What are some of the most advanced technical questions that could be asked in a summer analyst interview? Also - what are the hardest questions you have been asked in a summer analyst interview?
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revenue is 300, ebitda margin was 20% but depreciation is understated by 20. what is ebitda?
EBITDA is 60?
isn’t it 60? because depreciation shouldn’t affect EBITDA?
I’ll be very honest, I don’t think it bodes well for a person if they think this is the hardest question they have encountered.
This is right. There are some other comments saying the new corrected (and higher) D&A increases EBITDA, which is wrong. It was never part of EBITDA.
Maybe not the toughest question but apparently tough enough to fool some people based on the comments.
I actually saw a short thesis recently from a hedge fund, and the thesis was essentially "this company is overstating D&A and thus overstating EBITDA". They were correct that the company is indeed overstating D&A, i.e. they are aggressively depreciating assets and creating an arguably inflated D&A. But it was clearly incorrect to say this increases EBITDA.
walk me through an LBO
How in-depth are you supposed to go with that? I feel like I have a basic understanding of LBO, but will fuck it up if I get grilled on something I say.
Its a balancing act, say too much and you open the gates of hell. Say too little and you're donzeo.
This isn't very difficult. Fundamentally, it is very similar (with some caveats) to a DCF.
if that’s your answer, you won’t get the gig. all you are “trying” to say is there is a TVM concept involved in both. doesn’t help, that’s like saying they are both models.
the hard part with this isn't the initial explanation (which I would hope most people recruiting would know), but the follow up questions. I've had interviews where they get pretty specific in follow ups, and you really need to understand what's going on with an LBO (not just memorize a good answer to 'walk me through an lbo') to be able to answer.
Couldn't agree more. As long as you have built more than 1 LBO model, be it a case study or whatever, you know the drills and it won't be so hard answering the follow-ups.
If debt/equity is on the x-axis and WACC is on the y-axis, what does the graph look like.
My answer: Declining from left to right. Because debt is cheaper, so having more debt on the capital structure would reduce the cost of capital.
Is there a case where the answer is "it depends"?
I suppose it always depends on some specifics but the right answer is the one below where it goes lower in the beginning but rises as you move far to the right (high debt %).
I would actually disagree with the answer provided the WACC bottoms out at some point where you get the optimal capital structure then it comes back up again.
Yes, debt is cheaper and will always be cheaper than equity, but the cost of debt isn't static. As you take on more debt, the marginal cost of debt increases because of added risk. Similarly, the required rate of return on equity will also increase as higher leverage on the same asset beta increases equity beta. Thus, coming from 0 debt, you reach an optimal WACC and past that you should have WACC increasing again
It’ll look like a “V”. As the proportion of D/E gets larger, the WACC decreases because the proportion of debt, which is a cheaper form of capital, becomes greater. However, there is an inflection point at which the proportion of D/E becomes too great and the firm suffers financial distress. Then the WACC increases.
You'll probably come across this question in upper division finance courses. If you're interested to learn more, here's a link explaining everything about the shape of WACC.
https://www.accaglobal.com/hk/en/student/exam-support-resources/fundame…
Though ITS & COD could reduce WACC to a certain degree, be aware that default/distress risk embedded in COD also increases when D/V goes up
Not necessarily, it will certainly decrease WACC in the sense that you are placing more weight on rd, but I think that the leverage effect is far greater on the equity side. If D/E increases, Beta increases (now you have a hell of a lot more systematic risk to deal with). If Beta increases, the cost of equity increases too. Also, rd doesn’t stay constant and this is not a linear relationship. As leverage increases, rd will increase, and so will WACC.
debt initially lowers wacc, but past a certain point, wacc starts to rise. so u/v shape
That's right. Its roughly a smiley face. Eventually as debt gets too high, WACC would increase with a higher debt mix. Note that it doesn't even need to be new debt; it could just be a loss of equity.
.
Too easy, WACC decreases at first so downward sloping and then will begin to slope upward at a higher levels of leverage so almost like U-shape.
Technicals will never be that hard. Maybe work on some tougher problems. Which companies are the most undervalued right now. What sectors will drive M&A. What will happen to the money supply as we face a deflationary environment and aggressive money-printing at the same time. You probably have classmates trying to tackle these things right now because they learned long ago that technicals aren't hard.
U-shaped. Like Wrangler jeans.
