Notes for Technical Interview Questions

During a recent round of interviews with several banks, headhunters sent across a number of potential technical questions that they said I should be very comfortable with. However, through all of my interviews I was never actually asked any technical questions (although I did do a 3 hour modelling exam for one bank). Perhaps this is because I was coming from a couple of years already in IB and the interviewers assumed I knew what I was doing. Still, I took the time to put my thoughts in order. If any of you would like a refresher, you can find some of my notes below.

Just a small point to start with – Valuation is often an art and not an exact science. There are many different ways to approach the numbers, often depending on what you (and your client) want the numbers to show.

It is critical, however, that you can stand in front of a group of senior Japanese executives, for example, and confidently explain to them why your numbers stack up the particular way they do. Similarly, if you are preparing for an interview by simply memorizing the below formulas, but you cannot smoothly explain the function of each piece of each formula, you will not (or at least you should not) proceed to the next round.

How would you value a company?

- Depends on the industry and situation of the company

- We usually use a combination of tools, namely:

o Discounting the future earnings to the present value, which would generally be in the form of a DCFF, DCFE or DDM, depending on the company's industry and individual situation

o Using a multiple of earnings like EV/EBITDA or P/E, or a multiple of the company's assets like oil reserves or book value, depending on the industry and situation

How do you do a DCFF?

- First model out the future earnings of the company, ideally with the help of management estimates, broker estimates, maybe some third party consultant figures, and your own best judgements

- After you get the forecast, you find the Free Cash Flow to Firm in each year:
- Tax on EBIT
- Capex
+ Depreciation + Amortization
- Increase in WC assets
+ Increase in WC liabilities
+ Any other cash or non-cash adjustments that are company specific

- For the terminal value, at the end of the forecast period, you would use either:

(1) The Gordon Growth Model: (Final Year FCFF * (1 + Perpetual Growth Rate) ) / (WACC - Perpetual Growth Rate)

(2) Exit Multiple, which could be based on the entry multiple, or the long term average multiple for the industry, depending on the situation

- Then you would discount the FCFFs to the present value
o For this purpose, you would combine the Terminal Value with the annual free cash flow in the final forecast year
o FCFF in a particular year / (1+ WACC) ^ number of years in the future that particular cash flow occurs

- This would give you the Enterprise Value

o To get the equity value, you would:
+ Enterprise Value
- Minority Interests
- Net Debt
- Unfunded Pension Liabilities
- Preferred Shares
+ Associates / JVs
= equity value

How do you derive FCFE from FCFF?

o I usually start from EBIT when I am doing a DCFF, but I usually start from Net Income when I do a DCFE
+ Net Income
+ Depreciation & Amortization
- Increase in WC assets
+ Increase in WC liabilities
+ Increase in Deferred Tax
- Capex
- Interest on cash (net of tax)
+ Drawdown/(Repayment) of debt
+ Any other cash or non-cash adjustments that are company specific

o If you for whatever reason had to start with FCFF:
+ Tax on EBIT
- Actual tax paid
- Interest on cash (net of tax)
- Interest on debt
+ Drawdown/(Repayment) of debt

What is the discount rate used?

- The discount rate reflects the cost of capital that correlates to the cash flows you are discounting

- If you are doing a DCFF, then you would use a WACC, since it accounts for both Debt and Equity capital and the cash flows you are discounting are "pre-financing" and do not already include interest expense

- If you are doing a DCFE or a DDM, then you would use just the Cost of Equity since the cost of debt has already been taken into account in the cash flows that you are discounting

How do you get WACC? What is the tax rate used - marginal or effective?

