Essentiellement:

- Maîtriser la compta de base, financial statements (P&L, Balance sheet, Cash-flow), ratios de base,
liens entre les déclarations.
- Valorisation, les trois méthodes (Market comps, precedent transaction, DCF) dans les détails et avec
toutes les subtilités
- LBO: comprendre les mécanismes et savoir faire un modèle simple
- Finance générale: WAAC, beta, Gordon-Shapiro et les fondamentaux de finance de marché (indices
boursiers, pricer un bond...)
- Le M&A: pourquoi un deal, dilution/accretion, raisons stratégiques.
- Actu: les deals du moment, les deals de la banque, les deals de l'année.
- La consolidation : Intégration globale, mise en équivalence, proportionnelle.
- Les retraitements (minoritaires, associates, retraites etc).

D’après vous, comment se déroule une transaction M&A?

Prenons le cas d’un fonds de Private Equity cherchant à céder une des entreprises de son
portefeuille.

Once you get the mandate:

1. Teaser: to spark interest of investors, quick presentation of the company. You made
investors sign an NDA (Non Disclosure Agreement) to avoid that any info leak
2. Pitchbook : select a list of serious investors and you communicate a pitchbook : macro
analysis, of the sector, shareholder structure, financial analysis
3. Some investors can make a first bid with no juridical value non binding offer (do not engage
the investor)
4. Potential investors get access to a data room : all confidential information about the
company. To be able to manage information investors do a due diligence with independent
consultant, law firm, etc. The aim of the due diligence is to analyse the veracity of the data
and risks associated with the transaction
5. Valuation, with a bank or with the M&A team of the corporate
6. Offer

La première étape du processus est le choix d’une banque d’affaires mandatée par le fonds de PE
pour vendre l’entreprise. On dit que la banque a un mandat de sell-side. Elle va donc identifier les
potentiels acheteurs intéressés par la cible et préparer un premier document, le teaser, présentant
l’entreprise et ses performances. Ce document porte bien son nom, il est là pour susciter l’intérêt de
l’acquéreur, sans rentrer dans les détails. Pour prévenir toute fuite d’information sur le fait que cette
entreprise est en vente, un NDA (Non-Disclosure Agreement) ou CA (Confidentiality Agreement) est
envoyé avec le teaser.
L’étape suivante est la sélection d’une liste plus restreinte d’acquéreurs potentiels ayant fait part de
leur intérêt après avoir pris connaissance du teaser. La banque leur fait alors parvenir un IM
(Investment Memorandum) plus communément appelé « pitch book ». Ce document contient les
informations sur le développement stratégique de l’entreprise, une analyse macroéconomique, une
analyse de l’industrie dans laquelle elle se situe, un descriptif de l’entreprise (ses actionnaires et son
organisation), sa stratégie de vente et de production, et une analyse financière de l’entreprise. Le
travail du banquier est de compiler l’information et de produire ce document. C’est un travail de
longue haleine qui peut prendre plusieurs mois, en général rédigé avant même l’envoi du teaser.
Les acquéreurs potentiels fortement intéressés par la cible après lecture de l’IM font une première
offre qui n’a pas de valeur juridique, en anglais non-binding bid. Cette offre n’engage pas
l’acquéreur et il peut encore se rétracter à ce niveau du processus de vente. Toutefois, elle traduit un
intérêt important et permet de sélectionner des candidats sérieux pour l’acquisition. Le banquier
veut cependant garder un maximum de candidats à l’acquisition de manière à faire monter les
enchères dans la suite du processus de vente. Il est important de noter qu’à cette étape, un fonds de
PE peut négocier l’exclusivité, de manière à travailler de manière sereine sur la transaction.
Les acquéreurs potentiels accèdent alors à la Data Room. La Data Room est un lieu où sont
regroupées toutes les informations confidentielles de l’entreprise. Aujourd’hui, la plupart des data
room sont virtuelles et accessibles par internet. Afin de traiter toute cette information, procédure
appelée Due Diligence, ou encore « Due Dil », les acquéreurs font appels à des experts dans chaque
domaine de compétences : cabinets d’audit (équipes de Transaction Services et de Fiscalistes),
cabinets d’avocat et banquiers conseil en buy-side. L’enjeu de la Due Diligence est d’identifier les
risques liés à la transaction, ainsi que la validité des projections sur des points financiers comme la
structure de capital, le besoin en fonds de roulement (Working Capital) et les dépenses
d’investissement (CAPEX). La revue de la due diligence concerne également le business plan de
l’entreprise et les projections de ratios financiers. Un autre point important est l’ajustement de
l’EBITDA en ne tenant pas compte des évènements non usuels, comme la cession d’une filiale par
exemple. C’est en général cet EBITDA normalisé qui sera utilisé pour la valorisation par les banquiers.
L’acquéreur potentiel doit alors déterminer le prix qu’il est prêt à offrir pour l’acquisition. La
valorisation est prise en charge soit en interne par un département de M&A dédié, soit en externe
par une banque mandatée en buy-side.
Cette analyse s’appuie sur les méthodes de valorisation classiques, et notamment sur l’analyse des
multiples sur les transactions comparables. Les multiples les plus utilisés sont EV/EBITDA, EV/EBIT,
EV/EBITDAR, EV/trafic pour les sites web, … On regarde quels sont les moyennes, médianes,
minimums et maximums de ces multiples sur les transactions comparables et on applique ces
multiples aux données financières de la cible analysée. Evidemment, on utilise à ce moment là les
données financières issues de la Due Diligence (EBITDA ajusté par exemple). Afin de compléter cette
analyse sur les multiples, les banquiers effectuent un DCF (Discounted Cash Flows). En Private Equity,
on utilisera la méthode du « Multiple de sortie » pour calculer la Valeur Terminale (là où on pourra
utiliser un taux de croissance à perpétuité dans les autres cas). Dans tous les cas, ces analyses nous
donnent une Valeur d’Entreprise, et il faut alors passer à l’Equity Value. La formule, à maîtriser
absolument pour vos entretiens, est la suivante :
Enterprise Value = Equity Value + Net Debt + Preferred Stocks + Minority Interest + Unfunded
Pension Liabilities – Associates (=Investments in unconsolidated entities)
Tout au long du processus de vente, des réunions ont lieu entre le management de la cible et les
potentiels acquéreurs. Elles ont pour but de discuter les résultats de la due diligence, des questions
de valorisation, d’ajustement de l’EBITDA (ou tout autre métrique) et de familiariser le management
avec les potentiels acquéreurs.
En cas d’accord entre la cible et un acquéreur, les deux parties signent un document appelé SPA
(Share Purchase Agreement). Ce document est très important et comprend de nombreuses clauses
qui peuvent être très techniques. Après la signature de ce document et la clôture de la transaction,
les équipes de transaction services vont effectuer la PPA (Purchase Price Allocation), c’est-à-dire
soumettre les actifs de l’entreprise acquise à un test de validité, ou impairment test, puis passer des
Write-up et allouer le Goodwill.
Ainsi le processus de transaction M&A est plus complexe que ce qu’il ne paraît lorsqu’une transaction
fait la Une dans les journaux. Il implique de très nombreuses parties, qui engagent leur responsabilité
sur différents domaines de compétence.

