Beyond the guide: a list of real interview technical questions

Rank: Orangutan | 299

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)

 
2/13/18

Thanks for sharing!

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2/18/18

Is anyone here capable of answering these questions?

 
2/18/18

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?

 
2/18/18

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.

 
2/23/18

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.

 
2/18/18

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.

 
2/18/18

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.

 
2/22/18

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

 
2/22/18

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

 
2/22/18

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.

 
2/22/18

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.

 
2/22/18

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.

 
2/22/18

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

 
2/22/18

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).

 
2/22/18

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

 
2/22/18

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).

 
2/22/18

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.

 
2/24/18

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.

 
2/23/18

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."

 
2/23/18

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

 
2/23/18

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

 
2/23/18
"Alt E S" wrote:

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.

 
2/22/18

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

 
2/22/18

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.

 
2/22/18

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

 
2/22/18

Thank you for a great contribution to WSO

 
2/23/18
  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?
 
2/24/18

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

 
2/24/18

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

 
2/24/18

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

 
3/5/18

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

 
2/24/18

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

 
 
3/5/18

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.

 
3/5/18

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

 
3/5/18
  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
 
3/5/18

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

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

 
3/5/18

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

 
3/5/18

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

 
 
3/5/18

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.

 
3/5/18

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?

 
 
3/5/18

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.

 
3/5/18

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.

 
3/5/18
RobertSmith wrote:

- 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?

 
3/5/18
StreetLuck wrote:
RobertSmith wrote:

- 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?

 
3/5/18

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.

 
3/5/18
RobertSmith wrote:
StreetLuck wrote:
RobertSmith wrote:

- 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?
 
3/5/18

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

 
3/5/18
dealmaven123 wrote:

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. ???

 
3/5/18
StreetLuck wrote:
dealmaven123 wrote:

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?

 
3/5/18
StreetLuck wrote:
dealmaven123 wrote:

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"

 
3/5/18
  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...
 
3/5/18

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.

 
3/5/18

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

 
3/5/18

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

 
3/5/18
dealmaven123 wrote:

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

Yes.

 
3/5/18

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....

 
3/5/18

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.

 
3/5/18

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).

 
3/5/18
  • 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

 
3/5/18
TOmonkey wrote:

- 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

 
3/5/18
TooLeveraged wrote:
TOmonkey wrote:

- 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

 
3/5/18

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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3/5/18

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

 
3/5/18

open up a corp fin textbook son

 
3/5/18

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.

 
3/5/18

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

 
3/5/18

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

 
3/5/18

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.

 
 
3/5/18
  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).
 
3/5/18
  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.

 
3/5/18

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

Also look at covenant levels and cushion.

 
3/5/18
  1. Current ratio will give you some idea of liquidity problems to come. Look at the other liquidity ratios as well.
 
3/5/18

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).

 
3/5/18

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!

 
 
3/5/18

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.

 
3/5/18

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.

 
3/5/18

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.

 
3/5/18

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

 
3/5/18

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

 
3/5/18
GoVolckYourself wrote:

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

 
3/5/18

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 ...

 
3/5/18

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 WACC

 
 
  • b
  •  3/5/18

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

 
3/5/18

(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).

 
3/5/18

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.

 
3/5/18

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
  •  3/5/18

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.

 
3/5/18

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.

 
3/5/18

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)...

 
3/5/18

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

 
3/5/18

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

 
3/5/18

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

 
 
3/5/18

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

 
3/5/18

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

 
3/5/18

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 wrote:

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

 
3/5/18

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.

 
3/5/18

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.

 
3/5/18
NewIBHire27 wrote:

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.

 
 
3/5/18

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.

 
3/5/18

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.

 
 
3/5/18

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.)
 
3/5/18

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.
 
3/5/18
  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.

 
3/5/18

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

 
3/5/18
  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.
 
3/5/18
Iplaygoodguitar wrote:

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.

 
3/5/18
Iplaygoodguitar wrote:

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.

 
 
3/5/18

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.

 
3/5/18
Makewhole wrote:

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

Depreciation tax shield

 
3/5/18
Makewhole wrote:

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?

 
3/5/18
anavoisp wrote:
Makewhole wrote:

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.

 
3/5/18
NestoGrande wrote:
anavoisp wrote:
Makewhole wrote:

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?

