capital structures (one has more debt). but if same risk assumes same cap strcuture, then maybe because of exposure to certain verticals that may be weak or geo regions that may be seeing weakness
6)IS and CF. if just one, then IS

Mar 5, 2018
  1. There is really no such thing as 100% debt. The equity acts as a residual claimant, and as such acts like an option on the fund's assets with the debt representing the "strike price". This is a capital structure question, so just note the failures in Modigliani Miller. You can use enterprise value multiples to compare them, and then adjust for interest tax-credits, etc. It's not really a very good question as phrased. I would just ask people directly what the failings in Modigliani Miller are.
  2. You are reliant on assumptions regarding the perpetual growth rate.
  3. Just like how you would value any other asset, estimate future cash flows and discount accordingly. There's a bunch of industry specific stuff you can use, like CBAs, projected popularity of the sport, etc.
  4. This is a stupid question. How are you supposed to value a financial asset without estimating cash flows (I'm assuming when you say no DCF you mean no variants of it, even comparables are a rough, quick and easy way to do DCF)? I'm assuming that by comparables you mean private comparables too, so stocktwo50's answer does not apply...
  5. Cap structure...i don't think it's anything else because that would be captured in risk and growth stuff...again, a poorly worded question
  6. Agree, IS and CF are most important, with IS moreso
Mar 5, 2018

Why wouldn't you use the IS and the BS and forecast the SCF?

'Before you enter... be willing to pay the price'

Mar 5, 2018

4) How about comparable transactions? Is that legit, or do we consider that falling under "comparable companies?"

Its very rough, but you can just check general transaction multiples for any companies of a similar cap size or EBITDA generation, though not necessarily "comparable." Then apply those multiples to your firm

Mar 5, 2018

5) Brand name. Thats the single best answer I can think of. Its like KO vs. COT, for example

Mar 5, 2018

What are the 3 financial statements?

What are the major valuation methodologies?

How do you calculate a WACC?

In a DCF, how do you calculate FCF?

What does EBITDA stand for?

What is a better investment, a company with a higher or lower P/E?

All of these depend on what you say your strengths and experience are. I have had interviews with English majors who I asked one question and left it alone because they obviously knew nothing. On the other hand, I have asked nitty gritty questions on why CAPM is a reasonable methodology for finding equity cost of capital to finance majors who claim they know these sorts of things.

Make sure you can answer anything that you say you can on your resume, and preface anything you can't well.

--There are stupid questions, so think first.

Mar 5, 2018

i've also been asked:

-why would 2 firms want to merge?

-what are the components of a pitch book?

-general and specific market questions regarding current news

-pitch me a stock

-if i was given $1,000,000, how would I invest it and why?

Mar 5, 2018

First question. 1. Cost is too high (ie one party thinks they should get more) 2. No clear synergies 3. Should Staples and McDonalds merge?

Second. Depends on industry.

Third. Using DCF? Well when you project the future revenue, will it eventually become positive or do you mean its negative "in the long run"?

Fourth. Dunno.

Mar 5, 2018
Mar 5, 2018

FCF
Margins
Net assets
etc.

basically, while a company can lever ROE through loading on debt, they've got to remain solvent. A techy firm generally wants to have freed up cash, while say a manufacturer can support more of a debt obligation.

Mar 5, 2018
RobertSmith:

- Can you calculate comps with negative EBITDA?

If projected EBITDA is negative, go higher up the income statement to find valid multiples. Negative EBITDA multiples would be non-meaningful. Revenue multiples, perhaps?

Mar 5, 2018
StreetLuck:
RobertSmith:

- Can you calculate comps with negative EBITDA?

If projected EBITDA is negative, go higher up the income statement to find valid multiples. Revenue multiples, perhaps?

That's the only way I could think of it. Anybody else?

Mar 5, 2018

Q4.) Look at customer stats. Assign a life time value to customer and do a value projection.
Remember though for any such valuation implicit in any argument is that you are going to make a positive EBIT later. Else it won't add up, so basically you could do a very rosy DCF as well. Its all the same. Just that rule of thumb is easier to apply.

Q2.) D/E ratio varies as different industries have different requirements of capital, asset classes with different ease of liquidity and different abilities at servicing requirements. The higher the cash flow variance the higher the equity proportion.
E.g Utilities vis-a-vis Petroleum companies
Valuation Methods
a-) DCF
b-) Dividend Discount Model
c-) Net Asset Valuation
d-) Comps (Acqusition/Trading)
e-) Rule of Thumb ( e.g. Number of specific room types, revenue per room in
a hotel and location factor)
f-) Book Value
g-) Adjusted Present Value (APV)
h-) Economic Value Added ( invested capital *(ROIC-WACC))
LBO is a financing scheme, not a valuation methodology per se.

Mar 5, 2018
RobertSmith:
StreetLuck:
RobertSmith:

- Can you calculate comps with negative EBITDA?