+ Cost of Debt:

o Debt / (Debt + Equity)
- Should generally be the target capital structure, however we often use a rolling WACC, which changes with the capital structure of each forecast year

o * (Cost of Debt)
- Usually just the interest expense over the principal outstanding)

o * (1 – tax rate)
- This should generally be the marginal tax rate. We usually refer to a KPMG guide for this. However, for some companies that operate in a wide variety of tax jurisdictions, it would be incorrect to just use the marginal tax rate in Singapore, for example, for their global operations, in which case the effective tax rate could sometimes serve as a proxy. Similarly, if for some reason the company expects to continue to enjoy some kind of tax breaks, such as those enjoyed by some foreign invested, pure-export companies in China, then we might be better off using an effective tax rate. Usually we would just use the marginal rate though

+ Cost of Equity

o Equity / (Debt + Equity)
- Should generally be the target capital structure, however we often use a rolling WACC, which changes with the capital structure of each forecast year

o * Cost of Equity
- Usually based on CAPM, although some clients have a specific cost of equity that they like to use

What is the cost of debt and cost of equity used in calculation of WACC? How would you find them?

- Cost of Debt

o We usually take the effective interest being paid on the book value of the principal outstanding

o This should generally reflect the true cost of all of the company's debt, however if the company is in a distressed situation, you may be better to revalue the debt.

- Cost of Equity

o Use the CAPM formula:
- Risk Free Rate + Beta * (Market Return – Risk Free Rate)

o Risk Free Rate
- Generally we would use the long term local currency government bonds if, for example a Singaporean company was going to invest in a domestic project in Indonesia
- If you are acquiring a diversified international company like an international trading company based in Singapore, you could use the Singapore govt bonds.

o Beta
- If this is for a domestic Indonesian project, you would ideally look at the betas of comparable listed companies in Jakarta vs the Jakarta index. You would unlever the betas, generally take the average and then relever the beta based on the project capital structure
- If this is for an acquisition of an international company based in Singapore, then you would do the same with comparable companies listed on the SGX
- (if you wanted to use a rolling cost of equity, you would relever each year based on the changing projected capital structure)

o Market Return
- Similarly with the Risk Free Rate, if this is a Singaporean company investing in a domestic Indonesian project, you would use the market return on the Jakarta stock exchange
- If you are looking at a Singaporean company, you would look at the market return on the SGX
- Damodaran has a list of market returns for different countries, but we would also sometimes ask our country team for their general practice, as they are supposed to have a deeper understanding of the local market
- If you are arriving at a result that you are not happy with, this market return provides a convenient adjustment mechanism, since it is a relatively soft figure

How do you get the terminal value and how would you get the main assumptions?

- Either:

(1) Gordon Growth Model:
o (Terminal Year Cash Flow * (1 + terminal growth) ) / (Discount Rate – terminal growth Rate)

- Terminal Year Cash Flow
o Would be either FCFF, FCFE, or Dividend depending on what valuation you are doing

- terminal growth
o Usually a very conservative assumption, a bit higher than forecasted long term nominal economic growth rate

- Discount Rate
o Would be either WACC or Cost of Equity depending on valuation method

(2) Terminal multiple
o EV/EBITDA, P/E or other relevant multiple

- Could be based on the entry multiple, or the long term average multiple for the industry, depending on the situation

- This is sometimes preferable because the GGM is so sensitive to unknown assumptions, while an exit multiple is more understandable

Case study of what are the modelling steps for modelling a merger. How do you get goodwill?

- Make forecasts for each individual company

- Balance Sheet

o Determine:
- The purchase price of the acquisition
- Funding for the acquisition
- Transaction costs (such as advisory fees)

o Then make a sources and uses (this is helpful to determine how much debt would have to be raised)
- Sources
• Existing cash
• New Debt
• New Equity
- Uses
• Acquisition price (May include buying out stock options)
• May include paying back target company debt holders, although not always
• Transactions costs (like advisory fees)

o Determine Good Will
+ Acquisition cost
– Net asset value of target, which usually equals the shareholder equity value excluding minority interests
= Good Will

o Adjust parent balance sheet:
- If the parent is issuing new debt or equity, you would put those transactions through (effects cash as well as debt or equity)
- If the parent is paying cash, then the cash would come out of the parent's balance sheet (effects cash)
- If the parent is paying in new shares, then we'd reflect the increase in parent share capital (effects equity)
- Expense the transaction fees (effects cash and retained earnings)
- Add the Good Will from the transaction (effects Assets)

o Consolidate parent and target
- Remove all shareholders equity from target (but keep minority interests)
- Then consolidate adjusted parent with adjusted target