 
 
3/5/18
ValueAdder68 wrote:

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.

 
3/5/18

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

 
3/5/18

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.

 
3/5/18

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

 
3/5/18

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

 
3/5/18

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

 
3/5/18

"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"?

 
3/5/18
ballerjg wrote:

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.

 
3/5/18

Sorry I put that on my profile for anonymity purposes. Also, I never gave my email or name out? I think I accidentally had my last name saved as the file name for my resume. That was dumb.. But yes I do not go to Harvard by any means. Can we forget this part of the discussion...

Does anyone have any more tips that I could use for recruiting? I am sure you, peinvestor, have been through recruiting before... I would really appreciate a tiny bit of guidance/ advice. anything will do really.

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

 
3/5/18
StudentLoanBackedSecurities wrote:

Sorry I put that on my profile for anonymity purposes. Also, I never gave my email or name out? I think I accidentally had my last name saved as the file name for my resume. That was dumb.. But yes I do not go to Harvard by any means. Can we forget this part of the discussion...

Does anyone have any more tips that I could use for recruiting? I am sure you, peinvestor, have been through recruiting before... I would really appreciate a tiny bit of guidance/ advice. anything will do really.

I got your name and email off of your resume. I'm not going to be a dick and post it. You need to be more careful though.

Why the handle change?

 
3/5/18
StudentLoanBackedSecurities wrote:

I think I accidentally had my last name saved as the file name for my resume.

ATD

 
 
3/5/18

Hi there!

Recommend you check out macabacus.com, it's a great free resource.

In regards to question 1, company A would have to use equity method accounting to record its investment. There's a great section on the equity method in the M&A section of Macabacus.

In regards to question 3, it is important to distinguish land from buildings. Land is almost never depreciated. Buildings are depreciated mostly as an accounting convention which serves to assign an expense side to the economic benefits that you gain from having that building over x years. It is important to note that these are book values. Whether the building is worth more or less on the market is not reflected in these numbers. Buildings will typically be depreciated at very low rates which will often be offset by capital expenditures on the building throughout the years.

 
3/5/18

I think the right formula is EV = Preferred + market value of equity + market value of debt - cash and marketable securities and - minority interests...

 
3/5/18
Lou18 wrote:

I think the right formula is EV = Preferred + market value of equity + market value of debt - cash and marketable securities and - minority interests...

*+ minority interest

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

 
3/5/18
 
3/5/18

Preferred is a type of equity.

 
3/5/18

You can't depreciate land son

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

 
3/5/18

2) Usually as "income from affiliates" or "non-controlling interest income", earnings show up below the line in the income statement. Dividends would appear as a cash inflow from investments on CF statement. Balance sheet would get reflected by adjusting equity in affiliates up by the 1.6% x FB income for the period, unless they pay you a dividend in which case cash goes up also.

 
3/5/18

1. EV would not change. People must pay for that minority interest. So in this example, cash up by $40, MI up by $40. They would then balance out in the enterprise value equation.

2. Not 100% on this, but this is my understanding. It depends on intention of Microsoft. If just buying stock in another company intending to sell, goes on BS in 'short-term investments' and dividends would be reflected on IS and be cash flows. Assuming it was strategic however, its probably filed under 'equity in affiliates'. Whether it stays on at book value or is marked to market on a regular basis depends on how microsoft chooses to account for it. In the case of an IPO however, they would probably remark the value of those securities.

3. already answered - land does't depreciate. Buildings are 30 years normally.

"Success means having the courage, the determination, and the will to become the person you believe you were meant to be"

 
3/5/18

Isn't EV = Equity + Net Debt + Preferred + MI - Investment in Assc ? Therefore, whether EV will change would depend on how the market value of the equity changes upon the acqusition of the minority stake?