5) Quel est votre perception du métier d’analyste M&A?

Je pense qu’il y a 4 principales taches qu’un stagiaire M&A realise au jour le jour :
1. Excel, c’est-à-dire évaluer des enterprises ou modéliser une fusion, acquisition ou un
financement. Mes compétences en EXCEL sont bonnes. J’étudie et utilise EXCEL depuis trois
 ans maintenant, ainsi que son language de programmation, VISUAL Basic. Par exemple, en
deuxième année, j’ai étudié quelques stratégies de trading utilisant cet outil.
2. Faire des presentations PowerPoint, essentiellement pour les pithcs, sur les tendances dans
une industrie, des « executive summaries », or des explications de mes analyses.
3. De la recherche, sur les secteurs, une industrie particulière, pour les autres membres de
l’équipe.
4. Finalement, il y a les tâches administrative, comme organiser des réunions ou des rendez-
vous, prendre des notes, envoyer des memos d’information à l’équipe. Je suis quelqu’un de
très organisé donc ca ne devrait poser aucun problème.

Question:

Briefly walk through a discounted cash flow analysis (including WACC).

Answer:

- Calculate FCF= EBIT (1-tax rate) + D&A – Change in working capital – Capex
- Calculate WACC (appropriate dicount rate)
- Calculate Terminal Value :
o Multiple Method : Final year EBITDA by a multiple (based on comparables)
o Perpetuity growth method : Gordon Shapiro : Vt= FCFt(1+g) / r-g
- Discount FCF and Terminal Value with WACC

Question:

What is the formula for enterprise value?

Answer:
EV= market value of equity (MVE) + debt + preferred stock + minority interest – cash.

Question:

What is minority interest and why do we add it in the enterprise value formula?

Answer:
When a company owns more than 50% of another company, US accounting rules state that the
parent company has to consolidate its books.
In other words, the parent company reflects 100% of the assets and liabilities and 100% of financial
performance (revenue, costs, profits, etc.) of the majority-owned subsidiary (the “sub”) on its own
financial statements. But if the parent company does not own 100% of the sub, the parent company
will have a line item called minority interest on its income statement. This will reflect the portion of
the sub’s net income that the parent is not entitled to (the percentage that it does not own). The
parent company’s balance sheet will also contain a line item called minority interest which reflects
the percentage of the sub’s book value of equity that the parent does NOT own. It is the balance
sheet minority interest figure that we add in the Enterprise Value formula.
Now, keep in mind that the main use for Enterprise Value is to create valuation ratios/metrics (e.g.
EV/Sales, EV/EBITDA, etc.) When we take, say, sales or EBITDA from the parent company’s financial
statements, these figures – due to the accounting consolidation – will contain 100% of the sub’s sales
or EBITDA, even though the parent does not own 100%. In order to counteract this, we must add to
Enterprise Value, the value of the sub that the parent company does not own (the minority interest).
Because we do this, both the numerator and denominator of our valuation metric account for 100%
of the sub, and we have a consistent (apples to apples) metric.
You might wonder why – instead of adding minority interest to Enterprise Value, we don’t just
subtract the portion of sales or EBITDA that the parent does NOT own. In theory, this would indeed
work and may be more accurate. However, typically we do not have enough information about the
sub to do such an adjustment (minority owned subs are rarely, if ever, public companies). Moreover,
even if we had the financial information of the sub, this method is clearly more time consuming.

Question:

Which will place a higher value on the company, equity comparables (trading comps) or M&A
comparables (transaction comps) and why?

Answer:

M&A comparables will be higher due to a control premium that must be paid and synergies expected
to be derived from the deal.

Question:

A company makes a $100 cash purchase of equipment on Dec. 31. How does this impact the three
statements this year and next year?

Answer:
First Year:
Let’s assume that the company’s fiscal year ends Dec. 31. The relevance of the purchase date is that
we will assume no depreciation the first year.
Income Statement: A purchase of equipment is considered a capital expenditure which does not
impact earnings. Further, since we are assuming no depreciation, there is no impact on net income,
thus no impact to the income statement.
Cash Flow Statement: No change to net income so no change to cash flow from operations.
However, we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow from
investing activities. No change in cash flow from financing (since this is a cash purchase) so the net
effect is a use of cash of $100.
Balance Sheet: Cash (asset) down $100 and PP&E (asset) up $100 so no change to the left side of the
balance sheet and no change to the right side. We are balanced.
Second Year:
Here, let’s assume straight line depreciation over 5 years and a 40% tax rate.
Income Statement: Just like the previous question: $20 of depreciation, which results in a $12
reduction to net income.
Cash Flow Statement: Net income down $12 and depreciation up $20.
No change to cash flow from investing or financing activities. Net effect is cash up $8.
Balance Sheet: Cash (asset) up $8 and PP&E (asset) down $20 so left side of balance sheet down $12.
Retained earnings (shareholders’ equity) down $12 and again, we are balanced.
Walk me through an accretion/dilution analysis…
The purpose of an accretion/dilution analysis (sometimes also referred to as a quick-and-dirty merger
analysis) is to project the impact of an acquisition to the acquiror’s Earnings Per Share (EPS) and
compare how the new EPS (“proforma EPS”) compares to what the company’s EPS would have been
had it not executed the transaction.
In order to do the accretion/dilution analysis, we need to project the combined company’s net
income (“proforma net income”) and the combined company’s new share count. The proforma net
income will be the sum of the buyer’s and target’s projected net income plus/minus certain
transaction adjustments. Such adjustments to proforma net income (on a post-tax basis) include
synergies (positive or negative), increased interest expense (if debt is used to finance the purchase),
decreased interest income (if cash is used to finance the purchase) and any new intangible asset
amortization resulting from the transaction.
The proforma share count reflects the acquiror’s share count plus the number of shares to be
created and used to finance the purchase (in a stock deal). Dividing proforma net income by
proforma shares gives us proforma EPS which we can then compare to the acquiror’s original EPS to
see if the transaction results in an increase to EPS (accretion) or a decline in EPS (dilution). Note also
that we typically will perform this analysis using 1-year and 2-year projected net income and also
sometimes last twelve months (LTM) proforma net income.
Category: Mergers and Acquisitions | Comments are closed

What factors can lead to the dilution of EPS in an acquisition?

A number of factors can cause an acquisition to be dilutive to the acquiror’s earnings per share (EPS),
including: (1) the target has negative net income, (2) the target’s Price/Earnings ratio is greater than
the acquiror’s, (3) the transaction creates a significant amount of intangible assets that must be
amortized going forward, (4) increased interest expense due to new debt used to finance the
transaction, (5) decreased interest income due to less cash on the balance sheet if cash is used to
finance the transaction and (6) low or negative synergies.
Category: Mergers and Acquisitions | Comments are closed

If a company with a low P/E acquires a company with a high P/E in an all stock deal, will the deal
likely be accretive or dilutive?
Other things being equal, if the Price to Earnings ratio (P/E) of the acquiring company is lower than
the P/E of the target, then the deal will be dilutive to the acquiror’s Earnings Per Share (EPS). This is
because the acquiror has to pay more for each dollar of earnings than the market values its own
earnings. Hence, the acquiror will have to issue proportionally more shares in the transaction.
Mechanically, proforma earnings, which equals the acquiror’s earnings plus the target’s earnings (the
numerator in EPS) will increase less than the proforma share count (the denominator), causing EPS to
decline.
Category: Mergers and Acquisitions | Comments are closed

What is goodwill and how is it calculated?

