Hardest technicals ever
What are some of the most difficult technicals you've ever gotten?
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How would you value a piece of shit?
That is easy, the current going rate for pieces of shit is $8/couric
Yes, but first it must be checked for accuracy by officials from the European Fecal Standards and Measurements in Zurich. It must be officially one solid piece... After this information is analyzed and passed, then you can value the piece of shit on the Couric scale.
none are actually difficult, some are meant to be tricky though. such as, "How does goodwill impact net income?", or "If you are investing heavily into R&D, but a new accounting rule allows you to capilatize and amortize those expenses over a number of years, how does that affect value today?"
let me take a stab at the two questions:
(a) Goodwill does not affect net income, unless it's written down (impaired).
(b) Since cash flow is the driver of firm value, whether you capitalize or expense R & D should not affect value as the cash position in both cases remain the same.
A. If you really want to impress them, mention that it used to lower net income prior to June 2001 (before the new FASB rule), when goodwill was amortized.
B. Yes.
.
Actually B is incorrect. If you amorize R&D over a period of time, you are losing the tax deductable benefit of R&D by spreading out the amortization over a longer period of time rather than just realizing the expense upfront all at once. Due to the time value of money, this would actually cause a decrease in your valuation since your are realizing the tax deductable benefits of R&D over many years into the future rather than all a once.
I've gotten "walk me through an accretion/dilution model" and "walk me through an LBO model".
Let me now throw out a few questions which were a little obscure but nevertheless came out during interviews:
How do you account for minority interests in a free cash flow analysis, and what's the rationale for your answer?
List five examples of situations which give rise to deferred tax liabilities or deferred tax assets, and explain why.
Which has a greater impact on enterprise value: a 10% decrease in FCF each year, or a 10% increase in WACC?
I've had walk me through an accretion/dilution calculation with 25% debt, 75% equity, and these are the numbers, was handed a piece of paper. Not really a technical, but I guess it could be seen as one, when asked what are the components of EV, i said equity + interest bearing debt - cash + market value of minority interest - market value of investments in associates, the question that followed was when would you add back investments in associates. I didn't know but the interviewer explained it to me stating that if you have a acquiror that wants to buy the investments in associates they would add it back to the valuation.
My friend got, you have a trailing P/E of x, the forward P/E of y, calculate the growth rate for the coming year (this was without a piece of paper, without a calc, and a 1st round interview)
Which has a greater impact on enterprise value: a 10% decrease in FCF each year, or a 10% increase in WACC?
-neither of them should have any impact on enterprise value because E.P = equity value + preferred stock + debt - cash + minority interest.
Am I right?
A 10% decrease in FCF, will have a much greater impact on EV, because you are making an assumption of -10% growth (think compounding of negative returns in perpetuity), which will wipe out your terminal value (the largest portion of EV in a DCF calculation).
A 10% increase in WACC will have a fairly small impact. All it means is that your WACC will go from 8% to 8.8%, for example. This will lower your value slightly.
a lot of times if you answer a few questions right, or you throw out a few fancy terms, they will push you to see how far your knowledge goes...it's ok if you don't know the answer at a certain point, they just want to see where your limit is
a lot of times if you answer a few questions right, or you throw out a few fancy terms, they will push you to see how far your knowledge goes...it's ok if you don't know the answer at a certain point, they just want to see where your limit is
There are some good (and tough) questions on this thread, does anyone know the answers?
Also, what about these ones - -What problems could arise when valuing a company based on an EV/EBITDA multiple?
-Is EBIT(1-T) levered or unlevered?
-Why use EBIT(1-T) rather than net income in calculating FCF rather than Net income.
-If company A is acquiring company B and they have company B’s cash flow, which company’s cost of capital would you use to discount the cash flows to value the company?
Someone with a star please bust out your knowledge :)
EBIT is "unlevered" because it is before interest payments, meaning it is available to the entire enterprise.