Parabola
Parabola
Parabola
All these questions are a joke lol. Still straight out the shitty guides cmon. Can I have a challenge up in here, please?
delete
if you know the guides, you don’t need complicated questions. if you are as good as you think you are with fundamentals, you won’t need to answer the most technical question someone on WSO comes up with. each of these questions could trip you up if you aren’t thinking clearly - that’s the point
Tell me a joke
Sell me this pen
How do you account for underfunded pension liabilities in an LBO model?
i've had paper LBOs (EB) and YTM bond math / liquidation valuation (RX) thrown at me. depending on how in-depth they want you to be those will probably the most difficult you'll face.
Do you have to do bond math questions in your head?
yes
how do u do a liquidation valuation? feels like none of the guidebooks touch on it in detail
https://www.sec.gov/Archives/edgar/data/825692/000119312509122540/dex23…
can you expand more on the rx question ? thx
RX interview at my EB involved no numbers outside of a waterfall question. It was very qualitative, for example I would focus less on learning how liquidation analysis is done and more on why it’s done and when it’s used
other poster is pretty accurate, stuff like waterfalls and where's the fulcrum
when interviewing for s&t out of the blue after talking about general markets(didnt prep too much on swaps):
You have a $100m 10% 10Year receiver interest rate swap, if the rate changes to 11% tomorrow, what is your P&L?
Well golly would you look at that. Now that's what I call a question!
for some people this is trivial. really depends on your background
what’s the answer?
My stab at this would be: a) ask what side of the swap you are on (pay/rec fixed), b) based on that you would be +/- 1 million. Thoughts?
Edit: https://www.investopedia.com/articles/active-trading/111414/how-value-i… this link explains the need for discounting/forward rates
Your approach is correct, but the value of the swap wouldn't be +/- 1 million, as it would depend on the forward curve and the discount curve.
Check out IB Vine, https://ibvine.io/practice, has a lot of good "Outside the Guide" questions for practice.
Here's a sample one from the above website that may not be that difficult, but I feel is good nonetheless (this was from a JPM interview):
What is the market cap for a company that has...
1 billion brah
Correct @froggoboggowoggo. Here's a few more from the same website that I found to be good practice:
A. A company has 10,000 shares at $20 a share. There are 100 call options at an exercise price of $10, 50 restricted stock units (RSUs) and 100 convertible bonds at a price of $10 and par value of $100. What is the diluted equity value?
B. MULTI-STEP: Assuming a 20% tax rate, walk me through 3 statements with a:
Year 0: Buy Land for $90 using cash on hand. Walk through the 3 statements.
Year 2: Straight-line depreciation occurs over a 10-year period. After two years, you sell the land for $90. Walk through the 3 statements after the sale of land.
C. How does ____ affect Enterprise Value?
Raise $200m in Debt, use cash to buy a new piece of equipment.
D. MULTI-STEP: Assuming a 20% tax rate, walk me through 3 statements with a:
You raise $100 debt with 5% interest and 10% yearly principal repayment. You use that money to purchase $100 of short-term assets that have 10% yearly interest income attached.
Part 1) Right when you raise the debt and purchase short term assets, walk me through the 3 statements.
Part 2) After one year, walk me through the 3 statements.
E. Assuming a 30% tax rate, walk me through 3 statements with a:
$100 interest expense (50% cash interest / 50% PIK interest) and $50 interest income
F. 5 things a company can do with cash?
Coul you please elaborate the anwser? I'm not sure to get this one.. thank you
This website is fantastic. Thanks for sharing.
Hardest technicals definitely came at 2 of the EB's I superdayed with (1 in chicago, 1 in NY). Notably, one of them gave me a list of numbers and asked me to calculate 5 or 6 different metrics, then asked me to explain what type of company this was likely from and how I could tell. Another sat me down and gave me an excel template for a very specific type of industry model, had me fill it in, answer 5 or 6 short answer written response questions about the industry, trends, and some critical thinking. The real catch, though, was on the model template, there were some intentional errors (formatting, the word assumptions spelled wrong, some hidden cells/rows/columns w/ white text in them). Big takeaway here was a combo of knowledge and genuine attention to details; nothing is ever as straightforward as it seems, take all the time given to you.
At some point, there is always some technical question that comes straight from left field is a gotcha moment. Going in confident and explaining your logic on tough technicals is the best you can do
The hardest technicals I got during some of my SA interviews were not really questions, but instead case studies, or multiple questions asked in a row? Any question can start off fairly easy, but then its up to the interviewer to decide how far they want to grill you on that particular topic. For instance, a beginning question could be "walk me through an LBO?" (fairly simple question) but then they can start asking you specifics about the debt schedule and how that affects the fcf available to pay down debt.
