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.

Comments (47)

Jan 28, 2013

Aren't these a little much for analyst hiring?

I mean, they aren't very difficult but most candidates, i feel, would get these wrong.

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

Jan 28, 2013
Will Hunting:

Aren't these a little much for analyst hiring?

I mean, they aren't very difficult but most candidates, i feel, would get these wrong.

WSO's COO (Chief Operating Orangutan) | My Linkedin

Jan 28, 2013

I think these questions are pretty reasonable... they just require a solid understanding of the basics of finance and a little thinking outside the box.

jacobzhang.net - my thoughts and portfolio.

"Money doesn't talk, it swears." - Bob Dylan

See my other WSO Blog posts

Best Response
Jan 28, 2013

Yea, these are definitely not accurate- seem too tough/have never been asked these.

top 5 questions that will show you the door

1. 3 ways to value a company
2. walk through a DCF
3. How does depreciation up 10 flow through 3 financial statements
4. What do we usually use as the discount rate (and other dcf follow up questions)
5. What are common multiples to use for comps

More reasonable

    • 3
Jan 29, 2013
Black Jack:

Yea, these are definitely not accurate- seem too tough/have never been asked these.

top 5 questions that will show you the door

1. 3 ways to value a company
2. walk through a DCF
3. How does depreciation up 10 flow through 3 financial statements
4. What do we usually use as the discount rate (and other dcf follow up questions)
5. What are common multiples to use for comps

More reasonable

Thank God, lol

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Jan 28, 2013

I am confused on the first one (really need to sharpen my techs, unsurprisingly); how do you derive to P/E (price per share/ earnings) of a private company with no "shares" outstanding?

How do shares even come in to play in a private company is my main point I guess. It seems to me for a private company you'd just look at equity value in much simpler terms since there are no options, shares etc.

Am I as stupid as I feel?

Jan 28, 2013
streetwannabe:

I am confused on the first one (really need to sharpen my techs, unsurprisingly); how do you derive to P/E (price per share/ earnings) of a private company with no "shares" outstanding?

How do shares even come in to play in a private company is my main point I guess. It seems to me for a private company you'd just look at equity value in much simpler terms since there are no options, shares etc.

Am I as stupid as I feel?

P/E is given to you on a comps sheet usually. OP didn't say that there were no 'shares' just that you weren't given information.

Jan 28, 2013
streetwannabe:

I am confused on the first one (really need to sharpen my techs, unsurprisingly); how do you derive to P/E (price per share/ earnings) of a private company with no "shares" outstanding?

How do shares even come in to play in a private company is my main point I guess. It seems to me for a private company you'd just look at equity value in much simpler terms since there are no options, shares etc.

Am I as stupid as I feel?

P/E = Price/EPS = Equity Value/Net Income

Jan 28, 2013

I understand it on the terms crawl b4 brawl and kidflash described, however since when do private companies have shares? That is the only part I cannot wrap my head around. Maybe I am just being narrow minded in thinking of the traditional term for shares as applies to publicly traded companies?

Jan 28, 2013
streetwannabe:

I understand it on the terms crawl b4 brawl and kidflash described, however since when do private companies have shares? That is the only part I cannot wrap my head around. Maybe I am just being narrow minded in thinking of the traditional term for shares as applies to publicly traded companies?

Private companies still have shares. That's why there's shit like equity capitalization tables. http://macabacus.com/venture-capital/returns just to give you an illustration

Feb 4, 2013
streetwannabe:

I understand it on the terms crawl b4 brawl and kidflash described, however since when do private companies have shares? That is the only part I cannot wrap my head around. Maybe I am just being narrow minded in thinking of the traditional term for shares as applies to publicly traded companies?

It doesn't matter how many shares they have or even if they have shares or however they split up ownership. You can view the company as just 1 share, and if you have the earnings of the whole company (net income) then you simply multiply the net income by the P/E ratio and that is essentially your price for the whole company (market cap). Price (of whole company)/Earnings (of whole company) = P/E ratio.

Jan 29, 2013

On #2, how can you calculate WACC from a balance sheet when WACC uses the *market* values of debt and equity? Red flag...

Jan 29, 2013

How do you know the company debt load...

% debt is (D/D+E).... D is unknown.

If you gave an elongated technical answer that is fine, the question is basically "how else do you get a discount rate if you can't be certain the company has debt". You can't get a market value of a firms debt if you don't know if the company has debt. Hope that clears it up.

Finally glad someone got that net income times p/e is equity value... That was startling.