That is also the reason you would use it instead of Net Income when calculating FCF, because typically you would want to get unlevered FCF (unless you want to just get equity value)
If company A is acquiring company B, they would value the company using company B's WACC because you want to consider the riskiness of the investment or project you are looking at, not your own firm's riskiness.
Can you explain the second question (Why use EBIT(1-T) rather than net income in calculating FCF) fully? I don't understand how EBIT being before interest payments means that EBIT is available to the entire enterprise.. What does it mean that EBIT is available to the entire enterprise?
yea, can some analyst or associate help us out with some of the tough ones on this thread?
Thanks, Addicted2Bass. Could you explain to me what you said for the "explain an accretion/dilution model" as well?
The only reason I got asked that is because I said that I knew it, so I wouldnt worry about it if I was you. The short answer is that a deal is accretive when the combined company's EPS is greater than the acquirer's and dilutive when the new EPS is lower. There are quite a few considerations that go into the calculation and I doubt you will get asked about it.
Q: How do you value companies with no cash flow/profitability AND no revenue? (think biotech or early-stage startups)?
A: Either forecast appropriately ahead (makes sense more for biotech) and figure out TAM for each drug in its portfolio, estimated penetration rate, price of drug to get sales and cash flow at some year far in the future and discount. Or use other metrics - like registered users, downloads (for open source companies for example), pageviews for internet companies, etc.
Note I would not ask this to someone unless they make some claim about knowing a lot about valuation and/or have spent time in VC before or something.
Honestly I would not ask someone to go through an accretion/dilution or LBO model unless they have previous PE/banking experience.
I sort of assume this was a joke, but incase it wasn't: TAM = Total Addressable Market
Dosk17, so basically I would find comps and use multiples like EV/Pageviews, something that fits the industry. Thanks for a great response.
For the accretion/dilution walkthrough, I don't expect to get the question but I just want to understand everything that has an even remote possibility of being asked.
Here's one:
If inventories decreases by $100, what effect will that have on all three financial statemens? I had trouble with the income statement
Dosk17. I've been asked all 3 questions without banking experience.
Let me take a stab at it:
How does goodwill affect NI? cash flow? - due to changes in accnting rules, you can't amortize goodwill, you can do impairments. If you do impairments, NI will decrease. - impairments of goodwill are (at least partially) tax deductible, so even though goodwill impairments are not real cash charges they will lower your tax bill, which would increase cash flow
What happens to value when you capitalize R&D? - it depends depends on the tax implications. if for tax purposes you charge all of the R&D at once (i.e., you don't capitalize it for tax purposes) then nothing will happen to value. but if you amortize the R&D expenses, you will end up paying more taxes since you are only charging a fraction of the total R&D expenses every year (i.e., if you charge all of it, you get to lower your taxes immed). - wrt to cash: if you capitalize instead of expensing (for tax purposes and on the books) R&D, cash will decrease (which causes firm value to decrease).
Which has greater impact, 10% increase in FCF or 10% increase in WACC? firm value = FCFF / WACC FCFF*1.1 / WACC = 1.1 * firm value FCFF / (WACC * 1.1) = (1/1.1) * firm value
| 1.1 - 1 | - | 1/1.1 - 1 | = 0.1 - 1/11 = 1/110 -> 10% increase in FCF has greater impact.
What happens to IS/BS/CFS when inventories decrease by $100? (assume 40% tax rate) IS: COGS increases by $100, so NI decreases by $60 CFS: cash increases by $40 because we have an additional $100 of tax deductible expense BS: Assets decrease by $100, cash increases by $40, SE decreases by $60
Accretion-Dilution Analysis: You are looking at pro forma # of shares O/S and NI (EPS) AFTER an acquisition has occured. To do this you have to project the post-acquisition balance sheet and income statement. In an all stock deal, if a lower P/E company buys a higher P/E company, the deal is dilutive to the acquirer
Niles, you are such a smarty pants ;)
lol! I am definitely not.
This site is helpful. Its very helpful. The answers to all of the questions posted in this thread can be found in other threads.
