投行英文面试财务部分经典问题

1.Walk me through the 3 financial statements?∙The 3 financial statements are the Income Statement, the Balance Sheet and the Cash Flow Statement∙Income Statement gives the company’s revenue and expenses and goes down to Net Income, the final line of the statement∙The Balance sheet shows the company’s Assets (its resources such as cash, inventory and PP&E) as well as its Liabilities (such as Debt, Accounts Payable)and finally Shareholders Equity. A = L + OE∙The Cash Flow Statements begins with Net Income, adjusts for non-cash expenses and working capital changes and then lists cash flow from investing and financingactivities; at the end, it reports the company’s net change in cash2.How do the 3 statements link together?∙To tie the statements together, Net Income from the Income Statement flows into SE on the balance sheet, and into the top line of the cash flow statement ∙Changes to the balance sheet appear as working capital changes on the cash flow statement, and investing and financing activities affect balance sheet items such asPP&E, Debt and SE.∙The cash and SE items on the balance sheet acts as “plugs” with cash flowing in from the final line on the cash flow statement3.Where does depreciation appear on the Income Statement?∙It could be a separate line item, or it could be embedded in the COGS or Operating Expense – every company does it differently4.What happens when Depreciation goes up by $10 on the statements?∙Income Statement – Operating Income would decrease by $10 and assuming a 40% tax rate, Net Income would then decrease by $6∙Cash Flow Statement – The Net Income would in turn be reduced by $6, but the $10 depreciation is a non-cash expense that gets added back, thus overall cashflow from operations goes up by $4 (-$6 + $10 = +$4)∙Balance sheet – PP&E goes down by $10 on the Assets side because of the depreciation and Cash goes up by $4 from the changes in the cash flow statement ∙Overall the assets are down by $6, Net Income is down by $6 which implies that SE is down by $6. Both sides of the balance sheet foot out.5.If Depreciation is a non-cash expense, why does it affect cash balance?∙Depreciation is tax-deductible and since taxes are a cash expense, depreciation affects cash by reducing the amount of taxes the company pays6.What happens when Accrued Compensation goes up by $10?∙Assuming accrued compensation is now being recognized as an expense, Operating Expenses on the Income Statement goes up by $10, Pre-tax Incomefalls by $10 and Net Income Falls by $6 (assuming a 40% tax rate)∙On the Cash Flow Statement, Net Income decreases by $6, adding back Accrued Compensation will increase Cash Flow by $10, so overall Cash Flow fromOperation is up by $4 and the Net Change in Cash at the bottom is $4 ∙On the Balance Sheet, cash is up by $4 and so Assets are up by $4. On the Liabilities & OE side, Accrued Compensation is a Liability so Liabilities are upby $10 and RE are down by $6 due to the Net Income for a net change of $4.Both sides of the Balance Sheet balance out.7.What happens when Inventory goes up by $10 on the statements?∙Income statement – no changes∙Cash flow statement – inventory is an asset so it decreases your cash flow from operations. It goes down by $10 as does the net change in cash at the bottom ∙Balance sheet – Under assets, inventory is up by $10 but cash is down by $10, so the changes cancel each other out. Both sides of the balance sheet foot out.8.What is working capital? How is it used?∙Working capital = Current Assets – Current Liabilities∙If it’s positive, then it mean s a company can pay off its short-term liabilities with its short-term assets. If is often presented as a financial metric and its magnitudeand its +/- sign tells you whether or not the company is “sound”∙Bankers more commonly look at Operating Working Capital in models, which is defined as (Current Assets – Cash & Cash Equivalents) – (Current Liabilities –Debt)9.Why do we look at both Enterprise Value and Equity Value?∙Enterprise value represents the value of a company that is attributable to all investors while Equity value represents the portion available to shareholders(equity investors)∙We look at both because Equity value is the number the public-at-large sees, while Enterprise value represents its true value∙When looking at an acquisition of a company, you pay more attention to the Enterprise value because that’s how much an acquirer really “pays” and includesother mandatory debt repayment∙Enterprise Value = Equity Value + Debt + Preferred Stock + Minority Interest - Cash∙ A negative enterprise value would imply that the company has an extremely large cash balance or very low market capitalization such as companies on the brink ofbankruptcy or financial institutions with large cash balances on hand10.What is the difference between Equity Value then and Shareholders Equity?∙Equity Value is the market value while SE is the book value. Equity can never be negative since shares outstanding and share prices cannot be negative, but SEcould be any value.∙For healthy companies, the Equity Value usually far exceeds SE11.What are the three major valuation methods?∙Comparable Companies∙Precedent Transactions∙Discounted CF Analysis12.When would you not use DCF?∙You would not use a DCF if the company has unpredictable cash flows (tech or bio firm) or when debt and working capital serve a fundamentally different role(banks). For example, banks and financial institutions do not re-invest debt, astheir working capital is a huge part of their balance sheets.13.What are some other valuation methods?