- Income Statement

o Add in any synergies (such as increased revenues, increased cost efficiencies) to parent and/or target
o Add any expenses related to the issuing of new debt
o Subtract any tax charges arising from any additional profit
o Something to note: While the parent company would not consolidate the retained earnings of the target at the time of acquisition, the parent company would generate new retained earnings on future net income of the target

Bring me through the main differences between transaction multiples and trading multiples

- Transaction multiples theoretically include a take-over premium
o However, in some industries, there is not a depth of comparable and recent transactions
o Furthermore, the financials for many private transactions are based on press reports and other unofficial non-transparent sources

- We generally rely more on trading multiples because the data is more accurate, more recent, and perhaps more commercially relevant for the target company valuation

- We would then generally add an overlay indication with a takeover premium of maybe 25% or so, but this is a sliding number based on the unique situation

- We would also do a rolling multiples over time, to determine whether current valuations are depressed and some shareholders may be expecting to exit at a multiple closer to 'the good times'

How do you get Enterprise Value - detailed to the minority interest, associates etc.

Well, if you are starting with equity value:
+ equity value
+ Net Debt
+ Preferred Equity (although it's not common in Asia)
+ Unfunded Pension Liabilities (although it's not common in Asia)
+ Minority Interests
– Associates/JVs
= Enterprise Value

How would you do a merger by way of issuance of shares? What is the difference between the issuance of shares and cash?

- Build a Sources and Uses
- Instead of using current cash and new debt as sources, you would use new equity as a source
- You would then determine at what value you would be issuing each new share (Maybe a slight discount to current share price)
- You could then determine how many new shares you would need to issue
- Break that into the par value and additional paid in capital
- This is of course going to dilute your current shareholders, but if the current shares are trading at a high valuation, shares could be a cheap currency to use
- Of course you would want to check how this whole process will affect the earnings per share for your current shareholders

How would you know if an acquisition is dilutive?

- If your current shareholders' earnings per share goes down after the transaction, this would be dilutive
- If your current shareholders' earnings per share goes up, then it would be Accretive

- It is best to look at the effects over a number of years, otherwise, this could be a bit short sighted
- For example, if a pharmaceutical company with a low P/E acquires a small company with a new miracle drug, but that new miracle drug may not be on the shelves yet, the transaction is probably going to be dilutive for the buyer's shareholders. However, this new miracle drug might prove to be very lucrative, especially when combined with the buyer's existing distribution network. So in the medium term, EPS might improve and investors, who are looking at future earnings, might even push up the stock price despite the transaction being immediately dilutive

How do you calculate beta?

- Plot the index in one column and the relevant stock price in the next column (this might be closing data for each week over the past 3 years, for example)
- In the next column, calculate the % change in the index each week, and in the next column, calculate the % change in the stock price each week
- You would then take (COVAR(column containing % changes of the stock price, column containing % changes of the index) / (VAR(column containing % changes of the index)
- You would then delever the beta to get a beta that you can relever in subsequent calculations

What is the difference between asset beta and equity beta?

- The asset beta, which I would usually call the unlevered beta is the risk of the asset, without the additional risk of any leverage that the asset has
- Because more leverage means more risk for the equity holder, when you calculate the beta of any stock, this beta naturally takes into account this leverage
- When you are trying to figure out a beta for your target company by looking at the betas of the comps, you would calculate each comp's levered (or equity) beta, then delever it
- You would then re-lever the beta based on the capital structure of your company

How would you get a beta for a company which is private?

