投资银行真对MBA生的面试问题及参考答案

投资银行真对MBA生的面试问题及参考答案

Source:EfinancialCareers

Belowareacollectionofrealquestionsthatwereaskedofinvestmentbanking

candidatesattheMBAlevel,alongwithsuggestedanswersthattheylaterput

together.Ifyoufindyourselfona<superday,interviewatabigbank,youcanbetthat

you'llbeaskedatleastoffewofthesequestions.Disagreewithananswer?Letus

knowinthecommentsbelow.

ExplainanLBO(leveragedbuyout)tomygrandmother,whoknowsnothingabout

finance

AnLBOisatransactioninwhichapartypurchasesabusinessandbringsit

private.Thetransactionisfundedusingalargeportionofdebt.Threemain

characteristicsofLBOs-1)highdebt,whichisintendedtobepaiddown,2)

incentives,managersaregivengreaterstakeinbusiness,3)privateownership,many

LBOsgopublicagainoncedebthasbeenpaiddown.

Ifacompanywaslookingtoraisedebtorequity,whatarethe3mostimportant

questionstoask?

1)Whethertheywillgenerateenoughcashflowstocoverinterestobligations.How

manymultiplesinexcessofcurrentinterestpaymentsistheiroperationsgenerating

incashflow?

2)Whatistheircurrentcapitalstructureandcantheybringonmoredebtand

leveragethecompanyfurtherwithoutbeingtooleveredversusindustryandpeersso

thattheircreditratingandstockpriceisn'tnegativelyimpacted.

3)Whatisthecurrentequityvalue?Ifthestockpriceisappropriatelyvaluedorhasa

potentiallyhighvalue,thenequitymightbebetter.

HowdoesFEDchangetheinterestrates?

TheFEDcanadjusttheFederalFundsRatewhichistheinterbankovernightrateat

whichtheFEDlendsmoney.ThelowertheFederalFundsRate,thelowerreal

interestrates.TheFEDcanalsoadjustthemoneysupplythroughthepurchaseor

saleofgovernmentbonds,wherebyaffectinginflationaryexpectationswhichwill

adjustnominalinterestrates.

Whatwouldbethedifferencebetweentheinterestcoveragerateofaseniorboard

vs.juniordebt?

Interestcoveragerateisoperatingincomedividedbyinterestexpense

(EBIT/interest).Thisbasicallymeasureshowmuchleadwayacompanyhasbetween

itsearningsandinterestpayments(ahurdletheymustkeepjumpingtoavoid

default).

Ineventofbankruptcy,theseniordebtwouldhavetobepaidbeforethejunior.

However,whenusingtheinterestcoverageratiotoanalyzeacompany'sabilityto

keepupwiththeirdebtpayments,IwouldlookattheEBITdividedbyALLformsof

debtasafailuretomakepaymentsforanyformofdebtresultsindefault.

HowdoesNetIncomeflowintotheBalanceSheet,IncomeStatementand

StatementofCashFlows?

TheNetIncomeonthebottomlineoftheincomestatementgetsaddedintothe

retainedearningsonthebalancesheet.Thenetincomefromtheincomestatement

isalsothestartinglineofthestatementofcashflows.

Howdoyouvalueacompany?

Therearefivecommonvaluationmethodologies.

,TradingRange(therangethestockhasbeentradinginduringthepast52-weeks).

Ifwetrustthemarketweshouldassumethisisareasonableplacetostartour

analysis.

,DiscountedCashFlow(DCF),alsocalledIntrinsicValue,seekstofindapresent

valueofallfuturecashflowsofthefirmthatareavailabletostakeholders.

ThiscanbedoneusingWACC(weightedaveragecostofcapital)orAPV

(adjustedpresentvalue).

,PublicComparableslooksatpeercompaniestodeterminehowthemarketvalues

companiesinthesameorsimilarbusinessesusingmultiplesincludingP/E

andEV/EBITDA.

,AcquisitionComparables,alsocalledDealCompsorPrecedentTransactions,looks

toseehowmuchacquirersrecentlypaidforsimilarbusinesses.

,AssetValue,alsocalledliquidationorbreakupvalue,examineswhatyoucansell

thecompany'sassetsfor(includingrealestate).

Inaddition,valuationcanbeframedthrough:

,LeveragedBuyoutlooksatwhatafinancialsponsorcouldpayconsideringatarget

IRR(internalrateofreturn)andthedebtcapacityofthefirm.

,MergerConsequencesAnalysisisactuallyanaffordabilityanalysis(whatcanan

acquirerpay)ratherthanananalysisofthevalueofatarget.

