some questions from CS phone interview

Are you a finance major?

dude... no way an econ major with one or two acct classes from a LAC could answer those questions. heck, I was a SA at a BB with an offer and I can't answer some of them

I'm a finance major, and yes the last one did kinda busted my balls. The accounting question was the last question and it left me uncertain about how the interview really went even though I aced the earlier finance questions. My interviewer was cool though and gave me some hints to push me in the right direction, so I eventually arrived at that answer.

As far as the DCF, I just explained only the basics, didn't even talk about levering and unlevering beta, and he was pleased with my answer. I was told by an analyst that I did some mocks with to just keep it as simple as possible and then if they want you to explain a detail about the DCF then go into further detail.

i just finished up interviewing with BofA and Wachovia (1st and 2nd rounds at each). i'm a business major at a semi-target, and didn't get one technical question. (i am a girl, but.. still)

i did, however, get many questions on my resume/general fit questions from both- why banking, why this firm, why the south, etc.

a couple guys i know got "what are the 4 main valuation techniques?" and "walk me through an income statement" "tell me how depreciation plays a part in each of the statements, and explain how an increase in depreciation of X amount would affect each"

i heard that Morgan Stanley asked a lot about the accounting statements- the relationship, effects if something is raisec, etc.

sorry i can't be more specific. i'm a finance concentration, so i did expe ct more technical stuff, but... i was more than happy to not have any technical questions.

i dont think the free cash flow is right.

free cash flow is operating cash flow minus capex

your equation leaves out interest expense

but then again my corporate finance "professor" was a total douche bag (yes from a target school)

DCF's are subject to too many variables. You can always model the forecast period as a "business miracle" and get the highest valuation. Think of it this way. A seller will show projected financials with a DCF which is the starting point and already the buyers highest possible valuation. The actual transaction multiple will be almost always be a lower negotiated amounnt.

This is a good thread. we should continue posting interview questions. I have 4 1st rounds tmrw.

4? busy day

4 phone interview on 1 day lol, hope you have caller ID

All on campus recruiting. 30 minutes/per interview. Hoping they don't eat me alive.

It's funny, my friends interning with the Big4 really struggle with how depreciation flows through the sheets.

As I remember, my SA interview was really basic, mainly work experience and personal stuff. They hit me with some really simple accounting questions (name the financial statements, deferred taxes, etc.) but nothing to do with valuation. They ended with some discussion on recent deals in the sector and my knowledge of financial market news. Nothing like the CS questions at all!

these were the standard questions I got in my summer associate interviews

I also got some crazy brainteasers and behavioral questions

bwils29:

6. Give me the changes in each of the three financial statements when accrued liabilities increases by $10 and the tax rate is 40%. (A: IS- Increase expense by ten, decreases EBT, gives a tax savings of 4 dollars but NI decreases by 6 BS- Assets increase by 4, Liabilities increase by 10 and SE decreases by 6 (A=L+SE 4=10+(-6)) CF- in CF from Operating Net Income decreased by 6 but there was in increase in cash because of the increased liability of 10 giving a net increase of $4 in cash)

I think these answers are correct, but if someone sees something that is glaringly wrong please update this thread. Hope these help some of you who have interviews coming up, and hope others will post up questions as they have interviews.

Isn't question #6 just a change in working cap affecting the BS and CFS?

Kimbo, pm me those brainteasers or post them on the xoxo board,

tyia

2. Why would two companies merge? What major factors drive mergers and acquisitions? a. Synergies, economies of scale, increased market share, cross selling

3. Why might a company choose debt over equity financing? a. Debt is cheaper because interest is tax deductible b. They believe that there is lots of upside potential c. Do not want to dilute ownership share

4. If a private company wishing to sell the company approached you, how would you go about advising the company? a. Value the company under two premises: i. Acquisition-look at DCF ii. Merger-synergies, look at market comps, will pay premium

5. Draw graph of how cost of capital changes as company goes from 100% equity to 100% debt

6. Where do you think interest rates will be 2 year from now? a. Fed has held rates for the most of 2006 b. Will probably hold or cut rates in 2007 c. 2008, if the economy has soft landing, may begin raising rates again---Bernanke has said he is an inflation hawk

7. What is EBITDA? a. Earnings Before Interest Taxes Depreciation Amortization, used as a proxy for cash flow

8. Walk me through a typical cash flow statement, balance sheet, or income statement. a. Cash flow statement shows how cash is generated from what part, operations, investing, financing. Operations is CA, investing is NCA, Financing is change in owner’s equity, interest is operating expense b. Balance Sheet shows company’s resources and claims to those resources. Assets=Liab+equity c. Income Statement shows the companies earnings