- Come up with a list of comparable relevant companies
- Calculate the equity (or levered) betas for each of these companies, relative to the relevant index
- Delever each of the betas based on each company's capital structure
- You would then be able to calculate the average unlevered beta for the group
- You can then take that unlevered beta and reliever it based on your company's capital structure

Note to those who have followed some of my previous postings:

I was in IB for a couple of years. I then I took a year off to try to build a tech startup. I have now returned to IB.

I am planning to put together a thoughtful piece reflecting on this transition, however I will not be writing this until January or February in order to more clearly and holistically present the lessons learned.

In the meantime, feel free to comment on any of the technical points above.

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Comments (56)

Oct 7, 2013 - 10:19am

This is awesome. One mistake I caught...

You say: How do you get the terminal value and how would you get the main assumptions?
- Either:

(1) Gordon Growth Model:
o (Terminal Year Cash Flow * (1 + Terminal Growth) ) / (Discount Rate – Discount Rate)

It should be (Discount Rate - Terminal Growth)

Incredibly detailed though. Silver Banana from me sir.

“Success means having the courage, the determination, and the will to become the person you believe you were meant to be”
  • 2
Oct 7, 2013 - 10:30am

Thanks a lot @nontargetPSD92 - I have fixed that

Go East, Young Man
Oct 7, 2013 - 12:05pm


Thanks a lot @nontargetPSD92 - I have fixed that

Threw you a SB. One question I had is, because FCFE is supposed to capture the equity holder's claims on operations, would you include CFF (ie debt repayment/issuance?) from what i remember, M&I said don't include debt issuance/repayment when calculating FCFE.

Thanks for the detailed guide!

  • 1
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Oct 7, 2013 - 12:50pm

Great summary... nice refresher as well.

Progress is impossible without change...
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Best Response
Oct 8, 2013 - 7:04am

You would include all debt financing cash flows in the DCFE because this DCFE should show all of the cash flows in the company other than those that are theoretically for the equity holders - isolating the view of cash from the equity holders' perspective.

To take a $100m capex project as an example, if you have raised $90m in debt, the equity shareholders would theoretically have to pay the $10m of remaining costs. This $10m might be a new equity infusion, or it may simply be from the cash balance inside of the company, however it fundamentally reduces cash that the equity holders could theoretically use/enjoy. If you only raised $20m of debt, then the remaining $80m of value will have to come from equity holders.

Later on, when the $20m has to be paid back, that $20m will be diverted from (deducted from) the earnings that would otherwise go to the equity holders. The debt interest payments would also divert cash from the equity holders and towards other parties (debt holders).

One way to think about it is that a company would never hold cash on its balance sheet. It would dividend out all cash that happens to settle in the balance sheet (no dividend restrictions, or dividend distribution taxes, etc) and if the company was facing a cash shortage after taking into account all cash flows (including debt cash flows), then the equity holders would have to pay in more cash to fund the business. All that the DCFE cares about is this cash going in and out of the equity holders domain (regardless of whether or not the cash is realistically in the personal equity holder's own bank account).

Go East, Young Man
  • 5
Oct 11, 2013 - 3:12pm

Maybe I am misunderstanding your comment, however I think what you are thinking about is a graph that plots how the % movement in the index relates to the % movement in the stock price. You could then plot a regression line through those plotted points. However, of course you are not going to get a perfect match, so that R-sq is going to measure how well that regression line matches the plotted points.

A high R-sq is going to indicate that all of those dots are near the line, which would mean that if the market goes up 1%, then the stock is very likely to go up 1%. You would then (in you CAPM formula) take into account a lot of that market risk premium. If the market plays virtually no role in predicting the movement of the stock, then the R-sq (beta) is going to be low and this is going to drive down your cost of equity.