'You have a company w/ $100 revenue, 20% ebitda margin, and 40/60 F/V costs. What is the ebitda if volume increases by 10%?'
BX PE SA 1st round question
So ebitda is initially $20 and total costs are $80.
Of this $80, $32 is fixed (40%) and $48 is variable (60%). So if volume increases by 10%, then variable costs increase by $4.80 (10%$48). The $10 increase in revenue (10%$100) less the $4.80 increase in variable costs means a $5.20 increase in ebitda. So new ebitda is $20 + $5.20 = $25.20 ?
Is this the right way to approach this question?
Yep!
What's an F/V lmao
Believe it is fixed and variable
Assuming the 10% increase in volume equate to 10% in sales
that’s exactly what that means, yes.
Not really advanced, just a bit tough, especially in the moment:
Firm has an EV/EBITDA multiple of 10x
Leverage Multiple (ND/EBITDA, for the purposes of this question): 4x
Equity is 300.
What is the Enterprise Value of the Firm?
500
Yup, again, not the most difficult but it's a bit different than the standard guide questions and tests whether you understand the cap structure.
I'll give you one more similar one:
Firm currently is trading at a multiple of 5x EV/EBITDA with 300 in Senior Debt and 400 in Junior Debt
EBITDA of 100
What is the Junior Debt trading at?
Would you mind explaining this question?
Yeah not hard but when you are under pressure I can see why you would get nervous.
The key to this question is to immediately recognize that the equity/EBITDA multiple is the difference between 10x and 4x, which is 6x. You also would need to assume that the company has 0 cash, so you can simply add debt to equity to arrive at EV.
The prompt says net debt. No need to assume a 0 cash balance.
How many bricks are on your campus? Questions like these that are generally seen in consulting interviews really threw me off
and make me feel stupid
Got this from centerview. Jumped the gun on this one a little bit...
what’s the answer?
I once calculated that for the number of barbers needed in my town of 100,000 people, each barber cutting hair for 8 hours a day, with everyone getting their hair cut 6 times per year, and a few other metrics, that we would need ~30,000 barbers.
Yup, I said that 1 in 3 people were barbers. So I’d estimate around 16 trillion bricks probably
Update: there is no legitimate answer. The point is that you're supposed to calculate it out loud. They want to see that you can do either a "top-down" or a "bottoms-up" approach to a problem, and they want to see how you think. Get a sense of humor, rather than throwing MS at me.
Walk me through your resume.
This, even if meant as a joke.
I don't think I've ever dinged someone for getting a technical wrong (general financial incompetence is another story). But for 90% of people who are eventually dinged, I know within the first 2 minutes based on how they tell their story.
How much do you care about behaviorals during interview and is technical ability more important?
It had a little humor implied, largely because i knew that wasn't what was being asked, but yeah, for many it's a difficult question. Also "why IB?" You can know the 3 statements inside and out, accretion/dilution, LBO, etc. But if you can't sell the "why you" and "why this" it's a non-starter. And aside from memorizing generic answers, that can be exceedingly more difficult than the technicals.
Hey - bit of a serious question to you here (if you have time). What do people look for when asking this? I generally give a run through of my education, my roles, and a bit of the deals I've done. Concise and c.1 minute - I've never gotten a negative reaction but not sure if there's room in these sort of Qs to tilt the odds in my favor.
The hardest I got was with Moelis:
Imagine you have 2 Companys that produce complementary products with market share A and market share B. Now imagin that the second company buys Company B in an all cash deal. The market share of company C is higher than that of B and A and C also produces a complementary product. The margins of company B and C are about 25% EBIT and that of A is about 20%. What will possibly happen in these new oligopolistic market regarding margins and would you suggest Company C to use all cash or rather an all stock deal
What answer would you recommend giving? Thanks in advance.
My answer (not 100%): Margins would increase because of the consolidation of market share with Company C, which means first-mover advantage is higher for C. Regarding cash vs. stock dilemma, it's up the acquirer. Totally depends on costs associated with each option, and the potential future actions of A (which could require cash-on-hand to counteract).
With a higher market share and margin I pursue a winner take all market and sell the deal based on my outer vision. Because my margins are good, I reckon I trade close to where target trades, perhaps even above given my higher market share, so an all stock deal won't be as dilutive as you might think.
With a large increase in market share and a lower margin competitor, I offer an all stock deal and invest cash on balance sheet to invest more aggressively in growth. I also lower my prices and cut out A from the market given that my combined scale will likely give me a competitive advantage.