∙Liquidation valuationmon in bankruptcy scenariosii.Better to sell off assets separately or the entire company∙Replacement value∙LBO analysisi.Leveraged buyouted to see how much a private equity firm could pay (usually lower) based on a target IRR in the range of 20-25%iii.Set a floor on a possible valuation for a target company∙Sum of the partspany has completely different, unrelated divisions (GE)∙M&A premiums analysis∙Future share price analysis14.What are some common multiples used in valuation?∙EV / Revenue∙EV / EBIT∙EV / EBITDA∙P/E (share price / earnings per share)∙P/BV (share price / book value)15.How would you present these valuation methods to a company or investors?∙Usually use a football field chart where you show the valuation range implied by each methodology. You always show a range rather an one specific number 16.What criteria do you use to select Comparable Companies and Precedent Transactions?∙Industry classification∙Financial criteria (Revenue, EBITDA, etc)∙Geography∙For Precedent Transactions, you often limit the set based on date and only look at transactions within the past 1-2 years∙The most important factor is industry – that is always used to screen for companies/transactions, and the rest may or may not be used depending on howspecific you want to be17.How do you apply all three methodologies to actually get a value for the company?∙You take the median multiple of a set of companies or transactions and then multiply it by the relevant metric from the company you’re valuing18.What is the difference between EV/EBIT, EV/EBITDA and P/E multiplies?∙P/E depends on the company’s capital structure (banks, financial institutions)∙EV/EBIT and EV/EBITDA are capital structure-neutral∙EV/EBIT includes depreciation and amortization whereas EV/EBITDA excludes ∙EV/EBIT in industries where D&A is large and cap ex and fixed assets are important (manufacturing)∙EV/EBITDA in industries where fixed assets are less important and where D&A is comparatively smaller (internet companies)19.How do you value a private company?∙Use the same 3 methodologies as with public companies except the following:∙Apply a 10-15% discount to the public company comparable multiplies because private company is not as “liquid” as the public companies∙You can’t use a premiums analysis or future sha re price analysis because a private company does not have a share price∙Your valuation shows the Enterprise Value for the company as opposed to the implied per-share price as with publics∙DCF gets tricky because a private company doesn’t have a market capi talization or Beta –you would probably just estimate WACC based on the public comps’WACC rather than try to calculate it∙You discount the public company comparable multiplies but not the precedent transactions multiplies because public shares are liquid and must be accounted 20.How do you value banks and financial institutions differently from publics?∙Mostly the same except that you look at P/E and P/BV since banks have unique capital structures∙You may more attention to bank-specific metrics like NAV (Net Asset Value) and you might screen companies and precedent transactions based on those instead ∙Rather than DCF, you use a Dividend Discount Model (DDM) which is similar but is based on the present value of the company’s dividends rather than its FCF ∙Interes t is a critical component of the bank’s revenue and debt is part of its business model rather than just a way to finance acquisitions or expand the biz 21.Walk me through an IPO valuation?∙Unlike normal valuations, for an IPO valuation we only care about public company comparables∙After picking the comparables, we decide on the most relevant multiple to use and then estimate our company’s Enterprise Value based on that∙Once we have the Enterprise Value, we work backwards to get the Equity Value and subtract out the IPO proceeds because this is new cash∙Then we divide the total number of shares (old and newly created) to get its per-share price.22.How far back and forward do we usually go for public company comparable andprecedent transaction multiples?∙Usually look at the Trailing Twelve Months period for both sets, and then you look forward either 1 or 2 years∙Public company comparables - more likely to go backward more than 1 year and forward more than 2 years∙Precedent Transactions – odd to go forward more than 1 year because limited info 23.Walk me through DCF?∙DCF values a company based on the PV of its CFs and the PV of the Term Value ∙First you project out the company’s financials using assumptions for the revenue growth, expenses and working capital; then you get down to FCF for each year,which you sum up and discount to the NPV based on a discount rate WACC ∙Once you have the PV of the CFs, you determine the company’s terminal value using either the Multiples Methods or the Gordon Growth Model and then alsodiscount that back to its NPV using a discount rate WACC∙You add the two together to determine the Enterprise Value24.Walk me through how you get unlevered FCF in the projections?∙Take revenue from the income statement, subtract out COGS, subtract operating expenses to arrive at Operation Income (EBIT). Then multiply that by (1- taxrate), add back depreciation and other non-cash charges, subtract cap ex, subtractchange in working capital25.Is there an alternate way from the above?∙Take cash flow from operations, subtract cap ex which gets you to levered cash flow. To get unlevered cash flow, you need to add back tax-adjusted interestexpense and subtract tax-adjusted interest income26.Why do we use 5 to 10 years as the projections time frame?