 
3/5/18

Correct me if I'm wrong here but for question 1)

EV = Equity + Debt - Cash + MI + Preferred + Unfunded Pension Liabilities (UPL) - Investment in Assoc/JVs

If A buys 40% of B for $40m that's an associate investment, so pre-transaction let's say A:

equity value = 100m, Debt = 100m, Cash = 50m, MI = 0, Preferred = 50m, UPL = 0

so EV = 100 (Equity) + 100 (Debt) - 50 (Cash) + 0 (MI) + 50 (Preferred) + 0 (UPL) = $200m

after buying 40% of B for $40m, assuming the transaction has no impact on the value of any of the other components of EV, A's EV would now be:

EV = 100 (Equity) + 100 (Debt) - 10 (Cash) + 0 (MI) + 50 (Preferred) + 0 (UPL) - 40 (Investment in Assoc) = $200m

ie. unchanged, because effectively all you have done is exchanged some of your cash for equity in another entity, and shifted the value of your firm from one component of EV to another.

You know you've been working too hard when you stop dreaming about bottles of champagne and hordes of naked women, and start dreaming about conditional formatting and circular references.

 
 
3/5/18

I could be wrong, but for #1, they wouldn't use WACC because PE firms generally use APV, which is used for LBOs, because, assuming all equity value, it will add together NPV and PV of financing effects. This is useful when capital structure is constantly changing and costs of financing are complicated.

 
3/5/18

To #1, pretty sure they'd use unlevered cost of equity to discount cash flows and cost of debt to discount the value of the tax shield to get APV.

 
3/5/18

nol's act as a shield against taxes and are used up to reduce taxable income.

Year 1: nol's are $350, EBT is $200. $200 of EBT is shielded, $0 taxes. NOL's are reduced to $150.
Year 2: NOL's are $150, EBT is $200. $150 of EBT is shielded. Taxes are $50 * 40% = $20. NOL's are reduced to $0.

In Year 1, Net Income up by $200 * 40% = $80. That flows from Net Income to the other financial statements, just like a decrease in any other expense.

 
3/5/18

1. PEs will sometimes plug and chug to IRR. If you're looking for a 25% IRR on the equity you put in, look at cash flows to equity and discount at 25% rate. Remember, PE's aren't looking to buy things at "fair value"; they are looking to make a high return. When you are thinking about your deal and negotiating, its more useful to know "I need to pay $1b or less to get my 25% rate of return" than it is to know "I think fair value of this is $1b".

2. nol is a asset on the balance sheet (deferred tax asset or DTA). As you have positive taxable income on income statement, you use your NOLs (so DTA balance goes down on balance sheet). You are using NOLs to offset taxes so (1) the taxes paid on income statement is reduced and subsequently (2) your net income goes up. Affect on cash flow statement is obvious (higher operating cash flow because you are playing less cash taxes). Results in higher cash balance on balance sheet as well as equity (higher net income increases retained earnings).

Maybe search around for your dilution answer. If you have no luck, I'll give it a stab.

 
3/5/18

Correct me if I'm wrong but when a company decides to use its NOLs I thought there is no change on the I/S. Provision for taxes is unchanged and net income is consequently unchanged. The NOLs come into play on the CFS under operating activities to show the reduction in DTAs. For the B/S: cash is higher than it would have been without the nol utilization and the DTA account is reduced to reflect the utilization. The net change in assets is still zero.

 
3/5/18
NYKnicks92 wrote:

Correct me if I'm wrong but when a company decides to use its NOLs I thought there is no change on the I/S. Provision for taxes is unchanged and net income is consequently unchanged. The NOLs come into play on the CFS under operating activities to show the reduction in DTAs. For the B/S: cash is higher than it would have been without the nol utilization and the DTA account is reduced to reflect the utilization. The net change in assets is still zero.

I think I'm wrong and you are right.

http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter16/chbody1/net_operating_losses.htm

The pictures don't load anymore but the text says that the benefit from the operating loss is recognized in the year the loss is created, not when the loss is utilized.

 
 
3/5/18

what might they ask an econ major with no finance or accounting background? if they wanted to talk about keynesian economics or monetary policy, i could do that all day. ask me about valuing a company or something and i'd have much less to say.

 
 
3/5/18

A rating agency is where people who want to Wall Street but cant get into an investment bank or firm work.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw

 
 
3/5/18

You should study up on the Vault Guide to IB. However, unless you claim to know how to value companies or say you've taken finance classes, they'll most likely reserve the technicals for the finance-majors. Plenty of kids get SA positions as English, Econ, Engineering majors w/ no finance knowledge but they're resumes are extremely solid.

 
 
3/5/18

its a mixed bag. I know our firm is not that big on the tech questions and more on fit since they do a lot of work together.