On a more ridiculous note, even by stating that "the closest comps trade at 5x ev/sales and 10x EV/ebitda"... They usually still don't get it, it has been a very good indicator of "processing" versus "can write down multiply". Glad this question isn't asked much has been a great filter.

Jan 29, 2013
WallStreetPlayboys:

How do you know the company debt load...

% debt is (D/D+E).... D is unknown.

If you gave an elongated technical answer that is fine, the question is basically "how else do you get a discount rate if you can't be certain the company has debt". You can't get a market value of a firms debt if you don't know if the company has debt. Hope that clears it up.

Finally glad someone got that net income times p/e is equity value... That was startling.

On a more ridiculous note, even by stating that "the closest comps trade at 5x ev/sales and 10x EV/ebitda"... They usually still don't get it, it has been a very good indicator of "processing" versus "can write down multiply". Glad this question isn't asked much has been a great filter.

There are various ways to get a discout rate. But you can't calculate WACC from a balance sheet because the book values of debt and equity differ from the market values (the latter being used to calculate WACC). And you can't use the CAPM with just a CF statement because you don't have beta, the risk free rate, or the market premium. And I wouldn't arbitrarily estimate a discount rate because it would vary dramatically among industries and company lifecycles (I might estimate it as long run GDP+inflation if it were given that this were a company in its mature phase).

By definition you need market data because the discount rate is supposed to be the opportunity cost of capital. So you need information about other market opportunities.

Jan 29, 2013

I understand all of your points. Your elongated answer is just fine.

Basically once walking through a dcf and then talking about calculating rates, will run into "wacc/capm/high level what to use as a discount" type questions.

Same concept though, if you have no idea if the company has debt, you shouldn't spit out wacc as the answer. Which is the common immediate answer as people just memorize an interview guide and spit it out as a response.

Jan 29, 2013

This has been quite hilarious and enlightening.

Basically just make minor changes to interview guides people memorize and you can filter out 90% of the candidates.

EV/Sales * Sales = EV...

Other discount rate besides WACC...

X*1.1 is not as strong as x*.9

Pitchbook = can google and find old ones on the Internet

Only reason the 4th one is used is because everyone says "cash flow statement because cash is king" so then simply say it doesn't have cash flow and people spin wheels...

Maybe expectations are too high.

Jan 29, 2013
WallStreetPlayboys:

Pitchbook = can google and find old ones on the Internet

Where??? I can't seem to find a halfway decent one anywhere!

Jan 29, 2013

WallStreetPlayboys, do you work at a BB, MM or boutique? i remember that MM and boutiques were much more technical during interviews. never had to answer questions like those in my BB first rounds or superdays

Jan 29, 2013

Nice troll attempt... Right?

Jan 29, 2013

i doubt they ask these.

Jan 29, 2013

http://www.oracle.com/us/corporate/features/autono...

This is a pitchbook that, rather famously, was leaked. And it didn't really go well. But this is what they look like.

Jan 29, 2013
cityknight:

http://www.oracle.com/us/corporate/features/autono...

This is a pitchbook that, rather famously, was leaked. And it didn't really go well. But this is what they look like.

I did see that one, but I understood it to be woefully lacking. Especially since my understanding is that they tend to be much longer (on the order of 50 pages or so).

Jan 29, 2013

Three things learned
1. I'm apparently that one guy no one wants to interview with at this point.
2. This explains why we have a high A-A promote
3. BB and will PM you details later...

I guess everyone just gets the same old "depreciation, walk me through 3 statements and dcf" nowadays? I'm sticking with my guns though EV/sales * sales = EV is not hard to figure out on paper if I give you the comp sheet...

Will post a pitchbook from google today... Still think it is a troll though.

Jan 29, 2013

there are a couple PBs that you can find on scribd

also in my experience MM's tend to be less technical (very different from E-boutiques...)

Jan 29, 2013

^ book value = value listed when put on the BS at first
market value = how much the security trades for in the public arena

you can find equity value by taking # shares outstanding * share count (aka the market cap)

market value of debt is usually either public via data gathering sites (if they have bonds outstanding) or you can also use the book value b/c market value tends to stay pretty close to it.

Jan 29, 2013

Hilarious conversation today. The MD's in the office laughed when stating the "EBITDA/Sales * Sales" was difficult. However bull-pin believes I was the worst technical interview they had. Live and learn. Still going to ask the EV/Sales * Sales question though if you can't cancel out numbers sure don't want to explain fractions to you in the future.