That's a CDO squared.
just say NorthernMutual made me do it
If you had to calculate / model the value of an power plant, how would you do that? How would you model the terminal value with a DCF?
Derive black-scholes equation from Ito's Lemma
Oh, I miss those math classes where the professor just blurted out: hey for those non-math kids don't worry about this you won't be tested on this in your take-home.
I fucking cringed because I was one of those math kids.
One of the best LBO-specific technicals I came across:
Company A has revenues of 100 with 0% growth and a 20% EBITDA margin. You acquired company A 3 years ago and will sell it after 5 years total holding period (2 years until exit). You are now offered two options:
1) One-time working capital improvement of 130 in year 4
2) Margin increase to 30% in year 4 and 5
This is all information you are given, however you need more data to answer the question, that you specifically have to ask for.
What's the exit multiple?
12x
More of brain teaser, but thought this was a good one, “what’s the P/E ratio of cash?”
dollar value / interest rate
dollar value/interst income-tax expense. Not sure if it's right
what's the reasoning behind it ?
Making sure that you understand the relationship between P/E ratio, EPS, and Earnings yield, or, Earnings Yield = EPS / Price = 1 / (P/E Ratio). Also seeing if you can apply those relationships in a non-typical stock example, and make assumptions to get to a reasonable answer. Helpful since, at a high level, the concept of earnings yield is useful for comparing the yield between different types of assets.
Technically speaking yes, but I think for the purposes of answering the question in the context of an interview, it’s probably not material enough to warrant the extra brain damage. If you did include, you’d just want to state your assumed tax rate and rationale for choosing.
Once had an interview at a top BB for a SA position. After walking the interviewer through LBO, comps, DCF etc, crushed it. Then she asked me to do 3/8 in my head (=0.375). I had no idea how to do a simple fraction in my head which I hadn't done since the third grade. Didn't get the offer.
Still don't know how to do that
I just break it into two. 3(1/8). 1/8 is 0.125. If you don’t know that by head, it’s also (1/4)/2. So it’s 30.125. which is 0.375. Unless you’re talking about the modeling part.
Why do you want to do banking?
Reason being, never have I ever had to lie so much in my life and keep track of the lies to make sure people didn’t realize I was doing banking to get into private equity
If liberal slayer is put in a room filled with 1,000 liberals, how many people will come out of the room?
Have been through a bunch of them in my interviewing experience. Adding a few (apart from the textbook Qs) for now 1. (Research/consulting business) Which 3 ratios would you employ to whittle down a list of 100 stocks to 10 to do a deeper dive to invest in? 2. When modelling a DCF, how do you account for the cyclical nature, for say, an Auto business? How will you figure out the stage of cycle to begin your projections with? 3. You've worked with due diligence advisors on the deals mentioned. As a buy side investor, how would the key focus areas /nuances differ when reviewing an internet business like Uber, to say, a mature tech services company?
how would you answer the third question?
would be interested in hearing your thoughts for the first 2 as well
bump
Don’t remember exact numbers. Part A) you have a company with $250mm EBITDA and $1000mm of debt. If non-distressed comps trade at 6x, how do we price this company’s debt? Part B) Now, let’s say the debt is tranched out into a $400mm line of credit (1st lien secured) and the rest is unsecured notes. How is each tranche priced?
bump
I gotta say the standard for technicals for summers has gotten so crazy high from just 7-10 years ago haha. Interviewers - please, if someone doesn't get something right don't be a dick about it and either walk them through the solution or just move on to the next one. No need to wonder out loud why someone didn't get it right or be condescending about it.
following
Not a hard question, but if you just memorize the guides this would be a throw-off:
WACC is cost of equity and cost of debt, so if we are trying estimate a company's cost of equity that has business operations in Nigeria, Saudi Arabia, and Dubai, how will you calculate it and why would you use those calculations?
If you understand cost of equity then this shouldn't be too hard of a problem.
So cost of equity = risk free rate + Beta * Equity Risk Premium
The risk free rate is going to be different in each country, and it's going to be higher than the rate in the US because there is more risk that the country defaults on its debt (also political risks). Get the risk free rate by adding a premium on top of the US risk free rate (think this is called default spread). Also, the equity risk premium is going to be higher in these countries. Get the beta for the company and solve for the cost of equity in each country. Finally, calculate the blended cost of equity by weighting each cost of equity by how much of the company's operations are conducted in each country.
How'd I do boss.
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