If projected EBITDA is negative, go higher up the income statement to find valid multiples. Revenue multiples, perhaps?

That's the only way I could think of it. Anybody else?

Here's a crack at it without really understand what it means to "calculate comps" (determine the relevant multiple for a company based on comps or value a company based on an EBITDA multiple if the company has negative EBITDA)

  • Use a forward looking EBITDA (2-3 years out - good luck with the projections) to arrive at an enterprise value and discount back by WACC? (some sort of NPV approach?)
  • Use Price/Book (financial institutions), EV/Revenue (often not relevant), yield-based pricing (REITs) etc.
  • Negative EBITDA may not equate to negative net income (other income? interest income?) etc. but a P/E multiple for a company with negative EBITDA is probably meaningless anyway.
  • (During the tech bubble) EV/Engineers?
  • Strip out non-recurring expenses from the EBITDA?
Mar 5, 2018

Although I passed my interviews knowing the hallowed "Vault 4", I heard there are actually 6 standard valuation methods. Anyone know all 6?

Mar 5, 2018
dealmaven123:

Although I passed my interviews knowing the hallowed "Vault 4", I heard there are actually 6 standard valuation methods. Anyone know all 6?

1. DCF
2. Public Comps
3. Acquisition Comps
4. LBO
5. Break-up Valuation?
6. ???

Mar 5, 2018
StreetLuck:
dealmaven123:

Although I passed my interviews knowing the hallowed "Vault 4", I heard there are actually 6 standard valuation methods. Anyone know all 6?

1. DCF
2. Public Comps
3. Acquisition Comps
4. LBO
5. Break-up Valuation?
6. ???

Dividend discount model? Economic value added?

Mar 5, 2018
StreetLuck:
dealmaven123:

Although I passed my interviews knowing the hallowed "Vault 4", I heard there are actually 6 standard valuation methods. Anyone know all 6?

1. DCF
2. Public Comps
3. Acquisition Comps
4. LBO
5. Break-up Valuation?
6. ???

  1. The right number - the valuation that gets the deal done for whatever dumbass reason

"LIVING THE DREAM 24/7 ON http://THEALLNIGHTER.BLOGSPOT.COM"

Mar 5, 2018
  1. Credit PPE, Debit Cash/Receivable. Note payable isn't affected until you decide to pay it off. I think you should also show a gain on the income statement. Could be wrong, accounting is not my strong suit...
Mar 5, 2018

Yes you record a gain of 50. The number would be different if taxes are considered, but still principally the same. Realized Value- Book Value= Gain (or loss) ignoring taxes.

Mar 5, 2018

If you sell a PPE for 100, BV of 50 and you had a note payable of 50, how do you make entries into the balance sheet?

Credit PPE (50)
Debit NP (50)
Debit Cash 100
Credit Retained Earnings 50
Gain of 50

Mar 5, 2018

When you say "break-up valuation", I'm assuming you're referring to what I've heard termed "sum of the parts" valuation?

Mar 5, 2018
dealmaven123:

When you say "break-up valuation", I'm assuming you're referring to what I've heard termed "sum of the parts" valuation?

Yes.

Mar 5, 2018
Mar 5, 2018

Your accounting entries one can't be answered from the info you give - presuming you get cash for the PPE and then pay off the loan note:

Cr. PPE 50 (net effect - you would actually have a Dr. to accumulated depreciation and a Cr. to PPE cost)

Dr. Cash 50
Dr. Loan Note 50

Cr. Gain 50 (P&L impact if current year)

Blacksheeps entries are somewhat confusing because surely you need cash to pay the loan note... therefore you can't increase cvash by 100 and still pay off the note....

From the ghetto....

From the ghetto....

Mar 5, 2018

Essentially there are 6 methods which can be divided into three groups.

1) Real Options Theory (used for mining and commodity companies where the option to defer production is is a major asset)
2) Cash Flow (Free Cash Flow to Equity, Dividend Discount Model, Discounted Cash Flow, Economic Value Added)
3) Comps (P/E rations, P/S ratios, regression analysis involving multiple ratios) - used for finding relative value and where a firm isn't making any money.

Companies shouldn't merge

  • When the synergies are negative or outweighed by the transaction costs.
  • When the company is unlikely to get merger approval.
  • When the share price of the target company is overvalued.

Hostile takeovers and those involving cash rather than stock tend to have a better track record than friendly mergers.

Mar 5, 2018

Also, negative earnings are NOT a barrier to any of the three methods (except possibly comps using P/E) since cash flow valuations methodologies focus on the flows over the lifetime of a firm rather than just its immediate profits (i.e a pharmaceutical company won't turn a profit on a drug until passes through all the clinical trials and gets approval).

Mar 5, 2018
  • Why shouldnaEU(tm)t two companies merge?