Finally, seriously don't worry about the "Market value of debt" and "Market value of equity" distinction too much. Banking is "rough work" and if you use (D/D+E) from a balance sheet as a "proxy" in an interview people will get it. If you give a highly technical answer you're going to get grilled more, kind of like if you say you know "accounting very well" you're going to be asked harder questions. No reason to make life harder on yourself.

Jan 29, 2013
WallStreetPlayboys:

Hilarious conversation today. The MD's in the office laughed when stating the "EBITDA/Sales * Sales" was difficult. However bull-pin believes I was the worst technical interview they had. Live and learn. Still going to ask the EV/Sales * Sales question though if you can't cancel out numbers sure don't want to explain fractions to you in the future.

Finally, seriously don't worry about the "Market value of debt" and "Market value of equity" distinction too much. Banking is "rough work" and if you use (D/D+E) from a balance sheet as a "proxy" in an interview people will get it. If you give a highly technical answer you're going to get grilled more, kind of like if you say you know "accounting very well" you're going to be asked harder questions. No reason to make life harder on yourself.

What is the EV/Sales*Sales question? Do you just ask what does EV over Sales times Sales equal?

Jan 29, 2013

I hand the candidate a comps sheet.

Then say "The comps are trading at 2 times Sales (or whatever)" What is the Enterprise value of my fake company if it has $100M in Sales... This is just an example the actual question used is a variation of the first one.

All you have to do is realize this...

Enterprise Value / Sales = 2... You have the sales number

Sales ($100M) * 2 (EV/Sales) = $200.

Same thing with P/E times Net Income = Market Cap.

Jan 29, 2013

Anyone other than OP who saw these questions before? Sounds like a dick interviewer you'd not want to be in same group with.

Jan 30, 2013
abacab:

Anyone other than OP who saw these questions before? Sounds like a dick interviewer you'd not want to be in same group with.

Everything about OP screams douche, particularly the fact that these questions suck not because they are hard but because they are poorly worded/convoluted and don't really test financial competence. Oh and his username. And his icon. And his condescending tone.

Behind their computer screen everyone is a finance savant.

Jan 30, 2013

LOL i had about 15 first round interviews this past FT recruitment session and landed a top/elite MM firm...and i can assure you the questions he asked above did not come up once

had interviews with mid tier BBs like BAML, Wells, Citi, MMs like Piper, Jefferies, Oppenheimer, HLHZ, Guggenheim, HW, Imperial Capital, Duff & Phelps etc and boutiques like Sagent, Lazard etc

then again, spending 5 min reading these doesnt hurt either for shits and giggles of what the students face would look like lmaoo. I would love to ask a kid the P/E x Net Income question one day hahah, good call OP.

Jan 30, 2013
WallStreetPlayboys:

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.

This answer is simply wrong. You can't just plug your cost of equity in as a discount rate (also, where are you getting the info for a CAPM with just a CF statement?), and pulling 7-10% out of thin air is likewise BS.

The answer is that you can't come up with a discount rate with just the cash flow statement. You have no idea of the capital structure or financial risk of the company and thus can't extrapolate anything from interest payments.

    • 1
Jan 30, 2013
duffmt6:
WallStreetPlayboys:

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.

This answer is simply wrong. You can't just plug your cost of equity in as a discount rate (also, where are you getting the info for a CAPM with just a CF statement?), and pulling 7-10% out of thin air is likewise BS.

The answer is that you can't come up with a discount rate with just the cash flow statement. You have no idea of the capital structure or financial risk of the company and thus can't extrapolate anything from interest payments.

What do you mean by "thus can't extrapolate anything from interest payments"? do you mean you cant find out the cost of debt?

Jan 30, 2013
ddp34:
duffmt6:
WallStreetPlayboys:

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.

This answer is simply wrong. You can't just plug your cost of equity in as a discount rate (also, where are you getting the info for a CAPM with just a CF statement?), and pulling 7-10% out of thin air is likewise BS.

The answer is that you can't come up with a discount rate with just the cash flow statement. You have no idea of the capital structure or financial risk of the company and thus can't extrapolate anything from interest payments.

What do you mean by "thus can't extrapolate anything from interest payments"? do you mean you cant find out the cost of debt?

Exactly. You can't back into your debt load by taking your interest payments and dividing by an interest rate you deem appropriate because you could be wildly off on what is "appropriate" without knowledge of the industry, debt structure, etc.

Jan 30, 2013

There is no condescending tone at all in the posts. You are right in that you can't back into interest payments etc.

The questions are much more informal in nature and are usually done in a conversation which is how an interview is really run.