Goodwill is an intangible asset for a company that comes in many forms such as: reputation, brand,
domain names, commercial secrets, etc.
Goodwill, a type of intangible asset, is created in an acquisition and reflects the value (from an
accounting standpoint) of a company that is not attributed to its other assets and liabilities. Goodwill
is calculated by subtracting the target’s book value (written up to fair market value) from the equity
purchase price paid for the company. This equation is sometimes referred to as the “excess purchase
price.” Accounting rules state that goodwill no longer should be amortized each period, but must be
tested once per year for impairment. Absent impairment, goodwill can remain on a company’s
balance sheet indefinitely.
Category: Mergers and Acquisitions | Comments are closed

Why might one company want to acquire another company?

There are a variety of reasons why companies do acquisitions. Some common reasons include:
 - The Buyer views the Target as undervalued.
 - The Buyer’s own organic growth has slowed or stalled and needs to grow in other ways (via
acquiring other companies) in order to satisfy the growth expectations of Wall Street.
 - The Buyer expects the deal to result in significant synergies (see the next post for a discus-
sion of synergies).
 - The CEO of the Buyer wants to be CEO of a larger company, either because of ego, legacy or
because he/she will get paid more.
Category: Mergers and Acquisitions | Comments are closed

Explain the concept of synergies and provide some examples.

In simple terms, synergy occurs when 2 + 2 = 5. That is, when the sum of the value of the Buyer and
the Target as a combined company is greater than the two companies valued apart. Most mergers
and large acquisitions are justified by the amount of projected synergies.
There are two categories of synergies: cost synergies and revenue synergies. Cost synergies refer
to the ability to cut costs of the combined companies due to the consolidation of operations. For
example, closing one corporate headquarters, laying off one set of management, shutting redundant
stores, etc. Revenue synergies refer to the ability to sell more products/services or raise prices due
to the merger. For example, increasing sales due to cross-marketing, co-branding, etc. The concept
of economies of scale can apply to both cost and revenue synergies.
In practice, synergies are “easier said than done.” While cost synergies are difficult to achieve,
revenue synergies are even harder. The implication is that many mergers fail to live up to
expectations and wind up destroying shareholder value rather than create it. Of course, this last fact
never finds its way into a banker’s M&A pitch.

How does ??? impact the three financial statements?

Varieties of this question are some of the most common technical question asked in interviews
today. This type of question attempts to test your understanding of how the three financial
statements (income statement, balance sheet, cash flow statement) fit together. The most common
variation of this question is how does $10 of depreciation affect the three financial statements
(answered below). I’ve posted a few additional examples as well.
To answer this question, take the 3 statements one at a time. My advice is to start with the income
statement. Remember to tax-affect any change in revenue or costs (usually you will be told to
assume a tax rate of 40%). Work your way down to net income. Next, tackle the cash flow
statement. The first line of the cash flow statement is net income so start with that and work your
way down to net change in cash. Last, take the balance sheet. The first line of the balance sheet is
cash so again, start with that. The balance sheet must balance in order for your answer to be
correct, which is why I recommend doing the balance sheet last. Remember the basic balance sheet
equation: Assets = Liabilities + Shareholders’ Equity.
Don’t get too stressed when asked a question like this. Just take it slowly, one statement at a time.
Category: Accounting and Financial Statements | Comments are closed

If a company incurs $10 (pretax) of depreciation expense, how does that affect the three financial
statements?
The most common version of this type of question. Note that the amount of depreciation may be
a number other than $10. To answer this question, take the three statements one at a time.
First, the income statement: depreciation is an expense so operating income (EBIT) declines by $10.
Assuming a tax rate of 40%, net income declines by $6. Second, the cash flow statement: net
income decreased $6 and depreciation increased $10 so cash flow from operations increased $4.
Finally, the balance sheet: cumulative depreciation increases $10 so Net PP&E decreases $10. We
know from the cash flow statement that cash increased $4. The $6 reduction of net income caused
retained earnings to decrease by $6. Note that the balance sheet is now balanced. Assets decreased
$6 (PP&E -10 and Cash +4) and shareholder’s equity decreased $6.
You may get the follow-up question: If depreciation is non-cash, explain how this transaction
caused cash to increase $4. The answer is that because of the depreciation expense, the company
had to pay the government $4 less in taxes so it increased its cash position by $4 from what it would
have been without the depreciation expense.
Category: Accounting and Financial Statements | Comments are closed

A company makes a $100 cash purchase of equipment on Dec. 31. How does this impact the three
statements this year and next year?
First Year: Let’s assume that the company’s fiscal year ends Dec. 31. The relevance of the purchase
date is that we will assume no depreciation the first year. Income Statement: A purchase of
equipment is considered a capital expenditure which does not impact earnings. Further, since we are
assuming no depreciation, there is no impact to net income, thus no impact to the income
statement. Cash Flow Statement: No change to net income so no change to cash flow from
operations. However we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow
from investing activities. No change in cash flow from financing (since this is a cash purchase) so the
net effect is a use of cash of $100. Balance Sheet: Cash (asset) down $100 and PP&E (asset) up $100
so no net change to the left side of the balance sheet and no change to the right side. We are
balanced.
Second Year: Here let’s assume straightline depreciation over 5 years and a 40% tax rate. Income
Statement: Just like the previous question: $20 of depreciation, which results in a $12 reduction to
net income. Cash Flow Statement: Net income down $12 and depreciation up $20. No
change to cash flow from investing or financing activities. Net effect is cash up $8. Balance Sheet:
Cash (asset) up $8 and PP&E (asset) down $20 so left side of balance sheet doen $12. Retained
earnings (shareholders’ equity) down $12 and again, we are balanced.
Category: Accounting and Financial Statements | Comments are closed

Same question as the previous but the company finances the purchase of equipment by issuing
debt rather than paying cash.
First Year: Income Statement: No depreciation and no interest expense so no change. Cash Flow
Statement: No change to net income so no change to cash flow from operations. Just like the
previous question, we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow from
investing activities. Now, however, in our cash flows from financing section, we’ve got an increase in
debt of $100 (source of cash). Net effect is no change to cash. Balance Sheet: No change to cash
(asset), PP&E (asset) up $100 and debt (liability) up $100 so we balance.
Second Year: Same depreciation and tax assumptions as previously. Let’s also assume a 10%
interest rate on the debt and no debt amortization. Income Statement: Just like the previous
question: $20 of depreciation but now we also have $10 of interest expense. Net result is a $18
reduction to net income ($30 x (1 – 40%)). Cash Flow Statement: Net income down $18 and
depreciation up $20. No change to cash flow from investing or financing activities (if we assumed
some debt amortization, we would have a use of cash in financing activities). Net effect is cash up
$2. Balance Sheet: Cash (asset) up $2 and PP&E (asset) down $20 so left side of balance sheet down
$18. Retained earnings (shareholders’ equity) down $18 and voila, we are balanced.
Category: Accounting and Financial Statements | Comments are closed
V
Continuing with the last question, on Jan. 1 of Year 3 the equipment breaks and is deemed worth-
less. The bank calls in the loan. What happens in Year 3?
Now the company must writedown the value of the equipment down to $0. At the beginning of Year
3, the equipment is on the books at $80 after one year’s depreciation. Further, the company must
pay back the entire loan. Income statement: The $80 writedown causes net income to decline $48.
There is no further depreciation expense and no interest expense. Cash Flow Statement: Net
income down $48 but the writedown is non-cash so add $80. Cash flow from financing decreases
$100 when we pay back the loan. Net cash is down $68. Balance Sheet: Cash (asset) down $68,
PP&E (asset) down $80, Debt (liability) down $100 and Retained Earnings (shareholders’ equity)
down $48. Left side of the balance sheet is down $148 and right side is down $148 and we’re good!