Suprised noone's yet said, if the acquisition is not accretive (even with synergies), product cannibalization

  • Give me an ideal D/E ratio...

Depends on industry - should look at comps in that industry to figure out optimal cap structure

  • Can you calculate comps with negative EBITDA?

No. Use Revenue, or forward EBITDA, and then use forward multiple estimates to calculate EV

  • If you sell a PPE for 100, BV of 50 and you had a note payable of 50, how do you make entries into the balance sheet?

did you mix up note payable with receivable?

and you'd need to know what current depreciation is for PPE

somewhat an incomplete question, but someone answered corectly previously

Mar 5, 2018
TOmonkey:

- Why shouldnaEU(tm)t two companies merge?

Suprised noone's yet said, if the acquisition is not accretive (even with synergies)

Actually, that's not true. Often mergers that are initially dilutive create greater value down the line, and immediately accretive deals may underperform as they were only pursuing short-term synergies.

RE: a study in HBR:
http://www.cfoeurope.com/displayStory.cfm/1740086

Mar 5, 2018
TooLeveraged:
TOmonkey:

- Why shouldnaEU(tm)t two companies merge?

Suprised noone's yet said, if the acquisition is not accretive (even with synergies)

Actually, that's not true. Often mergers that are initially dilutive create greater value down the line, and immediately accretive deals may underperform as they were only pursuing short-term synergies.

RE: a study in HBR:
http://www.cfoeurope.com/displayStory.cfm/1740086

An interesting article, but theoretical, and would not hold well with the Street)

Ok, so what the article is saying is that a deal may be dilutive in the short-term (first 1-2 yrs) and highly accretive thereafter (it's called synergies man via strong execution of business plan, solid mgmt team,etc ...did i not write "if the acquisition is not accretive (even with synergies)" ...no synergies happen overnight, they take time.

So the article in fact reinforces what i wrote...accretion/value creation is key over the long term.

To add to that point and play devil's advocate, it is very difficult to convince investors that a dilutive investment will create substantial economic value in the long term and that it indeed is a good short term investment, as most investors are risk averse, and do not like to wait long to reap the rewards. Ask yourself, would you invest in a company that claimed it could create synergies, or would you wait before you saw that in their economics...

Also, if the company is looking to raise the necessary capital for the acquisition through an equity offering,a dilutive acquisition adds substantial risk to fully subscribing the offering.

Good read nonetheless, thanks for the link

my response may not be 100% clear, no time to double check

Mar 5, 2018

1 - Why shouldnaEU(tm)t two companies merge?

Because one is private and the other is public, so the i-bank will make more fees by IPO ing the private one and THEN advising on a takeover: double whammy.

Alternatively, because both companies use your i-bank as an M&A advisor, so if they merge, you'll only be able to avise one party creating work ang giving league table credit to another ibank, letalone the fact that as far as management at your i-bank is concerned, you have swapped short term M&A fees for all the future cash the bank would have gotten from one of the companies.

2 - Give me an ideal Debt / Equity ratio...

a) This is a bit of a chicken and egg situation,a nd it all depends on what the client wants to hear. Example: If client believes they have too much debt, you advise them to issue more equity (and make sure that they issue too much equity in an offering / private placement / etc). Before any other bank has a chance to pitch to them, you go and pitch releveraging the balance sheet on the back of all the equity they have. Once they do this, you pitch a mega acquisition to use all the cash they have lying about and doing nothing with. Once deal is done, and markets turn bearish, you come in to restructure the acquisition, spin off the company you advised them to acquire, restructure the debt you raised for them and virtually take them to square one. Square one, well, square one, plus loads of equity + debt + M&A + restructuring fees for the bank.

3 - Can you calculate comps with negative EBITDA?

Yes. A / B = C. If B is negative, so will C. Can you calculate it? Sure. Does it mean anything? Of course not. The bigger question here is whather calculating Enterprise Value / EBITDA or any other bullshit metric means anything. At the end of the day, why does it matter if you're advising a client on buying a company that all the comparable companies trade at 6.0x EV / EBITDA when you know there's some crazy private equity cowboy out there who's going to pay 7.0x? What do you do? Do you really foresake the fees and say they shouldn't pay 7.1x and win the deal and fees for you? Of course not. You madssage the numbers, add synnergies to the EBITDA, make deductions from the EV, do whatever you need to to make it look like you are paying 5.9x when you're really paying 7.1x and them tell the client they are gettign a great deal. You get your fees. Cleint management gets a big bonus from for securing a good price from sharesholders. Everyone wins, ahem, apart from shareholders, but why do they count?

4 - If you sell a PPE for 100, BV of 50 and you had a note payable of 50, how do you make entries into the balance sheet?

This is an irrelevant question. If you masagged your numbers well enough to get the client to pay 7.1x (see 3) whilst making it look like they are paying 5.9x, nobody will care what your balance sheet looks like. So, hard plug whatever you want, make sure your multiple shows 5.9x and go for a beer.