9. Company X's net income is ___; how do I compute their cash flow? a. Add back depreciation and amortization and other non-cash changes b. (-) increase in A/R c. (+) increase in A/P

10. What is goodwill? How does it affect net income? a. Measure of synergies when purchasing another company b. On B/S, shows up on I/S when impaired as impairment loss

11. What is working capital? a. CA-CL, measure of company’s efficiency and short-term financial health

12. What are deferred taxes? Where do they come from? a. Tax accounting is not financial accounting b. Taxes that arise from this discrepancy

13. What is beta, what are limitations of beta? a. Measure of systematic risk b. Standardized covariance between market return and individual security return

14. What is CAPM, what are limitations of CAPM? a. Capital Asset Pricing Model b. Rf+B(Rm-Rf) c. Limitations-sensitive to historical period used, beta may change, markets are inefficient

15. How do you unlever beta? a. Betal= (1+(1-t)(D/E)) * Betau b. Different companies have different capital structures, different risk characteristics, standardizes it

16. What is duration, convexity? a. Duration is weighted average of present value of cash flows b. Measures DP/DR, price sensitivity to rate changes c. Convexity is second derivative, how sensitive is DP to large changes in DR

17. Define Sharpe Ratio a.
    b. Tells us whether returns are smart or just very risky

18. How do you calculate the enterprise value of a firm? a. Market Value+net debt(debt-cash)+minority interest b. More accurate value of acquiring company

19. What types of companies make good LBO targets? a. Undervalued companies, steady cash flow, low debt

20. Give me an example of a coverage ratio?

21. In general, be prepared for different types of valuation questions (i.e., how to value public/non-public companies; all equity companies; companies w/no earnings; companies w/no history; know the various valuation techniques by industry, etc.)
22. Be sure and know the importance of when to use WACC and when not to.
23. If a company has bank loans, secured credit lines and high yield bonds, which would de-value first if the company were to move insolvent.
24. What assumptions would you make in valuing a business in a highly cyclical business?
25. What is the difference between a leveraged buyout and a merger?
26. What are common multiples used to gauge equity performance?
27. How are the multiples computed (numerator, denominator)?
28. What multiples are generally used in a merger/acquisition?
29. What are common ratios used to assess the debt of a company?
30. Why use EBIT in the DCF?
31. How do you go from P/E to ROE?
32. Suppose x happens, explain to me how that would effect all of the three of the financial statements?
33. What are some reasons why you would have a positive cash flow and a negative cash flow?
34. What are the mathematical reasons (calculations) for an Accretive vs. dillutive acquisition
35. Why add back depreciation and amortization to find Unlevered Free Cash Flow?

here are two:

(1) let's say you have 6 tennis balls in front of you and an old-fashioned legal scale. One of the six balls is lighter than the other but they all appear exactly the same. How would you go about determining which ball is the lightest in just two weighings? You can weigh the ball in any way you want.

(2) Let's say you have 3 light switches which correspond to three lightbulbs inside a room with no windows. Each switch corresponds to exactly one bulb. You can turn the switches on and off in any combination and as many times as you want to, but you can only go inside the room once (to inspect the bulbs). How do you figure out which switch corresponds to which bulb?

Q. What has a cheaper cost of capital, Equity or Debt? A. Debt has the cheapest cost of capital. There are two reasons. First, using debt allows corporations to deduct interest payments which lowers the cost. Second, debt holders would be paid off before equity holders in the event of a liquidation, so the risk of not being paid back is less for debt holders than equity holders. r2. Subordinated Debt (Mezzanine Debt) 3. Preferred Stock 4. Equity

Q. How do I determine the Cost of Debt and Equity? A. Debt- Does the company have any debt outstanding? If so, use the Yield to Maturity (YTM) on the bonds as the cost of debt. If there are no bonds outstanding, look at comparable companies' YTMs. Preferred stock can be found the same way. Equity - use the Capital Asset Pricing Model (CAPM). If you don't know the Beta, use a comparable company beta.

Q. How do I determine the Weighted Average Cost of Capital (WACC)? A. To determine the WACC, find the what percentage debt and equity are of the total capital structure and multiply these numbers by your cost of debt (1-t) and your cost of equity. For example: Capital structure= 100, Debt= 50, Equity=50, Cost of Debt= 8%, Cost of Equity=12%. The WACC is= .58%(1-T)+ .512

Q. If my capital structure is optimized, what also should be optimized? A. Return on Equity. Basically you have the optimal amount of equity to produce your net income.

Q. Define cash earnings per share. A. Cash Earnings=NI+Depreciation and Amortization+Deferred Taxes.

Q. A company is listed as an ADR on an American exchange. The ration of shares on the home exchange to ADR shares is 6 for 1. If the ADR earnings per share is $6 what is the EPS for a share listed on the home exchange? A. $1, treat as if a 6 for 1 stock split occurred.