 
3/5/18

Obviously have a basic understanding of whatever product you'd be selling. After that, it's up in the air. Be ready for some possible brainteasers/stats questions based on conditional probability.

 
3/5/18

In terms of stat question, will it be more difficult that just the conditional probability? will they actually ask ppl to derive an option value using binomial tree and such?

What if I am not sure about the product category? Should I ask the interviewers specifically?

 
3/5/18

what are you selling? I interviewed for numerous derivative trading positions and I never had to derive an option value using a binomial tree and such. I would be pretty shocked if you had to while interviewing for a sales role. Honestly, I would relax a bit and focus on pitching yourself. Come with some bullshit lines ready to go and just sell dude. Sell whatever the guy on the other end of the table babbles about. "Why did you chose XYZ university?"---your opp. to sell. "Why us?" SELL. It shouldnt matter, just be convincing and confident. At a certain point, preparation can only do so much and it depends on your ability to perform.

 
 
3/5/18

(1) cost of debt is cheaper so if you some debt to all equity, cost of capital will come down...however, after a while, the cost of debt increases as well as the cost of equity, and the U goes back up. Cost of debt will increase because there will be less-senior, more risky debt holders. Ke will increase because they are not senior.

(2) not exactly sure what you're asking...as you increase debt financing, risk increases....potential upside and downside risk both increase. For example, if you have a 100mm mortgage and 100% equity, the value increases by 10mm, you make 10% return. If you have 90% debt and 10% equity, you have a 100% return.

 
3/5/18

quote=dashriprock cost of debt is cheaper so if you some debt to all equity, cost of capital will come down...however, after a while, the cost of debt increases as well as the cost of equity, and the U goes back up. Cost of debt will increase because there will be less-senior, more risky debt holders. Ke will increase because they are not senior.
[/quote]

This is wrong, at least as long as theory is concerned.

Jhoratio already gave you an awesome answer. I would chime in and say that this concept (the inverted U- it describes the relation between capital structure and the value of the company, not capital structure and cost of capital - this would simply be a U) comes from the seminal papers of Miller-Modigliani. They first theorized, that in a world without taxes, capital structure does not impact the cost of capital, because of the arbitrage in the financial markets

This is because by adding debt (which admittedly has a lower required rate of return than equity) into the funding mix you increase the volatility of the cash flows that go to equity, increasing the rate of return equityholders demand from the company. So in a world with no taxes (and bankruptcy costs) there is no inverted U - there is a straight line. No matter the leverage, cost of capital remains constant.

As Jhoratio mentions, there are cash effects to using debt, and those stem from the fact that interest payments are tax deductible - the famous interest tax shield!. So funding with debt instead of funding with equity gives you a benefit in the form of lower taxes. In a world with taxes (but no bankruptcy costs) there is no inverted U, but an upwards sloping line - the more debt the higher the value.

Finally, there are costs of financial distress. They appear when a company is heavily leveraged. Bear in mind that this is not about higher risk! Higher risk is higher volatility of cash flows to equity and is already compensated for by the means of higher cost of equity. Bankruptcy costs are essentially extra transaction costs - you loose suppliers, clients who are scared to do business with you, there are legal fees etc. So when a company takes on very high amounts of debt the expect value of those costs increases and pulls the total value of the company down. Hence the inverted U! At some point the added tax benefits are overweighed by expected costs of financial distress.

 
3/5/18

2) I would say it has more upside in the sense that it is pure leverage, and you are not sharing ownership in profits (aka equity).

Jack: They're all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

 
3/5/18

2 is bec debt is a fixed claim, equity holders are always residual claimants. That means that creditors dont care if you earn a 200% roi, bec theyll only get coupons+face value anyway. Hence, debt has more upside bec the size of the repayment is independent of how much you make with the money you borrowed.

 
3/5/18

The short answer:

1) The cost of capital initially decreases because of the tax-shields contained in the debt's interest repayments. However as the debt increases the firm becomes more prone to financial distress (failure to service repayments) and ultimately more risky, thus the equity holders demand a higher return to compensate them for this risk because they sit at the bottom of the claims list in the event of bankruptcy.

The bottom of the U represents the equilibrium point where the marginal value from the interest tax shields is at its maximum relative to the cost of financial distress.