Walk me through a Discounted Cash Flow (“DCF”) analysis…

In order to do a DCF analysis, first we need to project free cash flow for a period of time (say, five
years). Free cash flow equals EBIT less taxes plus D&A less capital expenditures less the change in
working capital. Note that this measure of free cash flow is unlevered or debt-free. This is because it
does not include interest and so is independent of debt and capital structure.
Next we need a way to predict the value of the company/assets for the years beyond the projection
period (5 years). This is known as the Terminal Value. We can use one of two methods for
calculating terminal value, either the Gordon Growth (also called Perpetuity Growth) method or the
Terminal Multiple method. To use the Gordon Growth method, we must choose an appropriate
rate by which the company can grow forever. This growth rate should be modest, for example,
average long-term expected GDP growth or inflation. To calculate terminal value we multiply the last
year’s free cash flow (year 5) by 1 plus the chosen growth rate, and then divide by the discount rate
less growth rate.
The second method, the Terminal Multiple method, is the one that is more often used in banking.
Here we take an operating metric for the last projected period (year 5) and multiply it by an
appropriate valuation multiple. This most common metric to use is EBITDA. We typically select the
appropriate EBITDA multiple by taking what we concluded for our comparable company analysis on a
last twelve months (LTM) basis.
Now that we have our projections of free cash flows and terminal value, we need to “present value”
these at the appropriate discount rate, also known as weighted average cost of capital (WACC). For
discussion of calculating the WACC, please read the next topic. Finally, summing up the present
value of the projected cash flows and the present value of the terminal value gives us the DCF value.
Note that because we used unlevered cash flows and WACC as our discount rate, the DCF value is a
representation of Enterprise Value, not Equity Value.
Category: Discounted Cash Flow Analysis | Comments are closed
What is WACC and how do you calculate it?

The WACC (Weighted Average Cost of Capital) is the discount rate used in a Discounted Cash Flow
(DCF) analysis to present value projected free cash flows and terminal value. Conceptually, the
WACC represents the blended opportunity cost to lenders and investors of a company or set of
assets with a similar risk profile. The WACC reflects the cost of each type of capital (debt (“D”),
equity (“E”) and preferred stock (“P”)) weighted by the respective percentage of each type of
capital assumed for the company’s optimal capital structure. Specifically the formula for WACC is:
Cost of Equity (Ke) times % of Equity (E/E+D+P) + Cost of Debt (Kd) times % of Debt (D/E+D+P) times
(1-tax rate) + Cost of Preferred (Kp) times % of Preferred (P/E+D+P).
To estimate the cost of equity, we will typically use the Capital Asset Pricing Model (“CAPM”) (see the
following topic). To estimate the cost of debt, we can analyze the interest rates/yields on
debt issued by similar companies. Similar to the cost of debt, estimating the cost of preferred
requires us to analyze the dividend yields on preferred stock issued by similar companies.
Category: Discounted Cash Flow Analysis | Comments are closed

How do you calculate the cost of equity?

To calculate a company’s cost of equity, we typically use the Capital Asset Pricing Model (CAPM). The
CAPM formula states the cost of equity equals the risk free rate plus the multiplication of Beta times
the equity risk premium. The risk free rate (for a U.S. company) is generally considered to be the
yield on a 10 or 20 year U.S. Treasury Bond. Beta (See the following question on Beta) should be
levered and represents the riskiness (equivalently, expected return) of the company’s equity relative
to the overall equity markets. The equity risk premium is the amount that stocks are expected to
outperform the risk free rate over the long-term. Prior to the credit crises, most banks tend to use
an equity risk premium of between 4% and 5%. However, today is assumed that the equity risk
premium is higher.
Category: Discounted Cash Flow Analysis | Comments are closed

What is Beta?
Beta is a measure of the riskiness of a stock relative to the broader market (for broader market, think
S&P500, Wilshire 5000, etc). By definition the “market” has a Beta of one (1.0). So a stock with a
Beta above 1 is perceived to be more risky than the market and a stock with a Beta of less than 1 is
perceived to be less risky. For example, if the market is expected to outperform the risk-free rate
by 10%, a stock with a Beta of 1.1 will be expected to outperform by 11% while a stock with a Beta of
0.9 will be expected to outperform by 9%. A stock with a Beta of -1.0 would be expected
to underperform the risk-free rate by 10%. Beta is used in the capital asset pricing model (CAPM) for
the purpose of calculating a company’s cost of equity. For those few of you that remember your
statistics and like precision, Beta is calculated as the covariance between a stock’s return and the
market return divided by the variance of the market return.
Category: Discounted Cash Flow Analysis | Comments are closed

When using the CAPM for purposes of calculating WACC, why do you have to unlever and then
relever Beta?
In order to use the CAPM to calculate our cost of equity, we need to estimate the appropriate Beta.
We typically get the appropriate Beta from our comparable companies (often the mean or median
Beta). However before we can use this “industry” Beta we must first unlever the Beta of each of our
comps. The Beta that we will get (say from Bloomberg or Barra) will be a levered Beta.
Recall what Beta is: in simple terms, how risky a stock is relative to the market. Other things being
equal, stocks of companies that have debt are somewhat more risky that stocks of companies
without debt (or that have less debt). This is because even a small amount of debt increases the risk
of bankruptcy and also because any obligation to pay interest represents funds that cannot be used
for running and growing the business. In other words, debt reduces the flexibility of management
which makes owning equity in the company more risky.
Now, in order to use the Betas of the comps to conclude an appropriate Beta for the company we are
valuing, we must first strip out the impact of debt from the comps’ Betas. This is known as
unlevering Beta. After unlevering the Betas, we can now use the appropriate “industry” Beta (e.g.
the mean of the comps’ unlevered Betas) and relever it for the appropriate capital structure of the
company being valued. After relevering, we can use the levered Beta in the CAPM formula to
calculate cost of equity.
Category: Discounted Cash Flow Analysis | Comments are closed

What are the formulas for unlevering and levering Beta?

Unlevered Beta = Levered Beta / (1 + ((1 – Tax Rate) x (Debt/Equity)))
Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity)))
Category: Discounted Cash Flow Analysis | Comments are closed

Which is less expensive capital, debt or equity?

Debt is less expensive for two main reasons. First, interest on debt is tax deductible (i.e. the tax
shield). Second, debt is senior to equity in a firm’s capital structure. That is, in a liquidation or
bankruptcy, the debt holders get paid first before the equity holders receive anything. Note, debt
being less expensive capital is the equivalent to saying the cost of debt is lower than the cost of
equity.

