Top 5 Basic Technical Questions That Will Show You the Door

Overall when it comes to analyst hiring there are only a few technical questions that you cannot get wrong, where you'll be shown the door immediately. Over the past several years here are the top five basic questions people get wrong (from experience if there is a glaring omission please add to comments). In the near future an intermediate topic as well as associate questions will also be posted but these are important as you will be jobless.

Theme: "Did you just buy an interview guide and memorize common questions?"

1) If I give you a private company income statement only with no share information and a single comp sheet, please tell me how you would value the entity? (usually asked after valuation method question)

"Given nothing but a comp sheet and income statement numbers I would use EV/Sales, EV/EBITDA and other EV based metrics in the comp sheet to triangulate a range from top to bottom for the Enterprise Value. In addition I would use a P/E metric as well to calculate an equity value off of Net Income. Once a range is obtained I would then look at the comparables and find margin or revenue growth rates to determine if the Company deserves a higher or lower valuation range based on the comparables presented to me."

If you don't realize P/E * Net Income = Market Cap you're in trouble. Sometimes the question is phrased as "If you know LTM Net Income for a private company and you have a comp sheet what is the approximate Market Cap?" Also if you don't know why or how to use a comp sheet when you already know what they are for, we know you're just processing information and spitting out answers.

2) If I give you a cash flow statement and no balance sheet how would you arrive at a discount rate?

"There is no balance sheet information so unfortunately the WACC method cannot be used as a discount rate. In that case I would use the CAPM to come up with the cost of equity and apply this as a discount rate. In addition, I would also read the cash flow statement and see if the company has debt by checking for financings or debt payments. Finally, if we cannot use CAPM then it would be a good idea to approximate a discount rate by assuming long-term returns of roughly 7-10%."

If you don't realize that without a balance sheet you can't use WACC that is a red flag. Also when asked about discount rates in this context it is smart to imply you understand the underlying concept of applying a rate based on similar returns, in the above conversation you're talking about stocks/equity.

3). We have a private company that has not generated positive EBIT numbers in its lifespan. You can receive a historical financial statement to value the Company which do you choose?

"Given that the Company is not generating money and is likely cash flow negative I would choose the income statement as it would allow me to track sales growth and sequential or year over year changes to the margin profile. Above the EBIT line metrics could be used to value the company."

Another "are you thinking" question, many people always say cash flow but this does not work logically as it is next to impossible to have positive free cash flow on long-term negative EBIT companies.

4) Given the wealth of information on the internet, still calling this one a technical question "What is in a pitchbook"

"A pitchbook can be small to large. For small meetings where the Company is meeting the bank for the first time to larger pitchbooks where you are attempting to raise capital or pitch a transaction. In a larger pitch for an M&A transaction for example it would be organized as follows 1) Overview of firm with credentials/tombstones 2) Industry analysis [Market size] explaining why the firm is going to grow in the future, 3) Dive into company specific information of firm you want to sell/buy 4) Valuation accretion dilution/merger combined model to explain why transaction would work 5) Comps/precedents and other simple valuations in the back [note: biographies of your team may show up here as well]."

5) This one is simple and really is a rapid fire question. "A stock goes public and every trading day the stock appreciates 10% and then declines by 10%, is the price appreciating or depreciating?

"Depreciating."

The reason why this is one is asked and asked quickly, is a number of candidates like to give "it depends" answers and this is simply not acceptable when you can take a piece of paper out and see that it is depreciating within seconds.

TL;DR. There are only a few questions you really can't miss which are just variations on the same ~20 concepts. Don't worry, all five of these will be asked in different ways so there is no concern about memorization. You shouldn't be memorizing.