The upside refers to these tax shields and the fact that debt is able to amplify / leverage returns.

Hope this helps.

 
3/5/18

I have a problem with this question in general as it causes confusion about the actual meaning of "cost of capital." The "cost of capital" isn't really a price per se, i.e. you don't go around shopping for lower "cost of capital." You absolutely should try to find cheap debt, but that doesn't lower your "cost of capital." The concept "Cost of Capital" is an opportunity cost. Assuming the company is indeed the best use of your scarce capital and provides the best return possible, the "cost of capital" is the return on a project of similar risk. It is the expected return on the second best thing you could do with your money. In order to make an economic profit, you should earn more than this "cost of capital" because otherwise, what the heck are you doing tying up your capital in this crappy company? the "2nd best" option is obviously now the 1st best option. The financial claims on the assets of your company do not factor into this thought process in the slightest. We're talking about the total stack of capital, what return are you generating, and what return did you forego in order to invest in the current opportunity. This foregone return is the "cost of capital."

If you are 100% equity, the "cost of capital" for equity holders is exactly the firm's "cost of capital." The equity holders are collectively giving up the chance to earn the "cost of capital" in order to invest in the company and hopefully earn even more.

If debt holders enter into the picture, the "cost of capital" for the lenders is the foregone return on the next best LOAN they could have made. Usually, if the debt is fairly priced, there is no excess return on the debt as the "cost of capital", the interest income on next best loan, is equal to this loan.

BUT, because of the existence of the debt, and the fact that the debt holders get paid first, the equity now becomes MORE RISKY. The overall "cost of capital" for the firm HAS NOT CHANGED, merely reallocated onto the equity holders. If the cost of capital for a firm was 10%, the equity holders in an all equity firm would be 10%. But if the company took on debt and repurchased shares, making the firm 50% equity 50% debt, the firm "cost of capital" would STILL BE 10%. From the perspective of the firm as a whole, nothing has changed. From the perspective of individual claimholders, you have some (debt holders) whose cost of capital is 5% and some (the remaining equity holders) whose cost of capital is now 15%.

The WACC here is %Equitycost of equity + %Debtcost of debt = 50%15% + 50%5% = 10%. Taking on more debt doesn't lower the cost of capital, it merely reallocates it even further onto the equity holders. Say debt goes to 60%. New WACC for this company is still 10%, but now it looks like 60%5% + 40%17.5% = 10%. The opportunity cost for the equity holders has gone from 10% to 15% to 17.5% because from their perspective they are not just comparing companies of similar operational risk, but also similar leverage. By taking on more debt, we are LEVERING UP the return (AND THE RISK!!!) for equity holders, but has the opportunity cost for the capital stack as a whole changed as a result of these actions? Not at all.

It is true that there are real cash effects to debt that actually affect the firm's ability to produce cash, and there are default risks when you get to extremely high debt situations, but none of these things have any power to affect the firm-wide unlevered return on the next best option for the total capital stack, aka the cost of capital.

 
3/5/18

jhoratio presents a correct reasoning, but the WACC does change with the capital structure in anything but a perfect "Modigliani-Miller" world. For example due to tax advantages of debt, but also (from a theoretical corporate finance perspective) because in many cases debt helps reduce information asymetry problems.

But I agree it is a good way to look at it.

 
3/5/18

Is Jhoratio suggesting that WACC stays the same irrespective of capital structure in the real world?

Your examples seem a bit contrived and they assume that increases in debt ratios result in 1-1 increases in the cost of equity...such that WACC always stays the same. This seems theoretically misguided. A 100% equity firm that transitions to 20/80 debt/equity will not show the same movement in the cost of equity as a 60% equity firm that transitions to 80/20 debt/equity and crosses the threshold of financial distress. One would expect the relationship between cost of equity and marginal increases in debt in a company's capital structure to be exponential, not linear.

 
3/5/18
hungry wrote:

Is Jhoratio suggesting that WACC stays the same irrespective of capital structure in the real world?

Your examples seem a bit contrived and they assume that increases in debt ratios result in 1-1 increases in the cost of equity...such that WACC always stays the same. This seems theoretically misguided. A 100% equity firm that transitions to 20/80 debt/equity will not show the same movement in the cost of equity as a 60% equity firm that transitions to 80/20 debt/equity and crosses the threshold of financial distress. One would expect the relationship between cost of equity and marginal increases in debt in a company's capital structure to be exponential, not linear.