What is the difference between enterprise value and equity value?

Enterprise Value represents the value of the operations of a company attributable to all providers of
capital. Equity Value is one of the components of Enterprise Value and represents only the
proportion of value attributable to shareholders.
Category: Enterprise Value and Equity Value | Comments are closed

How do you calculate the market value of equity?

A company’s market value of equity (MVE) equals its share price multiplied by the number of fully
diluted shares outstanding.
Category: Enterprise Value and Equity Value | Comments are closed

What is the difference between basic shares and fully diluted shares?
Basic shares represent the number of common shares that are outstanding today (or as of the
reporting date). Fully diluted shares equals basic shares plus the potentially dilutive effect from any
outstanding stock options, warrants, convertible preferred stock or convertible debt. In calculating a
company’s market value of equity (MVE) we always want to use diluted shares. Implicitly the market
also uses diluted shares to value a company’s stock.
Category: Enterprise Value and Equity Value | Comments are closed

How do you calculate fully diluted shares?

To calculate fully diluted shares, we need to add the basic number of shares (found on the cover of a
company’s most recent 10Q or 10K) and the dilutive effect of employee stock options. To calculate
the dilutive effect of options we typically use the Treasury Stock Method. The options information
can be found in the company’s latest 10K. Note that if the company has other potentially dilutive
securities (e.g. convertible preferred stock or convertible debt) we may need to account for those as
well in our fully diluted share count.
Category: Enterprise Value and Equity Value | Comments are closed

How do we use the Treasury Stock Method to calculate diluted shares?

To use the Treasury Stock Method, we first need a tally of the company’s issued stock options and
weighted average exercise prices. We get this information from the company’s most recent 10K. If
our calculation will be used for a control based valuation methodology (i.e. precedent transactions)
or M&A analysis, we will use all of the options outstanding. If our calculation is for a minority
interest based valuation methodology (i.e. comparable companies) we will use only options
exercisable. Note that options exercisable are options that have vested while options outstanding
takes into account both options that have vested and that have not yet vested.
Once we have this option information, we subtract the exercise price of the options from the current
share price (or per share purchase price for an M&A analysis), divide by the share price (or purchase
price) and multiply by the number of options outstanding. We repeat this calculation for each subset
of options reported in the 10K (usually companies will report several line items of options
categorized by exercise price). Aggregating the calculations gives us the amount of diluted shares. If
the exercise price of an option is greater than the share price (or purchase price) then the options are
out-of-the-money and have no dilutive effect.
The concept of the treasury stock method is that when employees exercise options, the company has
to issue the appropriate number of new shares but also receives the exercise price of the options in
cash. Implicitly, the company can “use” this cash to offset the cost of issuing new shares. This is why
the diluted effect of exercising one option is not one full share of dilution, but a fraction of a share
equal to what the company does NOT receive in cash divided by the share price.
Category: Enterprise Value and Equity Value | Comments are closed

Why do you subtract cash in the enterprise value formula?

Cash gets subtracted when calculating Enterprise Value because (1) cash is considered a non-
operating asset AND (2) cash is already implicitly accounted for within equity value. Note that when
we subtract cash, to be precise, we should say excess cash. However, we will typically make the
assumption that a company’s cash balance (including cash equivalents such as marketable
securities or short-term investments) equals excess cash.
Category: Enterprise Value and Equity Value | Comments are closed

What is Minority Interest and why do we add it in the Enterprise Value formula?
When a company owns more than 50% of another company, U.S. accounting rules state that the
parent company has to consolidate its books. In other words, the parent company reflects 100% of
the assets and liabilities and 100% of financial performance (revenue, costs, profits, etc.) of the
majority-owned subsidiary (the “sub”) on its own financial statements. But since the parent
company does not 100% of the sub, the parent company will have a line item called minority interest
on its income statement reflecting the portion of the sub’s net income that the parent is not entitled
to (the percentage that it does not own). The parent company’s balance sheet will also contain a line
item called minority interest which reflects the percentage of the sub’s book value of equity that the
parent does NOT own. It is the balance sheet minority interest figure that we add in the Enterprise
Value formula.
Now, keep in mind that the main use for Enterprise Value is to create valuation ratios/metrics (e.g.
EV/Sales, EV/EBITDA, etc.) When we take, say, sales or EBITDA from the parent company’s financial
statements, these figures due to the accounting consolidation, will contain 100% of the sub’s sales or
EBITDA, even though the parent does not own 100%. In order to counteract this, we must add to
Enterprise Value, the value of the sub that the parent company does not own (the minority interest).
By doing this, both the numerator and denominator of our valuation metric account for 100% of the
sub, and we have a consistent (apples to apples) metric.
One might ask, instead of adding minority interest to Enterprise Value, why don’t we just subtract
the portion of sales or EBITDA that the parent does NOT own. In theory, this would indeed work and
may in fact be more accurate. However, typically we do not have enough information about the sub
to do such an adjustment (minority owned subs are rarely, if ever, public companies). Moreover,
even if we had the financial information of the sub, this method is clearly more time consuming.

What are the three main valuation methodologies?

The three main valuation methodologies are (1) comparable company analysis, (2) precedent
transaction analysis and (3) discounted cash flow (“DCF”) analysis.
Category: Valuation | Comments are closed

Of the three main valuation methodologies, which ones are likely to result in higher/lower value?
Firstly, the Precedent Transactions methodology is likely to give a higher valuation than the
Comparable Company methodology. This is because when companies are purchased, the target’s
shareholders are typically paid a price that is higher than the target’s current stock price. Technically
speaking, the purchase price includes a “control premium.” Valuing companies based on M&A
transactions (a control based valuation methodology) will include this control premium and therefore
likely result in a higher valuation than a public market valuation (minority interest based valuation
methodology).
The Discounted Cash Flow (DCF) analysis will also likely result in a higher valuation than the
Comparable Company analysis because DCF is also a control based methodology and because most
projections tend to be pretty optimistic. Whether DCF will be higher than Precedent Transactions is
debatable but is fair to say that DCF valuations tend to be more variable because the DCF is so
sensitive to a multitude of inputs or assumptions.
Category: Valuation | Comments are closed

How do you use the three main valuation methodologies to conclude value?
The best way to answer this question is to say that you calculate a valuation range for each of the
three methodologies and then “triangulate” the three ranges to conclude a valuation range for the
company or asset being valued. You may also put more weight on one or two of the methodologies
if you think that they give you a more accurate valuation. For example, if you have good comps and
good precedent transactions but have little faith in your projections, then you will likely rely more on
the Comparable Company and Precedent Transaction analyses than on your DCF.
Category: Valuation | Comments are closed

What are some other possible valuation methodologies in addition to the main three?
Other valuation methodologies include leverage buyout (LBO) analysis, replacement value and
liquidation value.
Category: Valuation | Comments are closed

What are some common valuation metrics?

Probably the most common valuation metric used in banking is Enterprise Value (EV)/EBITDA. Some
others include EV/Sales, EV/EBIT, Price to Earnings (P/E) and Price to Book Value (P/BV).
Category: Valuation | Comments are closed

Why can’t you use EV/Earnings or Price/EBITDA as valuation metrics?