Go East, Young Man
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Oct 11, 2013 - 3:18pm


I think this could help :

= EBIT(1-t) + D&A - Capex - ΔNWC
= NI + D&A + Int(1-t) - Capex - ΔNWC
= EBITDA(1-t) + D&A*t - Capex - ΔNWC
= CFO + Int(1-t) - Capex

= NI + D&A - Capex - ΔNWC + Net borrowing
= FCFF - int(1-t) + Net borrowing
= CFO - Capex + Net borrowing

For those in levfin
Levered free cash flow (cash available for debt repayment)
= EBITDA - tax paid - cash interest - ΔNWC - cash financial items - cash exceptionals - capex - acquisitions

Oct 11, 2013 - 3:23pm

@CyrilN this is not the whole picture. You have to, for example, deduct interest income on your cash balance (net of cash) when you are doing a DCFE.

I suggest people just use my original example above.

Go East, Young Man
Oct 11, 2013 - 3:25pm

Of course it is a simplified version but it is enough for most internship interviews and doing this little summary greatly helped me for my interviews in levfin. It would not help for really technical interviews / case studies

Oct 11, 2013 - 3:29pm

Just a quick question:

when you say

+ Tax on EBIT
- Actual tax paid
- Gain on investments (net of tax)
- Interest on cash (net of tax)
- Interest on debt
+ Drawdown/(Repayment) of debt

What do you mean by gain on investments ? Is that capital gains on sale of fixed assets ? If yes, shouldn't it be already excluded from FCFF as it is non cash?

Thanks !

Oct 11, 2013 - 3:51pm

Maybe because it is 4am now in hong kong after quite a bit of wine, but I am having difficulty coming up with a holistic answer to this. I might have to reword that "+gain on investments" into "+ other unique cash/non cash adjustments" as it would depend on the nature of the item and how else it would have been accounted throughout the statements.

Go East, Young Man
  • 4
Oct 11, 2013 - 3:33pm

Yeah, I agree with you. If you are just going out for some basic low level interview, you are probably not going to come across such detail as this (unless the interviewer doesn't like you).

Although it is nice to know (especially for the monkeys here who are actually working in this industry) why you would need to deduct out that interest - otherwise you would effectively be lowering your cost of equity, or giving yourself free money. The assumption of this model is that you are taking that money and investing it elsewhere at a certain rate of equity return. That is what the cost of equity is really about - opportunity cost. If you are including interest on cash balance, then you are theoretically going out and investing the cash elsewhere, while also earning interest on the cash while it is still in the company.

Go East, Young Man
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Oct 12, 2013 - 11:28am

kidflash, yeah, I shut down Rickshaw and decided to return back to IB. One year of trying to get a start-up off the ground certainly sobers you up. I will write a reflective posting sometime in the next several months.

Go East, Young Man
Oct 12, 2013 - 1:41pm


kidflash, yeah, I shut down Rickshaw and decided to return back to IB. One year of trying to get a start-up off the ground certainly sobers you up. I will write a reflective posting sometime in the next several months.

Hey man, do you mind if I pm you some questionss about the Asian finance scene?
  • 1
Oct 12, 2013 - 10:18am

Can you explain why one would use the marginal tax rate over the effective tax rate when calculating WACC? When you use the WACC to discount FCFFs, wouldn't it make sense to use the effective tax rate because it is most representative of what a firm pays out in tax? Whereas using the marginal tax rate may not apply as much because if your marginal tax rate is 35% -- you may pay 35% on some of your earnings, but 25% at the lower brackets, etc.

Oct 15, 2013 - 11:33pm

@neanderthal that is a good question and I don't have a clear answer (if anyone else has a clear answer, please jump in)

Possible reasons why you might use the marginal tax rate:
- You sometimes (often) have no idea what the ongoing future tax payments may be and probably cannot predict the company's tax planning
- In the end, the company is probably going to have to catch up with some of it's tax obligations
- There is also a mathematical/theoretical reason which I have seen before, but I can't remember now (if someone knows this, please respond)

However, this is one of the things i feel least comfortable with. Even according to this Kellogg pdf (, "Tc is the firm's marginal tax bracket, but the effective tax rate is often used as estimate"

I think that one problem is that these formulas were developed in another age before the current environment of permanent tax dodging and the realities of a multitude of different tax regimes faced by an international business.