All the question is really asking is "what else can you use besides wacc".

This is not a "what are the most common questions post" those are all over the Internet and instead was provided as how questions can be "spun". But feel free to learn finance in any way you wish.

Being a finance savant on the Internet is the least of my concerns. The purpose is to slowly load all of the possible interview questions for free on the Internet making it possible to help anyone get into finance. Not sure how that makes it a d-bag move.

It is not like the questions are asked and then no words are exchanged. If a person cannot write on a piece of paper "shares*price" = market cap and "eps*shares" is net income then that's a bad sign. The goal is to see if the guy can think or not.

Finance success in general is about quickly getting good answers on the fly, no real banker cares if a comp is trading at 7.7x or 7.8x p/e, the world is much more "back envelope quick and dirty".

Jan 30, 2013
WallStreetPlayboys:

There is no condescending tone at all in the posts. You are right in that you can't back into interest payments etc.

The questions are much more informal in nature and are usually done in a conversation which is how an interview is really run.

All the question is really asking is "what else can you use besides wacc".

This is not a "what are the most common questions post" those are all over the Internet and instead was provided as how questions can be "spun". But feel free to learn finance in any way you wish.

Being a finance savant on the Internet is the least of my concerns. The purpose is to slowly load all of the possible interview questions for free on the Internet making it possible to help anyone get into finance. Not sure how that makes it a d-bag move.

You said this:

"This has been quite hilarious and enlightening.

Basically just make minor changes to interview guides people memorize and you can filter out 90% of the candidates."

Sounds condescending to me, especially when you are confusing people with some questions that are only borderline legit.

I agree with you on the informal nature of an interview though. Technicals are going to vary based on the experience and abilities of the candidate, which can generally only be gauged in the course of an interview. Generally deeper thought technical questions will be given as a candidate displays a mastery of the basics (dep'n question, walk me through a DCF, etc.). Personally, I would just ask "What else can you use besides WACC?" as a follow up to walk me through a DCF (and assuming the candidate nailed the answer). Likewise, I'll usually only give hypothetical questions as a follow up to a basic competency question or to test a very general concept.

Jan 30, 2013

That comment was meant to be tongue in cheek.

If more helpful I can edit and explain how these questions come up.

I don't like asking "what is another way besides WACC" because people just memorize capm.

Basically my point is it seems people just memorize nowadays and do the bare minimum to get the offer. So the above is how I'll purposely "tweak" the interview to make sure we don't hire those types of candidates.

It seems that the only one that is catching heat is the wacc one. I purposely ask number three because I know people just picked up a guide and interview saying cash is king. The changes to the questions are meant to see if the guy thinks. This is a MAJOR issue in analyst/associate hiring. They just process stuff and spit out numbers, which makes it incredibly hard to move up the ranks.

Hope that all helps.

Feb 4, 2013
WallStreetPlayboys:

That comment was meant to be tongue in cheek.

If more helpful I can edit and explain how these questions come up.

I don't like asking "what is another way besides WACC" because people just memorize capm.

Basically my point is it seems people just memorize nowadays and do the bare minimum to get the offer. So the above is how I'll purposely "tweak" the interview to make sure we don't hire those types of candidates.

It seems that the only one that is catching heat is the wacc one. I purposely ask number three because I know people just picked up a guide and interview saying cash is king. The changes to the questions are meant to see if the guy thinks. This is a MAJOR issue in analyst/associate hiring. They just process stuff and spit out numbers, which makes it incredibly hard to move up the ranks.

Hope that all helps.

Jan 30, 2013

Dude is just trying to attract attention to his interview prep website.

Jan 30, 2013

Do not have an interview prep website and no interview guide (that costs money) will ever be posted. Happy to answer for free though.

The level of cynicism in 20 year old men seems quite high nowadays, so providing answers. For free.

Jan 30, 2013

I haven't interviewed with BB's (mostly elite boutiques and MM), but from talking to my friends, my elite boutique interviews were a lot more along the lines of OP's questions, while BB's were pretty behavioral.

Jan 30, 2013

The irony is by asking harder questions I'm implicitly implying hard questions are for banks or groups that try to promote within.

If you can pick up a smart guy who thinks he's going to be a rock star hire. The funny thing is the non-target we hired got the first question correct as you can infer from the two posts.

Hard questions = higher chances of promotion. Wanting you to SUCCEED in Wall Street. Don't like hiring processing machines all the time.

Feb 4, 2013

these are some serious hardo questions bro

Feb 4, 2013
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Oct 30, 2013
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