Q. Suppose you have a company where EBITDA has been rising for the past several years and that company suddenly declares bankruptcy, name some reasons for why that could have happened? A. Companies declare bankruptcy because they have no cash (liquidity crunch); the best answer would be to walk down the cash flow statement and describe how each of the sections could contribute to a bankruptcy filing:

• Working capital crunch (receivables could be rising; could be getting pushed on payables; might be required to build significant inventory)
• Capex requirements could be large (ie telecom)
• Might not be able to refinance a maturing issue
• Litigation (ie Philip Morris posting tobacco bond) Report abuse Amber Adams on 8/31/2006 9:14:28 AM wrote: Some more questions - lets get a big discussion going here.....

Q. You are looking at acquiring a company, but that company has a negative book value of equity. Is this a big deal? A. You would want to see why the BV of equity is negative, and there could be several reasons: - Could be from negative net income over the past several years - this might a problem from an operational perspective - Might be due to a write-down of assets - would want to understand this but might not be as bad a recurring negative net income - Firm might have levered up to issue a large dividend - will leverage be an issue going forward?

Q. Which will place a higher value on the company, equity comparables or M &A comparables and why? A. M &A comparables will be higher due to a control premium that must be paid and synergies expected to be derived from the deal

Q. Briefly walk through a discounted cash flow analysis. (including WACC) A. First, you want to calculate free cash flow for a certain period of time (generally five or ten years). To calculate free cash flow, start with after-tax EBIT and then add back D &A, subtract Capex and add/subtract and decrease/increase in working capital. Next, you want to determine the appropriate discount rate for the cashflows, the WACC. The cost of debt is determined using the current yields on the company's existing debt issues (where bonds are trading) and tax affecting them. The cost of equity is generally determined by CAPM (ie risk-free rate plus company's beta multiplied by the equity risk premium). WACC=D/(D+E)(1-T)Kd + E/(D+E)*Ke Next, you would calculate a terminal value for the firm either using a multiple of EBITDA or a perpetuity growth rate on the firm's free cash flow. - Multiple Method - Multiply the final year's EBITDA by an appropriate EBITDA multiple for the firm (based on comparables) - Perpetuity Growth Method - multiply the final year's free cash flow by (1+growth rate) and divide that by (r-g) You would next calculate the PV of the terminal value Next, you would determine the PV of the free cash flows for the given period (dividing the cashflows by WACC) Finally, you would add the PV of the terminal value to the PV of the free cash flow to determine the value of the firm

Q. If a company is considering an all-stock acquisition, what is the easiest way to determine (roughly) whether or not the acquisition will be Accretive or dilutive? A. The quick way is to look at P/E multiples. If the acquirer's P/E is higher than the target's, the acquisition will likely be Accretive and vice versa. For instance, if the acquirer's P/E is 20, and the target's is 10, then you are able to pay less per dollar of earnings for the target.

Q. If you are going to graph a company's cost of capital, with the cost on the Y-axis and with the company's leverage level across the X-axis (from 0% leverage to 100% leverage), what would the graph look like? A. It would look approximately like a smile; the cost of capital would initially decline as you add leverage, however as the firm becomes increasingly levered, the cost of capital would increase due to bankruptcy risk

Q. Why would two companies merge / What major factors drive M &A? A. synergies (revenue - cross-selling; expenses - cost cutting); could exploit economies of scale, common distribution channels, elimination of a competitor, etc., defensive (do not want someone else to acquire them)

Q. Why might a firm choose debt over equity financing? A. Assuming the firm has the ability to take on additional leverage without damaging its creditworthiness, the firm might choose this in order not to dilute ownership; also, up to a reasonable level, debt can be seen as having a lower cost than equity.

Q. How do you unlever at beta? A:: BL = Bu * [1+(1-T)*D/E] (Hamada formula) T = tax rate; D/E = debt/equity ratio

Q. How do you calculate the enterprise value of a firm? A. Enterprise Value = equity value (i.e. shares outstanding under Treasury method * price) + debt - cash + preferred stock + minority interest

Q. How do you value a company that is not CF positive, has no public comps, nor any acquisition comps? A. Look at distribution, production methods of other companies and see if you can find any operational similarities. (i.e. find value drivers and see if there are companies that could be comps)

Q. Give me an example of a coverage ratio? A. EBITDA/interest expense: shows ability of the firm to generate sufficient cash flow to cover fixed charges; (EBITDA-Capex)/interest expense: shows ability to cover interest expense after spending for capex

Q. What types of companies make good LBO targets? A. Has predictable, stable CF; mature, steady industry; well-established products; limited capex and product development expenses; undervalued or out of favor; owned by a motivated seller; not highly levered

Q. Conglomerate X has a significant amount of debt maturing next year. With debt markets still tight, what options does the company have? A. If the company does not have excess cash, it could sell some of its assets (but would lose cashflow from that unit) or issue equity (these are the two primary answers)

Q. How would you value the naming rights of a stadium? A. You could look at comparables (adjusting for market differences, football, concerts, demographics, TV rights, size of stadium) to get the intrinsic value; you would then think about market specific details and willingness to pay of potential buyers (key points understand valuation is based on intrinsic value and willingness to pay).