∙It’s about as fa r as you can reasonably predict into the future. Less than 5 years would be too short to be useful while over 10 years is too difficult to predict formost companies27.What do you use for the discount rate?∙Normally use WACC though you can use Cost of Equity depending on how you’ve set up the DCF28.How do you calculate WACC?∙Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred)∙For Cost of Equity, you can use the CAPM∙For others, you can use comparable companies / debt issuances and the interest rates and yields issued by similar companies to get estimates29.How do you calculate the Cost of Equity?∙Cost of Equity = Risk free rate + Beta * Equity Risk Premium∙Rf rate represents how much a 10-year or 20-year US treasury bond should yield ∙Beta is calculated based on the riskiness of comparable companies∙Equity Risk Premium is the % by which stocks are expected to outperform bonds;normally pull this from a publication called Ibbotson’s30.Is there an alternate way to calculate the Cost of Equity w/o CAPM?∙Alternate formula: Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends31.How do you get the Beta in the Cost of Equity calculation above?∙You look at the beta for each comparable company (usually from Bloomberg), unlever each one, take the median of the set and then lever it based on yourcompany’s capital structure. Then you use this levered beta in the Cost of Equitycalculation∙Unlevered Beta = Levered Beta / (1 + ((1-Tax Rate)*(D/E)))∙Levered Beta = Unlevered Beta * (1 + ((1 – Tax Rate)*(D/E)))32.Why do you have to un-lever and re-lever the Beta?∙Compare apples to apples analysis as the betas on Bloomberg will be levered to reflect the debt already assumed by those companies∙We want to evaluate how risky a company is regardless of their capital structure∙Then we need to re-lever it because we want Beta used in the cost of equity calculation to reflect the true risk of our company, taking into account its capitalstructure this time.33.How do you calculate the terminal value?∙You can apply an exit multiple to the company’s Year 5 or 10 EBITDA, EBIT or FCF (Multiples Method)∙Or you can use the Gordon Growth Model to estimate its value based on its growth rate opportunity. Terminal Value = Year 5 FCF * (1 + Growth Rate) /(Discount Rate – Growth Rate)34.What’s an appropriate growth rate to use when calculating the terminal value?∙Long-term GDP growth rate∙Rate of Inflation∙In mature economies, long-term growth rates over 5% would be quite aggressive since most developed countries economies are growing at less than 5% per year35.How do you select the appropriate exit multiple when calculating the terminal value?∙You look at the Comparable Companies and pick the median of the set or something close to it∙You always show a range of exit multiples and what the Terminal Value looks like over that range than one specific number36.In general, which method of calculating the terminal value will be higher?∙In general, the Multiples Method will be more variable than the GGM because exit multiples tend to span a wider range than possible long-term growth rates 37.What is the flaw in basing terminal multiples on public company comparables?∙The median multiples may change greatly in the next 5-10 years so it may no longer be accurate by the end of the period you’re looking at∙It is particularly problematic with cyclical industries (semiconductors)38.How do you know if your valuation is too dependent on future assumptions?∙If the company’s Terminal Value for its Enterprise Value is significantly more than 50% then the DCF is probably too dependent on future assumptions39.What’s the relationship between debt and Cost of Equity?∙More debt means that the company is more risky, so the company’s Levered Beta will be higher. All else equal, an increase in debt will raise the Cost of Equity 40.Two companies are exactly the same but one has debt and the other does not – which onewill have the higher WACC?∙Initially, the one without debt will have a higher WACC up to a certain point because debt is less expensive than equity∙The reasons for this is because interest on debt is tax-deductible, debt is senior to equity in a company’s capital structure, and interest rates on debt are usuallylower than the Cost of Equity numbers that you see.∙Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will∙However, once a company’s debt goes up high enough, the interest rate will rise dramatically to reflect the additional risk taken on and so the Cost of Debt willstart to increase. If this number gets high enough, then it might exceed the Costof Equity and thus any additional debt would now increase WACC ∙It’s a U-shaped curve where debt decreases WACC up to a certain point before it starts to increase41.How do you calculate WACC for a private company?∙Private companies don’t have market caps or Betas, so you would most like estimate WACC based on work done by auditors, valuation specialists, or basedon what WACC for comparable companies are42.Why don’t you use DCF for banks or financial institutions?∙Banks use debt differently from other companies and do not re-invest it in the business – they use it to create products instead.∙Interest is a critica l part of the banks’ business models∙Working capital takes up a huge part of their Balance Sheet∙More useful and common to use a Dividend Discount Model for valuations 43.What types of sensitivity analyses would we look at for DCF?∙Revenue Growth vs Terminal Multiple∙EBITDA Margin vs Terminal Multiple∙Discount Rate vs Terminal Multiple∙Long-term Growth Rate vs Discount Rate (denominator of GGM formula)。