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Mar 5, 2018

these are the kind of things you can find out on your own if you spend an hour researching them...

Mar 5, 2018

open up a corp fin textbook son

Mar 5, 2018

Once you you get answer these questions and you are sure that you have the right answers.. to all of them.. you can post them on the forum. This would be beneficial for FAQs and every one..

just an idea..

p.s. there are som e good questions in there.

Mar 5, 2018

You need to actually study these subjects - even if someone types out all the answers for you, and you memorize them, you won't do well in interviews unless you understand the topic in depth. You can research it on the web, but there's no substitute for real coursework.

Professor Damodaran's Corporate Finance course is free on the web, including webcast lectures, powerpoint slides, quizzes, and a ton of other stuff. Worth a look.

www.damodaran.com

Mar 5, 2018

Okay here are the answers I have, which can help everyone, but can someone help me with the questions I could not get? Thanks guys

1) What are the limitations of beta? How do you calculate beta?
Limitations of beta is that it only takes historical information. Its also hard to determine expected return of the market

2)What does the yield curve look like?

3)What are the two largest ways companies can play with their earnings? Reinvest, dividends, re-purchase stock?

4)How would you raise a stock price?

5)What is the difference between a leveraged buy out and merger?
Merger-two companies merge together to form one company in either a stock, cash or both. LBO: Usually individual or bunch of individuals raise debt to take a controlling amount of company.

6)What are common multiples used to gauge equity performance?
P/E Ratio, Price/Sales, Price/Book Value, Price/Cash flow ratio

7)What multiples are generally used in a merger/acquisition?
TEV/EBITDA TEV/EBIT TEV/Revenues and more?

8)Why use EBIT in the DCF?

9)How do you go form P/E to ROE?
P/E-price per share/ EPS (NI-Preferred Stock/avg outstanding shares)
ROE- Net Income / shareholder's equity
Can determine ROE from ratio

10)What are the mathematical reasons (calculations) for an accretive and dillutive acquisition?

11) You have a $10,000 credit card debt and $10,000 in market index, What should you do?

12)Company is trading at 10 times P/E what is the implied terminal growth rate?

13)You realize that you misstated depreciation expense by $10. Tell me how that changes the financial statements

14)Suppose you are buying a new fixed assets- part cash and part debt. Take me through how it affects all the financial statements.

15)In a merger situation, how would you determine whether to finance the merger with cash on hand, by raising debt, or with stock?

16)A firm is using LIFO, and prices ons upplies start decreasing. What are effect on I/S, BS and CFS

17)What major factors affect the yield on a corporate bond?
1)interest rates 2) change the corporate issues defaults 3)bond can be callable 4) event risk(natural disaster

18)What would have a greater impact on valuation 10% reduction in revenues or 1% reductions in discount rate?

19)What would you evaluate the creditworthiness of a tuna manufacturer with three factories in different locations throughout the U.S?

20) What is the yield on a zero coupon bond trading at par with 10 years maturity?

21) In LBO, why leverage up a firm? 1) low capital or cash requirements for acquisition 2) synergy gains 3) improve leadership & mangement

Can you guys help me out with the questions I left blank, my accounting is rusty and I'm going to re-read basic accounting book. But in the mean time can someone check my answers and answer the blank ones? Thanks guys

Mar 5, 2018

for the ones that interest me.

1) volatility is not the same as risk. but that wouldn't go over well
2) depends on the country, you can see the us treasury and swap curve in the WSJ
11) pay down the credit card, i doubt you're getting over 18% a year in the market.
17)pretty good
20)0%....meaning you've got 0% prevailing yields in the market or you just got picked off.
21) b/c you shorted the bonds or bought CDS? Also, not a good answer in an interview.

Mar 5, 2018
  1. B. You can lever up, but too much and your debt expense will start eating into your income.
  2. Tax loss carryforward: It's an asset on your balance sheet. Suppose you have a loss one year of 10MM, and you have a marginal tax rate of 40%. You'll have an asset of 4MM until you "claw back" 10MM in profit (basically your firm 10MM is tax-exempt).
Mar 5, 2018
  1. ROA - Increase Operating Leverage (might also have the opposite effect), ROE - Financial Leverage.

2) That will give you cost of equity. Make sure you understand how/when that is used.

3) ^ What he said.

4) I don't understand your question. Maybe I'm missing something.

5) Interest & fixed charge coverages. Other fixed charges might include rent, which isn't always considered an operating cost.

6) Interest obligations aren't in the cash flows they're in net income from your p&l so just looking at the cash flows isn't enough. However, CF does show you how much cash is being generated from NI vs how much is from working capital, etc. Also, be sure to check notes in your K. The company might be sitting pretty on cash for now but could have huge commitments in coming years.