Excellent thread. Keep them coming..

isn't dcf > transaction comps? (after all, dcf is the intrinsic value) if not, is it because of the premium paid for an acquisition?

wow great questions

Would a coverage ratio also be something like the current ratio or quick ratio?

Anyway thanks for all the questions guys. Again I absolutely appreciate all the work you guys are doing to provide us with this.

2. Of these 3 techniques which is most likely to give the highest value of a company and which is most likely to to give the lowest value. A: highest-transaction comps

lowest- DCF (LOWEST IS NOT public comps as OP stated)

Is it incorrect to use WACC for all equity?

100% Equity WACC = CAPM

http://www.kellogg.northwestern.edu/student/club/ibank/resources_recrui…

You guys are wrong about the highest/lowest/middle values. I got this question and sort of guessed at it and they told me the answer.

Basically, transaction comps are the highest, because of strategic value/synergies.

Company comparables are just below this.

DCF can go either way. Because you have to make assumptions in these models, if you project cash flow to be high, you will get a higher company value, if you are conservative and project cash flow to be lower, you will get a lower value.

I had the exact same questions (even the random accounting one) for my CS phone interview ...btw what office/group was your interview for?

mine was for energy in houston...but it was my first interview (never did the office interview in December).

have you heard anything back yet?

"accrued liabilities" is simply a change in net working capital. Why does it become an expense/affect the IS?

In a bull market, trading/company comps can be higher than transaction comps. Especially, if the timing of the transaction and trading comps is different. As anon3333 correctly said, DCF can go either way depending on the assumptions you make - which is often influenced on whether you are on the buy side or the sell side.

To determine the cost of debt can one find the interest coverage ratio, use a default spread for all companies with that interest coverage ratio and find the cost of debt?

Are these questions for an analyst or associate position? Summer or FT? Would it be the same questions for summer and FT?

bump

brain teasers are fun but you only get them if the interviewer doesn't like you.

What does SA stand for?

Senior analyst/associate? sales __ ?

great thread ..bump

Two good ones from final rounds at TD M&A ....

(1) What's the main difference between valuing a company using comparable P/E multiples vs EV/EBITDA multiples?

(a) P/E is much more dependent on the targets capital structure whereas the EV/EBITDA multiple is less dependent (think levered vs unlevered)

(2) Say a company has excess cash on its B/S compared to comparables, will its P/E be trading at a higher or lower multiple?

(a) MKT CAP = EV - Net Debt - MIN INT = EV - Debt + Cash - MIN INT Thus more cash on the B/S implies a higher mkt cap (equity value) and thus a higher P/E multiple

No, the enterprise value will be higher because of the extra cash. Market cap refers only to the equity value. Equity value does not have a tangible link to cash on the balance sheet (other than, if a stock has a lot more cash of all a sudden people would be willing to pay more for it which would imply a higher PE than before). Your formula should read: Enterprise Value = Equity Value (or market cap) - Debt + Cash - Minority Interest

I don't think I agree with the answer to the last question, because in a cash flow statement, an increase in accrued liabilities doesn't mean you have to pay the cash out immediately at the end of the year. It could be placed in accounts payable in which case, there wouldn't really be a decrease of $6, however, a reduction in tax expenses of $4 can be accounted for in the cash outflow.

I dont quite agree with the answer to the last question. It depends on what kind of liability goes up. OP is assuming the expense liability so I shall assume that.

An increase in accrued liabilities expense should not change the net income statement whatsoever, because the total amount due, regardless of what has actually been paid, is recorded. Say you have an expense of Rent of $50 for a year, but you pay $30; expense recorded in IS is $50. If you pay $20 (an increase in accrued liabilities of $10) the IS should still show $50 for rent expense.

However, OP's answer might be true, if the increase in accrued liabilities for expense has not been accounted for at all. In the above example, you realize that the rent was $60 instead of $50 instead of and you now owe more. In which case, the IS will be effect and SE in the balance sheet will be effected. The Assets will be uneffected.

Cash flow statement will change in the first scenario, but not in the second one.

P.S I could have gotten my accounting all wrong!

Why don''t use search box to find suggestions??? I found suggestions for some questions here : http://freeinterviewquestions.net/technical-support-interview-questions/ Hope this helps!