I'll admit that the search function is not that great, but its good enough. The guys here really do a good job of establishing a) what the interviwers are likely to ask b) what the best answer is
Are you aware your fly is down?
I said yes, absolutely
Are you aware your fly is down?
I said yes, absolutely
http://pages.stern.nyu.edu/~adamodar/
This a very useful link. It has a section called "25 Questions on DCF Valuation". I cannot link it in here but you can find it on the website under "Research and papers" --> "Estimation Issues in DCF Valuation". This is paper #7 in the box.
How do you go from P/E to ROE?
A friend was asked this and I still have not figured out the answer.
p/e= dividend payout ratio/(k-g) G= growth rate G = ROE*B b = plowback ratio
so how do you derive k and b?
ROE = NI / BV of SE
P/E = MV of SE / NI
ROE is an accounting ratio, P/E is a market valuation. Can you derive one from the other? If you knew the relationship between book value of SE and market value of SE then I think you can derive it.
"What happens to IS/BS/CFS when inventories decrease by $100? (assume 40% tax rate) IS: COGS increases by $100, so NI decreases by $60 CFS: cash increases by $40 because we have an additional $100 of tax deductible expense BS: Assets decrease by $100, cash increases by $40, SE decreases by $60"
I agree that COGS will increase by $100, but will NI decrease by $60? If COGS increases by $100 then revenue would also increase by whatever the margin is set at. This would lead to a higher NI (holding everything else constant).
So... IS: COGS increases by $100; Revenue increase by $100 * (1 + margin %); NI equals X CFS: Cash increase by $100 + X BS: Inventory decreases by $100; Cash Increases by $100 + X; SE increases by X
Example (very basic; no interest, SG&A, etc.) Year 1 Sales: $120 COGS: $100 EBT: $20 NI: $12
Balance: Cash=12 Inventory=100 SE=112
Year 2 Sales: $240 COGS: $200 EBT: $40 NI: $24
Cash Flow: +124 New Balance: Cash=136 Inventory=0 SE=136
Both of the answers given so far assume that the $100 decrease in inventory was due to a sale of the inventory. May be splitting hairs, but the OP's question is ambiguous as to the cause of the decrease. It could be a decrease in the value of the inventory due to obsolescence - which would be accounted for on the financial statements in a different way.
My initial thought would be to ask the interviewer the circumstances of the decrease, but then you would probably be traveling down a road you don't want to go down unless you are familiar with inventory obsolescence. There are probably alternate reasons inventory would be reduced by $100.
I agree with you, and I thought the same thing. But then again, I think this type of question is similar to the $100 of depreciation question.
The idea is to assume that you only have that extra $100 of depreciation and nothing else... even with the depreciation question, you might ask where they are getting an extra $100 of depreciation (did they purchase equipment, did they make a mistake, or did they change accnting principles?)
To do the question I just assumed that somehow (due to error possibly?) we have an additional $100 of COGS (or inventories are $100 less than assumed, etc.) Couldn't this occur if say you switched from LIFO to FIFO?
Maybe I should tell the interviewer my assumptions before answering the question.
Niles,
Good point: I guess if there was some type of "inventory write down" or "error" you would be correct.
here are a few ones...
1) what types of discounts/premiums would u apply after determining valuation based on a comp valuation? 2) Suppose an acquisition is accretive. how do u make it less accretive? 3)If you had to choose one multiple, what would it be? why? 4) What major factors affect a corporate bond? 5) What are the major factors to consider when choosing between TEV and Equity value?
I understand that k is the discount rate and that b is the div ratio... but I wanted to know how one derives those two quantities from the P/E ratio alone. We're still stuck no? Now we need beta of the company along with the div payout ratio, both of wich I doubt you can derive from the P/E ratio.
Wouldn't the best answer be to say that a very crude approx would be to take the inverse of that (i.e., assume that P is an approx of book value of equity per share)? Or to say that you can't derive ROE purely from the P/E ratio?
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