Mar 5, 2018

Total Liquidity ( cash + rev. Availability) and change in liquidity.

Also look at covenant levels and cushion.

Mar 5, 2018
  1. Current ratio will give you some idea of liquidity problems to come. Look at the other liquidity ratios as well.
Mar 5, 2018

3) What are tax loss carryforwards?

If your firm experiences an 'NOL' (pre-tax loss) in any given year, it can deduct this NOL amount from any future years' pre-tax income (until it runs out) and pay no tax in those future years. Example: We make a profit for 5 years, and then suddenly experience a $40M pre-tax loss in 2008 b/c of the recession, but then start having $30M in pre-tax income in 2009 and again 2010. What we can do is apply the $40M of the NOL and deduct it (to the max) from 2009 pre-tax income to determine our tax basis; in 2009, we use it to the max ($30M) and owe no tax. We then still have $10M of our 2008 NOL's that we can use in 2010. If our pre-tax loss is $30M again, we deduct $10M from it and only pay taxes on $20M in 2010. This is the carryFORWARD - we carry the NOL forward, deduct it from any incomes, and save on tax. This can be done for up to 20 years on any given NOL.

What happens more often, though, is that in order to get more cash immediately, the company will first apply the 2008 NOL to past 2 years of any pre-tax income. If they made money in 2006 or 2007, they can apply the NOL and basically get their money back immediately in 2008. Whatever's left, they can use for carryforwards - OR opt to only use it for carryforwards.

The reason why it's an asset is that it pretty tangibly saves you cash to the amount of your tax rate times the usable NOL. If you've modeled your I/S into 5 years and see that your NOL is large enough that it can be applied to 3-4 years of future pre-tax incomes, you apply an NPV formula to discount back any cash tax savings (in our example above it's $30M in year 1 and $10M in year 2).

Mar 5, 2018

Let me rephrase #4

Should you consider cash in comparing the EV/EBITDA multiple of the two firms? Why or why wouldn't you?

Thanks for all the help guys!

Mar 5, 2018

1. Your return (irr) is lower than your cost of capital. it's a bit like paying 12 percent interest to invest in a deal that pays 10 percent. ie don't do the deal.

Those who can, do. Those who can't, post threads about how to do it on WSO.

Mar 5, 2018

2. You don't mention whether earnings are the same. That is somewhat critical.

Those who can, do. Those who can't, post threads about how to do it on WSO.

Mar 5, 2018

1. Don't do the deal because IRR is less than WACC. Why pay 12% to earn 10%?
2. Growth rates. ie) revenue is expected to grow by 3% for A vs. 2.5% for B

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

Mar 5, 2018

1. What @"SSits" said.

2. Assuming that even earnings are same, the most probable answer seems to be the terminal growth rate. Assuming that all future balance sheets are also the same, it implies that future debt and capex will also remain the same, thereby resulting in the exact same cash flow.

Only items left that can impact the free cash flow are terminal growth rate and WACC. Since the balance sheet is same and they are in the same business, naturally the WACC ought to be the same. What remains is the assumption for terminal growth rate, which should be the answer.

Read my blog: Bateman Begins

Mar 5, 2018

What firm is this? WACC can be different if this is GS / MS - sounds silly but they re same business but can be in different countries so country risk premia could be different. If its same business, i don't get why growth rates would be different anyway

Mar 5, 2018
GoVolckYourself:

WACC can be different if this is GS / MS - sounds silly but they re same business but can be in different countries so country risk premia could be different.

That's actually true. I said growth for future growth rates being different due to similar reasons actually - the businesses being located in different regions, resulting in varying external factors (economic/industry outlook, govt. policies, etc.)

Read my blog: Bateman Begins

Mar 5, 2018

Yep agreed. Actually there's lots of answers to this but its basically either WACC or what you used for your projections. Your WACC can also be different if the market value of the debt / equity is different at which point the #s are skewed. Hell one could be listed and one not ...

Mar 5, 2018

WACC and project hurdle rate shouldn't be confused. If a firm, and its cost of capital, are as risky as the project, then yes you would pursue if WACCIRR and Project Discount Rates.

  • b
  •  Mar 5, 2018

1.) If you have the income statement and begining and ending balance sheets, you can generate a statement of cash flows.

Mar 5, 2018

(1) is a common interview question. I've seen a variety of responses, but one answer would be income statement and balance sheet, because from these two statements, you can work out most of the items in the CF statement (or at least the Free Cash Flow).

(2) All else being equal, it would be the publicly traded company because it has a liquidity premium attached to it (i.e. there's a price tag attached to being able to buy and sell shares freely in the capital markets). (However, IF private company shares are sold to an investor as a block, e.g. >50%, then there would be a control premium attached to it).

Mar 5, 2018

I've heard it before and never gotten an explanation. I understand the concept of a control premium, but shouldn't there be a control premium in purchasing a private company as well? You DO get to control it.