Enterprise Value (EV) equals the value of the operations of the company attributable to all providers
of capital. That is to say, because EV incorporates all of both debt and equity, it is NOT dependant on
the choice of capital structure (i.e. the percentage of debt and equity). If we use EV in the numerator
of our valuation metric, to be consistent (apples to apples) we must use an operating or capital
structure neutral (unlevered) metric in the denominator, such as Sales, EBIT or EBITDA. These such
metrics are also not dependant on capital structure because they do not include interest expense.
Operating metrics such as earnings do include interest and so are considered leveraged or capital
structure dependant metrics. Therefore EV/Earnings is an apples to oranges comparison and is
considered inconsistent. Similarly Price/EBITDA is inconsistent because Price (or equity value) is
dependant on capital structure (levered) while EBITDA is unlevered. Again, apples to oranges.
Price/Earnings is fine (apples to apples) because they are both levered.
Category: Valuation | Comments are closed
What is the formula for Enterprise Value?

The formula for enterprise value is: market value of equity (MVE) + debt + preferred stock + minority
interest – cash.
Autres thèmes évoqués en vrac:
- Les minorities (pourquoi etc.)
- Le retraitement pour passer de l’EV à l’Eq
- Parlez moi de EV/sales (pertinence, limites etc.)
- Parlez moi des différents statements (quels sont les grands agrégats qui compose chacun des 3
principaux statements + quand tu regardes tel statement, quelles sont les questions que tu te poses
et pourquoi)
- FCFE/ FCFF
- intéret de l'EBITDA vs EBIT? Pk en finance on s'intéresse davantage à l'EBITDA plutôt que l'EBIT?
- Parlez moi du working capital
- question sous jacente sur le gearing (EBIT >> 0 avec pourtant un NI très faible)
- quelles sont les autres méthodes de valo
- Quel est l'intérêt de faire un SOP pour le cas présent?
- Question de compta : qu’est ce qui se passe comptablement lorsqu’une boite achète un actif
(par ex ici une machine) ?
- Pourquoi dans les retraitements quand on fait un bridge, le working capital ne rentre pas en
compte ?

Il y a aussi eu quelques questions de motiv

- Quels sont les valeurs/qualités importantes en M&A

- Qu’est-ce qu’on fait en intraday en M&A ? (Il fallait pas répondre des trucs du genre : on
rencontre des tops executives a longueur de journée)
- Pourquoi le M&A? Pourquoi pas le trading?
- Quels ont été les trucs que tu n’as pas aimé dans ton précédent stage ?
- Quels sont les éléments négatifs d’un stage en M&A ?

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Interview Questions
This page is here to help us all be prepared for the types of questions that are typically asked
during an interview. We have tried to break them down into the categories listed below as
best as possible.
Personal Questions - Finance Questions - Accounting Questions - Other Questions

Personal Questions
Q. Spend 5 minutes and walk me through your resume.
A. The first question you will most likely be asked. On the surface it seems like an easy
question, but you will need to be clear and concise with your response. This is something
you will need to practice repeatedly so that you can SUCCINCTLY talk about yourself and
relate your background to the job. Try to start after you finished undergrad. and talk about:
Each position you have held, your role and responsibilities (try to highlight ones that match
the job), and what you liked about that work. You want to work your way up to attending
Emory.
Q. Why do you want to work in Investment Banking/Sales & Trading / Research/ PCS?
A. Probably the second question you will be asked. This is probably the most important
question you will have to answer. You should be able to relate experiences in your job and
interests that match the job you are interviewing for. This is a question that you need to
have a rehearsed 2-minute response. Your answer should end along the line "and that’s why
I want to go into Investment Banking."
How can you relate your background if you didn’t used to work in the industry? Be creative!
Interviewers don’t care if you didn’t work in this field before. Questions to ask yourself:
Did your company ever get bought out or did your company ever buy another? Did you read
an article about a merger in the Wall Street Journal? Work that into your answer.
Here is what a second year student who came from different backgrounds said:
DAVID RICHARDS- Manager at HBOC McKesson (Internship: SunTrust)
I spent my time focusing on the things I had done that were related to Banking.
P&L responsibilities I had & my motivation/track record of being profit focused
The transactional work that I have done before and liking the work
Leveraging grades/GMAT as a way to show my quant. orientation
Client centric management (more a corporate banking plus)
I also spent some time talking about the two years of night school and preparation to come
back to business school specifically for banking.
Q. Why did you decide to go to Emory?
No standard answer, but people usually mention: Small Class Size Need to be in a big city (if
you want to work in NYC- don't say you like living where its warmer) The diversity of
students (33% International). Do not say something like: "I didn’t get into Harvard." You
need to stay positive.
Q. Why do you want to work for Company X?
A. Try to tell them about your interests and how it relates to the strengths they provide. For
example: I would like to work at Chase because I'm interested in working in leveraged
finance and Chase is a leader in debt financing through syndicated loans and high yield
offerings. I think SG Cowen would be a great place for me because I'm interested in doing
healthcare banking, which is a particular strength of the firm.
Q. What other companies are you considering?
A. Don't just say that their company is the only one. You can be honest. They don't expect
you to put all your eggs in one basket. I think the key to this question is to mention firms
that may be similar to the reasons you gave for wanting to work at the company you are
interviewing with. Using the Chase example from above, you might want to tailor your
answer around other banks known for fixed income, such as B of A, Lehman, the Big
Three(Merrill, Goldman, MSDW) or Bear. The thing not to say is someone like Robertson
Stephens ( a fine institution, just not known for fixed-income). If you would want to work for
a niche firm, don't say you are considering Merrill or some type of bulge bracket firm.
The person interviewing you is trying to see if you are really interested in a certain type of
work/environment or are you just bullshitting.
Q. What specific area are you interested in?
A. Obviously you want to display an interest in some area, but also need to be able to talk in
detail about that subject area so they don't think you are trying to bullshit them. If you want
to work in equity research covering telecommunications you should be able to talk now (as
of 12/15/2000) about how telecomm. firms are struggling and what are some of the
problems they face.
Q. In 1 sentence, tell me why we should hire you?
A. Don't just blurt out an answer. Take your time and use commas.
Q. Look outside my office. Down the right side of the building are offices of bankers that
all went to Harvard Business School. Down the left side are all bankers that went to
Wharton. I get hundreds of resumes every year - mostly from Harvard, Wharton, Chicago,
and Columbia. There's a long track record of success here from those schools - if I take a
chance on an HBS grad, and it doesn't work out, nobody will second-guess me. However,
in your case, if I take a chance and you don't work out, I'll have some explaining to do
about my judgment. How are you going to convince me to hire you over the hundreds of
resumes I get every fall?
Q. Is there anything else, that is not your resume that I should know about?
A. Try to highlight personality traits. You could talk about work ethic, being a team player,
and how you are an easy-going person who is great to work with.