Not WACC, but cost of capital. He treats cost of distress and interest tax shields separately. But if you factor them in, than you will be correct. WACC obviously takes taxes into consideration. But its just a question of methodology.

 
3/5/18

Hungry,

I understand your confusion here as it's very easy to forget which is the tail and which is the dog. The main thing to remember is that "cost of capital" is not exactly something that is calculated, rather something which is estimated. Not to say that calculations won't help you in the task of estimating, not to say you can't use the output of your calculation AS your estimate, not to say that your estimate won't actually be the market beta, but in the final analysis, the cost of capital is not the answer to a math problem, but an estimate of the risk-return of the 2nd best thing to do with your money.

Cost of capital is an opportunity cost. Repeat that sentence to yourself a few hundred times as it is worth remembering. If you have access to two equally priced tickets to two different shows, a play and a symphony, on the same night at the same time, the opportunity cost of paying to see one is NOT paying to see the other. In order to come out ahead and realize an "economic" profit on your investment in the ticket, you have to ESTIMATE that you will enjoy the play more than the symphony (or the other way around). Now consider if that thought process, even for a fraction of a second, took into account whether you paid for your ticket with cash, paid with credit card, or asked a friend for the money.

Cost of capital as a single number is a FIRM LEVEL concept. It is, once again, the opportunity cost of the entire capital stack. In order for that to change, something outside the firm, and therefore by definition something which in utterly unaffected by the debt level within the firm, must change. The only way for the play ticket's opportunity cost to change is if the symphony hall is hit by a meteor or something resulting, in your estimation, in the next best thing being clearly inferior to the play. Now the opportunity cost for going to the play is much lower. Now you will beat the next best option by a larger amount and realize a larger economic profit.

WACC is simply a way to decompose this estimate. However, sometimes the process for forming the estimate of cost of capital seems like the tail wagging the dog. We look how the market is valuing our equity, and we're able to see the market's opinion (along with a substantial portion of statistical noise), or their collective ESTIMATE of their opportunity cost for the entire capital stack. But remember what is wagging what here. Once you've concluded that the market estimates the cost of capital as 10%, and you go and apply that to your firm's own capital structure, you can't lower the debt component and then say "HEY, lookee here, I just lowered our cost of capital!!!" You can't go from 50%15% + 50%5% = 10%, then get a better deal on debt and claim that now, 50%15% + 50%4.5% = 9.75% = WACC. It just doesn't work like that. (In the first place the percent of debt to equity is not entirely in your control as we always use the MARKET, not book, value of the equity.) The 10% is a market estimate. The WACC can and does change, but these changes are best thought of as MARKET CHANGES as the equity holders collectively evaluate what their 2nd best options are. Obviously, if those 2nd best options become 1st best options, they sell the stock.

To conclude, you should ask yourself which is more likely in a robust economy such as ours: that the 2nd best option for your money would be relatively stable, or that it would go through violent fluctuations?

 
 
3/5/18

i would give the brief first and then go into detail

if you lay it all out first then like you said, they may probe further
also, you may get caught up in your own words and accidentally miss something and they will call you out on it

just my two cents, others may disagree

 
3/5/18

Check out the WSO tech guide, I think it gives you actual sample answers to many questions.

 
3/5/18

give the brief overview like you did, then ASK your interviewer on which detail you should be more explicit.

 
 
3/5/18

Well... what are you interviewing for?

Jack: They're all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

 
3/5/18

Credit Suisse Holt

 
3/5/18

Depreciation and its affect on cash flow.

 
3/5/18

Isn't HOLT more of a banking job than S&T?

Jack: They're all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

 
 
3/5/18

For the NWC question, I believe it has to do with what actually NWC entails, and with the equation you have it is Operating Work Capital. It is the necessary amount of operating working capital that is needed to run the business. It is more of a measure of the operating efficiency of the business rather than it financing means, capital structure etc. It is basically a measure of how well the company is doing its business regardless of the financing. Which is why you take out the cash and debt.