Mar 5, 2018

control premium occurs in both private and public companies when you buy, say, a substantial number of shares (>50%) which gives you the right to appoint directors and control affairs of the company. I didn't say that it can occur in only private or public companies.

  • mschutzy
  •  Mar 5, 2018

The answer is the public company. The question doesn't ask anything about owning a majority stake, ect. You should just answer the public company, because the private company would have liquidity and/or marketability discounts applied to its shares.

There are many ways to elaborate on this answer, but I've always found that the short and sweet answer is the best. Let them ask more questions if they want elaboration. Don't open doors that you may not want to walk through.

Mar 5, 2018

Agreed, control premium is not relevant. Liquidity of ownership stake and other visibility/comparability issues make public companies more valuable. One reason IPOs make good PE exits.

Mar 5, 2018

yeah i would agree that giving the most common answer would be the best...

i. Income Statement and Balance Sheet
ii. Public due to liquidity (and you could answer more transparency as well)...

Mar 5, 2018

what about public company costs? or are we assuming same bottom line numbers?

Mar 5, 2018

thank you guys so much for your responses. Those were the exact answers that I've given at my interview but just wasn't 100% sure. I cant definitely sleep better at night now

Mar 5, 2018

thank you guys so much for your responses. Those were the exact answers that I've given at my interview but just wasn't 100% sure. I can definitely sleep better at night now haha

Mar 5, 2018

if you gather all the tech questions in a free forum, then the value of the guides from wallstreetoasis becomes zero value lol

Mar 5, 2018

yes, we've battled with the forum structure for a while and thought about this.

the issue is a lot of these technical questions could belong in the Get a job or I-banking bullpen forum. Get a job if they are related specifically to an interview, or i-banking if they are related to a technical question on the job.

having a separate technical forum would be cool, I'm just not sure people would post their questions there(we could force it w more stringent moderation, but not always easy to keep up). The other more problematic issue with a "Technical Forum" is that is would likely need to be "Beahvioral Forum" and a "Brainteaser forum", etc.

Ideally, with the tags we have in place, all of these discussions would already be in their own "bucket" / forum when they are tagged with the keyword "technical" like here:

http://www.wallstreetoasis.com/tag/technical
problem is not all the good technical threads are tagged, but that is another big problem we are working on as well...

thoughts?
Patrick

Mar 5, 2018

I don't think a behavioral or brainteaser forum is needed since those types of questions should be asked in the "technical" forum. Maybe a "technical" questions forum is too specific/restricting. I was think more in terms of a forum where people can actually learn the logic/reasoning behind the answers they give in technical questions. A forum that acts as a knowledge library.

If you ever put one up, I'd be happy to ask questions and answer questions.

WallStreetOasis.com:

yes, we've battled with the forum structure for a while and thought about this.

the issue is a lot of these technical questions could belong in the Get a job or I-banking bullpen forum. Get a job if they are related specifically to an interview, or i-banking if they are related to a technical question on the job.

having a separate technical forum would be cool, I'm just not sure people would post their questions there(we could force it w more stringent moderation, but not always easy to keep up). The other more problematic issue with a "Technical Forum" is that is would likely need to be "Beahvioral Forum" and a "Brainteaser forum", etc.

Ideally, with the tags we have in place, all of these discussions would already be in their own "bucket" / forum when they are tagged with the keyword "technical" like here:

//www.wallstreetoasis.com/tag/technical

problem is not all the good technical threads are tagged, but that is another big problem we are working on as well...

thoughts?
Patrick

Mar 5, 2018

If we had a technical forum that would be awesome. I'm sure I'm not alone when I say that a technical question sub-forum would probably be extremely useful. So many people here seem to be students preparing for interviews and jobs, and would really like to improve their technical skills.

Mar 5, 2018

I agree a forum would be interesting, but I think what Patrick has done with the guides is great and provide a great overview of almost all the questions that have been posed on the site with easy to read, accurate answers, all compiled into one place, for a pretty reasonable price.

Mar 5, 2018
NewIBHire27:

I agree a forum would be interesting, but I think what Patrick has done with the guides is great and provide a great overview of almost all the questions that have been posed on the site with easy to read, accurate answers, all compiled into one place, for a pretty reasonable price.

Man, I really need to read that technical guide, it sounds awesome.

Mar 5, 2018

In my experience the questions were not as in depth as the BIWS advanced questions, but I still recommend you learn all of the questions in the guide. if you know how to answer the harder questions from BIWS you will be very confident heading into the interview, and this will tremendously help your performance.

Mar 5, 2018

The vast majority of the questions I got were the basics from the guides...the harder questions I got are not in any guides and tested conceptual understanding more than memorized answers.