Finance Questions

Q. What are the three basic ways to value a company? A. The three most common ways to
value a company are:
Discounted Cash Flow (DCF)- The value of a firm is the present value of all future cash flows.
A basic DCF involves forecasting free cash flow for the firm over a specific time horizon and
discounting these cash flows back at the weighted average cost of capital (WACC). Free cash
flow (FCF) is usually defined as:
Operating Income (also known as EBIT) * (1-Tax Rate)
Plus: Depreciation and Amortization (or other Non-Cash Charges)
Less: Change in Net Working Capital and Capital Expenditures
Generally, you would forecast a FCF number for each year over a certain time horizon
(usually 5 or 10 years) and then attach a terminal value (TV) for the firm. The TV represents
the firm as a growing perpetuity. You can estimate the TV one of two ways:
TV= Final Year FCF (1+g)/(k-g)
TV= Exit Multiple based on EBIT or EBITDA
The FCFs and the TV are then discounted back at the WACC. This value is known as the
Enterprise Value. By subtracting out net debt (debt outstanding-less cash), you are left with
an equity value for the firm. The equity value divided by the number of diluted shares
outstanding is the per share value. (Whew!!!)
Trading Comparables (Comps)- This method involves finding comparable (this can be tricky)
companies in the marketplace and determining at what multiple they trade to a variety of
factors. For example, if comparable companies have firm values anywhere from 5x-10x EBIT,
and the company I am valuing has $100 million in EBIT, then the company could be worth
anywhere from $500 million to $1 billion dollars. If you are asked about this, the best way is
to give a quick example like the one described above.
Acquisition Comparables- Similar to Trading Comps. If comparable companies have been
sold for 5x-10x revenues, and my company has $100 million in revenues, then my company
may be worth anywhere from $500 million to $1 billion dollars.
They key to comparable valuation is picking the right set of comps. Obviously picking
companies in the same industry is necessary, but also think about other factors such as:
capital structure (companies who use more leverage may trade differently than companies
with all equity financing), size, seasonality, and operating margins.
Other valuation methods include liquidation value and Leveraged Buy-Out, however,
interviewers generally stick to the first three.
Q. What has a cheaper cost of capital, Equity or Debt?
A. Debt has the cheapest cost of capital. There are two reasons. First, using debt allows
corporations to deduct interest payments which lowers the cost. Second, debt holders
would be paid off before equity holders in the event of a liquidation, so the risk of not being
paid back is less for debt holders than equity holders. My general rule of thumb is that the
more senior the claim, the lower the cost of capital. Here is a breakdown of costs of capitals
form lowest to highest.
1. Debt
2. Subordinated Debt (Mezzanine Debt)
3. Preferred Stock
4. Equity

Q. How do I determine the Cost of Debt and Equity?

A. Debt- Does the company have any debt outstanding? If so, use the Yield to Maturity
(YTM) on the bonds as the cost of debt. If there are no bonds outstanding, look at
comparable companies' YTMs. Preferred stock can be found the same way.
Equity - use the Capital Asset Pricing Model (CAPM). If you don't know the Beta, use a
comparable company beta.
Q. How do I determine the Weighted Average Cost of Capital (WACC)?
A. To determine the WACC, find the what percentage debt and equity are of the total capital
structure and multiply these numbers by your cost of debt (1-t) and your cost of equity.
For example:
Capital structure= 100, Debt= 50, Equity=50, Cost of Debt= 8%, Cost of Equity=12%.
The WACC is= .5*8%(1-T)+ .5*12
Q. If my capital structure is optimized, what also should be optimized?
A. Return on Equity. Basically you have the optimal amount of equity to produce your net
income.
Q. Define cash earnings per share.

A. Cash Earnings=Net Income +Depreciation and Amortization+Deferred Taxes.

Q. A company is listed as an ADR on an American exchange. The ration of shares on the

home exchange to ADR shares is 6 for 1. If the ADR earnings per share is $6 what is the EPS
for a share listed on the home exchange?
A. $1, treat as if a 6 for 1 stock split occurred.
Q. Suppose you have a company where EBITDA has been rising for the past several years
and that company suddenly declares bankruptcy, name some reasons for why that could
have happened?

A. Companies declare bankruptcy because they have no cash (liquidity crunch); the best
answer would be to walk down the cash flow statement and describe how each of the
sections could contribute to a bankruptcy filing:

- Working capital crunch (receivables could be rising; could be getting pushed on payables;
might be required to build significant inventory)
- Capex requirements could be large (ie telecom)
- Might not be able to refinance a maturing issue
- Litigation (ie Philip Morris posting tobacco bond)
Q. You are looking at acquiring a company, but that company has a negative book value of
equity. Is this a big deal?

A. You would want to see why the BV of equity is negative, and there could be several
reasons:
- Could be from negative net income over the past several years - this might a problem from
an operational perspective
- Might be due to a write-down of assets - would want to understand this but might not be
as bad a recurring negative net income
- Firm might have levered up to issue a large dividend - will leverage be an issue going
forward?
Q. Which will place a higher value on the company, equity comparables or M&A
comparables and why?

A. M&A comparables will be higher due to a control premium that must be paid and
synergies expected to be derived from the deal
Q. Briefly walk through a discounted cash flow analysis. (including WACC)

A. First, you want to calculate free cash flow for a certain period of time (generally five or
ten years). To calculate free cash flow, start with after-tax EBIT and then add back D&A,
subtract Capex and add/subtract and decrease/increase in working capital.
Next, you want to determine the appropriate discount rate for the cashflows, the WACC.
The cost of debt is determined using the current yields on the company's existing debt issues
(where bonds are trading) and tax affecting them. The cost of equity is generally determined
by CAPM (ie risk-free rate plus company's beta multiplied by the equity risk premium).
WACC=D/(D+E)*(1-T)*Kd + E/(D+E)*Ke
Next, you would calculate a terminal value for the firm either using a multiple of EBITDA or a
perpetuity growth rate on the firm's free cash flow.
- Multiple Method - Multiply the final year's EBITDA by an appropriate EBITDA multiple for
the firm (based on comparables)
- Perpetuity Growth Method - multiply the final year's free cash flow by (1+growth rate) and
divide that by (r-g)
You would next calculate the PV of the terminal value
Next, you would determine the PV of the free cash flows for the given period (dividing the
cashflows by WACC)
Finally, you would add the PV of the terminal value to the PV of the free cash flow to
determine the value of the firm
Q. If a company is considering an all-stock acquisition, what is the easiest way to
determine (roughly) whether or not the acquisition will be accretive or dilutive?

A. The quick way is to look at P/E multiples. If the acquirer's P/E is higher than the target's,
the acquisition will likely be accretive and vice versa. For instance, if the acquirer's P/E is 20,
and the target's is 10, then you are able to pay less per dollar of earnings for the target.
Q. If you are going to graph a company's cost of capital, with the cost on the Y-axis and
with the company's leverage level across the X-axis (from 0% leverage to 100% leverage),
what would the graph look like?

A. It would look approximately like a smile; the cost of capital would initially decline as you
add leverage, however as the firm becomes increasingly levered, the cost of capital would
increase due to bankruptcy risk
Q. Why would two companies merge / What major factors drive M&A?

A. synergies (revenue - cross-selling; expenses - cost cutting); could exploit economies of

scale, common distribution channels, elimination of a competitor, etc., defensive (do not
want someone else to acquire them)
Q. Why might a firm choose debt over equity financing?