 
3/5/18

These non cash charges is taken into account when calculating the N/I, obviously they did not affect cash flow (CF)
So when deferred liability (which is an asset) increase, it is implied you've paid out some cash to increase that asset, make sense? Thus, you decrease cash when non cash current assets increase, and vice versa. Example of the opposite would be accounts receivable, also a non cash current asset. So when people who owe you money pay up, it would reduced/decrease your accounts receivable, and your cash is increased.

unrealized gains or loss on various securities are actually reflected on the N/I stmt using Fair value accounting. Since it's un-realized, they do not affect CF. Therefore, unrealized gains/loss must be subtracted/added to net income when deriving CF.

notes-payable (bonds) are recorded at market value, not at par (unless, of course it was purchased at par).
Debit cash for amount received, and you would credit that amount for notes payable. So that is effectively recording bonds are market value.

Hope that helps.

 
 
3/5/18

I had S&T and IB final rounds. It's different across banks, in the IB one I had 2 interviews, one was purely technical, the other easier and more interested in seeing how I think. The S&T was very relaxed, more of a get to know you attitude, no technical questions, just market questions. I'd prepare for everything if I was you, had I not prepared very well I'd not have gotten an offer. The key is to get the questions no one is easily getting and to get along with your interviewers from what I surmised. Good luck!

 
3/5/18

CNB90, could you go a little further as to how you prepared? Which guided you used, etc?

It would be greatly appreciated, I'm a rising sophomore from a Canadian semi-target, just like you.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.

 
3/5/18
mhurricane wrote:

CNB90, could you go a little further as to how you prepared? Which guided you used, etc?

It would be greatly appreciated, I'm a rising sophomore from a Canadian semi-target, just like you.

Hey, I'm actually a Junior. How I prepared, I had as many coffees with people in the industry as possible, I asked alumni to give me mock interviews, and I got the BIWS/WSO guides and read them up. Overall, I presented very well because I was confident in my approach and had prepared adequately. It's a lot of hard work, you need to put in a lot of time. But it's worth it.

 
3/5/18

BIWS guides will help

XX

 
3/5/18

I found it to be mostly fit + market questions, but it really depends on the interviewer and your background. They may do a quick check on your mental arithmetic as well (I was once asked what 857 * 653 was). As for the technical questions that may pop up time to time, the key is not giving them the right answer, but communicate your thought process clearly and logically.

 
3/5/18
msmandoo wrote:

(I was once asked what 857 * 653 was)

This is impossible to compute in a reasonable time unless you've been training for years.

Most people wouldn't even be able to do it even with unlimited time, they would start computing and then forget some intermediate result etc...

 
3/5/18
Zafrynex wrote:
msmandoo wrote:

(I was once asked what 857 * 653 was)

This is impossible to compute in a reasonable time unless you've been training for years.

Most people wouldn't even be able to do it even with unlimited time, they would start computing and then forget some intermediate result etc...

I have been asked similar questions in interviews, and while I would agree that they can sometimes be difficult, they are in no way impossible if you break it down into more easily calculated numbers.
857 * 600 + 50 * 857 + 3 * 857 = 85700 * 6 + 5 * 8570 + 2571 = 514200 + 42850 + 2571 = 559621
I managed to calculate it in ~3 mins and I have in no way "been training for years".

 
3/5/18
Domino wrote:
Zafrynex wrote:
msmandoo wrote:

(I was once asked what 857 * 653 was)

This is impossible to compute in a reasonable time unless you've been training for years.

Most people wouldn't even be able to do it even with unlimited time, they would start computing and then forget some intermediate result etc...

I have been asked similar questions in interviews, and while I would agree that they can sometimes be difficult, they are in no way impossible if you break it down into more easily calculated numbers.
857 * 600 + 50 * 857 + 3 * 857 = 85700 * 6 + 5 * 8570 + 2571 = 514200 + 42850 + 2571 = 559621
I managed to calculate it in ~3 mins and I have in no way "been training for years".

I didn't say it was impossible, but usually when I had "mental maths" questions, they were expecting answer quite fast.
And you cannot solve 3 digits multiplication in 15-20 sec without heavy traingin unless you are one of those gifted with a brain calculator without even knowing how they compute.
For 2 digits with a little training you can go sub 10.

3 minutes is by no mean what i was calling "reasonable time".

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