Mar 5, 2018

I am going to take a stab here.. would appreciate it if someone double checked these:

  1. If everything else is equal, company B would be better, because you are "paying less" for their earnings vs. the earnings of company A. As for comps, there isn't always a correct answer for "what should I use?".
  2. I believe this would depend on how the assets were financed (cash, debt, etc.)
Mar 5, 2018

Also not sure but I will take a stab:

  1. Would depend if you are doing stock swap vs. cash purchase. Stock swap maybe A would be better but cash purchase I would go with B.
  2. Free Cash Flow would decrease because net working capital would rise.
Mar 5, 2018
  1. Increased assets (Assuming this means PP&E or other depreciable asset) means that there will be a higher depreciation amount on the income statement leading to a lower net income. The company will also pay less income tax.

Next quarter, assuming a straight line depreciation method, will result in the same thing.

Free cash flow has nothing to do with the income statement.

Mar 5, 2018

Oh yeah, missed that it was only for the income statement.

Mar 5, 2018
  1. It's impossible to answer this question. A particular company may be trading at a higher premium because of a more robust growth outlook, better market position, better financial performance. Are the companies in the same industry? Different industries also tend to trade at different multiples.

As far as comps go - what are you comping? Do you want to show a client they're undervalued? Do you want to show the client they're trading at a premium to peers (for some specific reason)?

P/E ratios are just one of many things to consider when evaluating a buy. Are you an investment banker? Are you a private banker?

  1. Increase in what assets? current assets - such as components of working capital? An increase in cash? An increase in PP&E? Like stated earlier an increase in PP&E would have a corresponding impact on depreciation. Is it financed with debt? If so this will have a corresponding impact on depreciation? Is it just a change in cash balance? if so this will have a corresponding impact on interest income.
Mar 5, 2018
Iplaygoodguitar:

1. It's impossible to answer this question. A particular company may be trading at a higher premium because of a more robust growth outlook, better market position, better financial performance. Are the companies in the same industry? Different industries also tend to trade at different multiples.

As far as comps go - what are you comping? Do you want to show a client they're undervalued? Do you want to show the client they're trading at a premium to peers (for some specific reason)?

P/E ratios are just one of many things to consider when evaluating a buy. Are you an investment banker? Are you a private banker?

What Hesaid
2. Increase in what assets? current assets - such as components of working capital? An increase in cash? An increase in PP&E? Like stated earlier an increase in PP&E would have a corresponding impact on depreciation. Is it financed with debt? If so this will have a corresponding impact on depreciation? Is it just a change in cash balance? if so this will have a corresponding impact on interest income.

Mar 5, 2018
Iplaygoodguitar:

1. It's impossible to answer this question. A particular company may be trading at a higher premium because of a more robust growth outlook, better market position, better financial performance. Are the companies in the same industry? Different industries also tend to trade at different multiples.

As far as comps go - what are you comping? Do you want to show a client they're undervalued? Do you want to show the client they're trading at a premium to peers (for some specific reason)?

P/E ratios are just one of many things to consider when evaluating a buy. Are you an investment banker? Are you a private banker?

  1. Increase in what assets? current assets - such as components of working capital? An increase in cash? An increase in PP&E? Like stated earlier an increase in PP&E would have a corresponding impact on depreciation. Is it financed with debt? If so this will have a corresponding impact on depreciation? Is it just a change in cash balance? if so this will have a corresponding impact on interest income.

The OP stated that beside the P/E all else is equal. I took this to mean literally everything else including things such as the growth outlook, meaning B is relatively cheaper and a better purchase.

But I do agree that the second question was a little ambiguous as to what type of asset. If PP&E, I agree with STorIB.

Mar 5, 2018

1. Beta is impacted by the leverage of the business and as such the leveraged beta is higher than unleveraged beta for companies with debt due to higher risk of bankruptcy

2. The cost of debt is post-tax since we do not account for the tax shield in the FCF calculation

3. APV is a DCF with operating NPV and financing NPV broken out, but not sure what DTS stands for.

Mar 5, 2018
Makewhole:

3. APV is a DCF with operating NPV and financing NPV broken out, but not sure what DTS stands for.

Depreciation tax shield

Mar 5, 2018
Makewhole:

1. Beta is impacted by the leverage of the business and as such the leveraged beta is higher than unleveraged beta for companies with debt due to higher risk of bankruptcy

2. The cost of debt is post-tax since we do not account for the tax shield in the FCF calculation

3. APV is a DCF with operating NPV and financing NPV broken out, but not sure what DTS stands for.

Thank you. But for question 2, why do we multiply it to the debt part instead of the equity part? What is the point of imposing corporate tax to a firm's debt?

Mar 5, 2018
anavoisp:
Makewhole:

1. Beta is impacted by the leverage of the business and as such the leveraged beta is higher than unleveraged beta for companies with debt due to higher risk of bankruptcy

2. The cost of debt is post-tax since we do not account for the tax shield in the FCF calculation

3. APV is a DCF with operating NPV and financing NPV broken out, but not sure what DTS stands for.

Thank you. But for question 2, why do we multiply it to the debt part instead of the equity part? What is the point of imposing corporate tax to a firm's debt?