A. Assuming the firm has the ability to take on additional leverage without damaging its
creditworthiness, the firm might choose this in order not to dilute ownership; also, up to a
reasonable level, debt can be seen as having a lower cost than equity.
Q. How do you unlever at beta?
A:: BL = Bu * [1+(1-T)*D/E] (Hamada formula)
T = tax rate; D/E = debt/equity ratio
Q. How do you calculate the enterprise value of a firm?

A. Enterprise Value = Equity Value (i.e. shares outstanding under Treasury method * price) +
debt - cash + preferred stock + minority interest
Q. How do you value a company that is not CF positive, has no public comps, nor any
acquisition comps?

A. Look at distribution, production methods of other companies and see if you can find any
operational similarities. (i.e. find value drivers and see if there are companies that could be
comps)
Q. Give me an example of a coverage ratio?

A. EBITDA/interest expense: shows ability of the firm to generate sufficient cash flow to
cover fixed charges; (EBITDA-Capex)/interest expense: shows ability to cover interest
expense after spending for capex
Q. What types of companies make good LBO targets?

A. Has predictable, stable CF; mature, steady industry; well-established products; limited
capex and product development expenses; undervalued or out of favor; owned by a
motivated seller; not highly levered

Q. Conglomerate X has a significant amount of debt maturing next year. With debt
markets still tight, what options does the company have?

A. If the company does not have excess cash, it could sell some of its assets (but would lose
cashflow from that unit) or issue equity (these are the two primary answers)

Q. How would you value the naming rights of a stadium?

A. You could look at comparables (adjusting for market differences, football, concerts,
demographics, TV rights, size of stadium) to get the intrinsic value; you would then think
about market specific details and willingness to pay of potential buyers (key points
understand valuation is based on intrinsic value and willingness to pay).

Accounting Questions
Q. State three events that reduce retained earnings.
A. Treasury stock purchase. Net Loss. Dividend payment.
Q. Construct an accounting cash flow statement. Define the sections of the statement and
detail the components of each section.

A. The three parts of a cash flow statement are Operating Activities, Investing Activities, and
Financing Activities. A basic cash flow statement looks something like this:
Operating Activities: Net Income +Non-Cash Charges
Change in current accounts other than cash (- for increases in Current Assets, + for increases
in Current Liabilities)
= Cash Provided by Operating Activities Investing Activities:

-Capital Expenditures = Cash Provided by Investing Activities Financing Activities:

+ Issue of Common Stock
-Dividends = Cash Provided by Financing Activities =
Net increase (decrease) in cash balance +Beginning Cash Balance =Ending Cash Balance

Q. What are the effects of FAS 141 and 142?

[Link] 141 - all acquisitions accounted for under purchase method; FAS 142 - no amortization
of goodwill or indefinite life intangibles. Amortize finite life intangibles, such as patents.
Goodwill should be tested for impairment on an annual basis.

Q. If you are in a business that wants to preserve cash, what type of inventory accounting
method would you use (LIFO or FIFO) in a time of rising prices, and why?

A. You would use LIFO because that would give you a higher cost of goods sold and would,
thus, lower your pre-tax income and reduce the amount of taxes owed.
Q What is a deferred tax liability (asset)? (The mother of all interview questions, can be a
deal-maker if you nail it)

A. Deferred tax liabilities (assets) arise in periods when temporary timing differences
between tax and financial reporting cause taxable income to be different from net income
on the income statement. Deferred tax liabilities (assets) represent expected increases
(decreases) in the taxes payable in future periods when these temporary timing differences
reverse- at which time the deferred income tax liabilities (assets) are written off the books.

Other Questions
Q. You won a contest that paid you one chocolate bar every day for the rest of your life.
The IRS intends to tax you for this prize, but is looking to you to justify the tax basis that
you feel is appropriate for this prize. What amount do you report for tax purposes?
A. This is nothing more than a valuation question. The chocolate contest scenario is intended
to see if you really understand the concepts involved in valuation of a stream of cash flows.
There are questions to ask such as 1) Can you use an average life expectancy?, 2) Will that
expectancy be lowered by excessive chocolate intake?, 3) What is the value of a candy bar?,
etc.... After the parameters had been fairly established, my answer eventually ended in a
discussion of what is the appropriate cost of capital with which to discount this chocolate-
flow. Is it better to use a high cost of capital or low cost of capital? Since you are looking to
minimize the valuation (thereby lowering your tax basis), you would likely choose the higher
personal cost of capital. This will return a lower tax basis in present value. When asked how
to justify a high cost of capital, you can talk about the relative risk of your various
investments or internal rate of returns. Creativity is key in this discussion. I believe the
interviewer was looking for three things: 1) Do you understand valuation concepts and the
mechanics involved?, 2) Can you ask the right questions to frame the parameters of the
valuation?, and 3) Do you understand the meaning of cost of capital and risk?

Q. What is 73 ? (Definitely a Sales & Trading type question)

A. The wrong way to answer this question is to try to think quietly and determine what 49*7
is in your head. They want you to think out loud so they understand your thought process.
The best way to do it is to say " 7*7 is 49. And 7* 50 is 350, so by subtracting 7, I get 343. Try
to think of other numbers where this would work.
Q. What is 6/7ths ?
A. Answer like the last one. 1/7th is approximately 0.14, and six times 14 is 84, so the answer
 is approximately .84. Getting the answer right to the fifth decimal place is not what they are
testing. Make sure you know all the 8ths and 16ths too (ie 1/8th is .125).
Q. What is a stock you follow and why should I buy it?
Definitely more common in research and sales and trading type interviews. The point of this
question is not whether you are "correct", but rather, can you
an idea to them. Any job you take always involves some type of sales. Know some basic
highlights of one stock (it doesn't matter which, but probably one in some area that interests
you) and be able hit those highlights in bullet point format (don't ramble, you want to be
concise and be able to tell a quick and dirty story). Get a copy of an analyst report from the
CBI if you need some highlights. For example an answer might be something like this:
"A stock I would recommend is Cisco. The company is the dominant player in providing
technology infrastructure, which is a rapidly expanding market. Its sales have been growing
at 20% per year and are forecasted to grow at that rate for the next 3 years. It has operating
margins that are superior to its competitors that continuing to grow as it leverages
economies of scale."
(Note: I made up everything I just said, but you get the point)
Q. How much would it cost to fill the Statue of Liberty with liters of Vodka?
A. Yes, I was actually asked this once. Try to break it down into pieces. Your numbers don't
have to make sense, it's just your thought process. The statue of Liberty is X high by Y wide
by Z deep. From that you can calculate a volume. Approximate how many liters that would
be and then decide how much a liter a vodka costs.
Q. What is the current unemployment rate?
Q. What was the lead story on the front page of the WSJ summary section today?
Q. What kind of effect will the rise in oil prices have on the U.S. economy?
Q. Can you describe the shape of the yield curve currently?

Q. Where are the Dow, Nasdaq, and S&P 500 trading currently?

Q. Where are 10-year Treasurys trading?

Q. Where is the Federal Funds rate?

Q. Where is 3-month LIBOR?

Q. Where is the dollar versus the Yen and Euro?

Dual culture
Decivise/[Link]
Organized : way to mutlitask, to organize my work : not tedious, laborious
Good communicator
Tenacity : perseverant . I don’t take no for an answer. I am not afraid of challenges.
Ex : Music academy = sign of tenacity
BagPacking in New-York
Copenhagen