If you are a Hong Kong corporation, but operate anywhere and everywhere, you may be paying the Mainland Chinese tax rate on some of your cash flow (and you may actually hold PRC debt), US tax rate on some of your cash flow (and may have USA debt), German tax rate on some of your cash flow (and may have German debt), while funnelling some of your profits through a cayman entity which may augment your general tax position across different businesses.

If you were going to stick to the old way of academically putting together a DCFF, you might have to break each nation's business segment into an entirely different DCFF. This would be terrible.

So, I think you might have to decide on a case by case basis, looking at each firm's historic tax situation and making a judgement. If this is a Singapore coffee shop chain that only operates in Singapore, I'm probably going to use the Singapore marginal rate. Even if this coffee shop business might have paid a slightly lower rate last year, it's probably not going to be a permanent situation. If this is Starbucks, I might consider using the effective rate.

Go East, Young Man
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Oct 16, 2013 - 12:52am

Thanks for the input, it makes sense that you would want to use a tax rate that would be easily predicted over time since what they paid historically may not be permanent due to deferred tax implications, etc.

Oct 14, 2013 - 3:05pm

I think it's also very important to remain calm and pace yourself when answering technical questions. Some bankers may press on several components of the DCF, and it is very important to not get agitated or frazzled. Also, if you forget how to do a step or don't know the answer to a question, admit you don't know. Give an attempt to answer it, but state you don't know. Bankers appreciate the honesty more than the bs, and they'll know if you are bsing!

Oct 15, 2013 - 2:55pm

Great post!

Can anyone comment on the comprehensiveness of this post compared to the technical section of an IB Interview guide?

*Note:I'm wondering if I can forego purchasing a guide and use this post among others. I am not implying the authors post didn't meet the breadth of a guide.

"Not me. Im in my prime"

Oct 16, 2013 - 11:42pm

Had a question as well: is the FCFF just unlevered FCF and FCFE=levered FCF?
Also, I can't find too much info on DCFE, is this knowledge going to be asked in BB IB SA interviews, any links to info? I'm studying from the WSO now, appreciate the help!

Jun 6, 2018 - 12:27pm

Can someone please shed some light on why cash and cash equivalents are not in any of these enterprise or equity value calculations? I was always taught:
EV = Mkt value equity + Mkt value Debt + Mkt value Pref shares - Cash&Cash Equivalents

May 21, 2019 - 7:50pm

First of all thanks to @AsiaiBanker" for this great guide. Could sb please explain further how we should handle interest income and expenses, particularly on the FCFF->FCFE conversion? What I struggle with is:

1) You start with Net Income (which is supposed to include the net impact of interest income/expenses) and then you proceed with "- Interest on cash (net of tax)".

I read the "You have to, for example, deduct interest income on your cash balance (net of cash) when you are doing a DCFE." and "...otherwise you would effectively be lowering your cost of equity, or giving yourself free money."

But I do not get it..

2) In the second formula, starting from FCFF, again a) I do not understand why you subtract interest of cash (net of tax) and additionally, b) why the subtracted interest on debt is not net of tax. I expected sth like: FCFE=FCFF-(i exp (1-tax) + net borrowings; given that interest expenses are tax deductible.

Is it because of the additional separate "-actual tax paid" line? If so, why the words "net of tax" on the interest on cash but not on debt?

Could somebody guide me? Many thanks in advance!

A Dutchman in London

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Jul 7, 2019 - 4:25am
  1. This is because net income is a post-tax line item and reflects the tax-deductibility of interest payments. Hence, to remove the cash flow to debt holders, we have to minus interest expense and the corresponding tax-savings on the interest to reflect the cash flow to equity holders.

  2. I belive the taxes attributable to debt holders would be taken into consideration by the (+tax on EBIT - actual tax paid), leaving the taxes attributable to equity holders for FCFE calculation. That being said, "FCFE=FCFF- i exp (1-tax) + net borrowings" is logical too.

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