I believe it's because interest on outstanding debt is tax deductible.

Mar 5, 2018
NestoGrande:
anavoisp:
Makewhole:

1. Beta is impacted by the leverage of the business and as such the leveraged beta is higher than unleveraged beta for companies with debt due to higher risk of bankruptcy

2. The cost of debt is post-tax since we do not account for the tax shield in the FCF calculation

3. APV is a DCF with operating NPV and financing NPV broken out, but not sure what DTS stands for.

Thank you. But for question 2, why do we multiply it to the debt part instead of the equity part? What is the point of imposing corporate tax to a firm's debt?

I believe it's because interest on outstanding debt is tax deductible.

Thank you so much. Do you know the answer to question 3?

Mar 5, 2018
ValueAdder68:

Not saying that is a bad thing, but does being personable/confident sometimes, or ever, outweigh the ability to just be an excel drone who can get every technical question right?

Yes, but these two traits are not mutually exclusive. Plenty of people out there can do both.

Mar 5, 2018

Right, and I consider them very gifted individuals. And certainly the minority, at least at some firms. I tend to notice that the intense technical oriented kids out of undergrad are usually the ones who can't take criticism, maybe someone you wouldn't want talking with management of a target/lead, ones who cannot confidently present in front of a room of people etc. I could be wrong here, but that is what I have realized. Also don't mean to offend, these are my speculations.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Mar 5, 2018

As many people have said, IB isn't rocket science. You don't need to have a PhD to understand the technicals. With that said, why would it imply that people who are good at technicals are also the people who are arrogant, immature, or socially awkward?

On another note, unless you are at a small shop, you will not really be speaking with management of a target/lead, and would definitely not present in a room full of people.

From my experience and opinion, you are there to eat a large pile of shit by using a shovel, and smile while the shit is dripping from your chin. The technicals will help by giving you a bigger shovel, the stamina will give you a large stomach to digest the pile, while the attitude will help you keep that smile on your face.

Just my 2c though.

Mar 5, 2018

Um ... I'm not sure investment banking, or maybe professional services more generally, is for you.

Mar 5, 2018

Haha thank you for that analogy. And again, that is just my assumption. Not so much that just because you are good at technicals, you are also the awkward one.. I consider myself "good" at technicals, just not great. I guess what I really meant to say is the ones who feel entitled, because of a University they go to or some Goldman job they were able to schmooze as a Freshman. Sure, I guarantee that kid is brilliant.. But what I meant is this what firms really care about?

There are definitely better candidates out there in terms of intellect and the ability to make a DCF on the back of a napkin than myself, is what I am saying.. Does this fucking matter in the general scheme of trying to land an IB gig? That part is more directed to interviewers.. Because in my honest opinion, the non-target IB-hungry kid that I see around these forums, like myself, will 100% work diligently, efficiently and put their full-effort into everything, and actually appreciate the job, rather than the entitled-Harvard kid who happens to have the skill of foresight at a young age, the financial support of a wealthy family, and the knowledge at a young age to start learning this stuff...

Truly just a stereotype, so take no offense to that anyone. - So to clear up my rant, that is more of a two part question. The: Are technicals super-important question, and the: who would you rather take, Candidate A or Candidate B question...

"An investment in knowledge pays the best interest." - Benjamin Franklin

Mar 5, 2018

I changed the post to make more sense. I just re-read that and that was way too long and was like 7 different questions/topics in one post...

Could you guys provide some example and tips for SA IB interviews? Everyone says the guides... But they really don't help you "learn" anything.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Mar 5, 2018

"rather than the entitled-Harvard kid who happens to have the skill of foresight at a young age, the financial support of a wealthy family, and the knowledge at a young age to start learning this stuff... "

Please. Not all Harvard kids are entitled brats, some of them worked their asses off to be where they are today. That itself is a sign that he/she can work diligently and efficiently. And if not, they're probably from a wealthy family with a wide network -- helps bring in business for the IB. So why wouldn't you hire a Harvard kid (or any other target for that matter) if he/she isn't a complete tool/dumbass?

For the 1st round, you get pass it because you've shown yourself to not be a dumbass. (You don't have to be really smart)
For the superday, interviewers hire you because they like you. That's it.

edit: Not sure if OP is trolling but it says that he's from Harvard in his user profile LOLL. Since when is Harvard a "non-target"?

Mar 5, 2018
ballerjg:

edit: Not sure if OP is trolling but it says that he's from Harvard in his user profile LOLL. Since when is Harvard a "non-target"?

He is trolling on his profile. He told us he transferred to Fordham and gave us his email and full name tho. That was a nice surprise.

Mar 5, 2018