Describehowtovalueaprivatelyheldcompany

Valuationforaprivatecompanyisthesameasthevaluationofapubliccompany

withsomecomplications,particularlyasitrelatestoDCF(discountedcash

flow).Becauseaprivatecompanyhasnopubliclytradedequity,abetacannotbe

directlycomputed.

Tofindthecostofequity(KE)

1.Estimatethetotalvalueoftheprivatecompanybasedoncomparables(useaverage

EV/EBITDA)

2.Deductthevalueofthedebttogetestimated“market"valueofequityorinternal

useonly

3.Gettheaverageleveredbetafromthecomparablesandunleverit

4.Re-leverthebetafortheprivatecompanybasedonthetargetD/E(debt-to-equity)

ratio

5.CalculateKebasedonCAPM(capitalassetpricingmodel)

Tofindthecostofdebt(Kd)

1.Someprivatelyheldcompanieshavepubliclyti'adeddebt-solookuptrading

yieldstoestimateKd

2.Alternatively,estimatewhatthecreditratingofthecompanywouldbebasedon

comparables(lookatcreditstatistics)

3.Forestimatedcreditratings,usecurrentmarketyieldsforsimilarlyrated

companiestodetermineKd

ThencalculateWACCasnormalandDCFasnormal

Supposeyourclienthadsignificantexcesscashonthebalancesheet.Howwould

yourecommenditsuse?

First,youmustdefinewhatyouthinkissignificantexcesscash.Forcompaniesthat

areincyclicalindustries,payingoutlargeamountsofcashmightleavethecompany

unpreparedforasubsequentmarketdownturn.Onceyouhaveestablishedthatyour

clientdoesindeedhaveexcesscashonthebooks,thereareafewtriedandtested

usesforexcesscash.

■Investinpositivenetpresentvalue(NPV)projects(acquisitions,CapEx,R&D)

■Returnmoneytoshareholdersintheformofsharerepurchases,dividends,and

debtrepayments

■MusttakeintoaccountKd,Ke,WACC,andtaxconsiderations

Whymighttwocompanieshaveadifferentcostofequity?

Theyhavedifferentbetas.Thebetaofastockmeasuresthatstock'ssensitivityto

movementsintheoverallstockmarket.Morevolatilestockshaveabetahigherthan

one;lessvolatilestockshaveabetalessthanone.

Inanall-stocktransaction,acompanywithalowerP/Eisbuyingacompanywith

ahigherP/E.Whatistheeffectofthistransaction?Whathappensifyouuse

debt/cashtomakepartoftheabovetransaction?Why?

Thepointofthisquestionistogetyoutosaywhethertheacquisitionisaccretiveor

dilutive.Generally,companiesdonotwantdilutiveacquisitionssincetheydestroy

shareholdervalue.Thecombinedcompan/sratiowillhaveahigherP/Ethanthe

acquireroriginallydid(butlowerthantheseller,obviously).However,sincemore

shareswillhavetobeissuedbythelowerP/Ecompany(thanwouldhavebeen

needediftheacquirerhadahigherP/Eratio),thecombinedcompanywillhavea

lowerEPS(dilutiveacquisition).Typically,thecompanywiththehighergrowthrate

andgrowthpotentialcommandsahigherP/E.Theoppositeistrueforcompanies

withlowerP/Eratios.Ifyouthrowindebt/cash,fewershareswillbeneededforthe

acquisition,thusthetransactionwillbelessdilutive,andpotentiallyaccretive.

IfacompanychangesitsmethodofinventoryvaluationfromLIFOtoFIFOinan

inflationaryenvironment,whatistheimpactonthethreefinancialstatements?

IfacompanychangesitsmethodofinventoryvaluationfromLIFO(lastin,firstout)

toFIFO(firstin,firstout)inaninflationaryenvironment,itmeansthatthecostof

goodssold(COGS)willfall,sincegoodspurchasedearlierarebeingchargedtoCOGS

andendingbalanceofinventorywillrisesincerecentlypurchasedgoodswillnowbe

reflectedinendinginventory.ThismeansthatincomewillriseintheI/S,andvalue

ofassetswillincreaseintheB/S.

Ofthethreemainvaluationmethods(DCF,Publiccomparablesandtransaction

comparables),rankthemintermscfwhichgivesyouthehighestprice.Whichone

typicallyyieldsthehighestvaluation?

Simpleanswer-itdepends.DependsondiscountrateinDCFmodel,dependson

thecomparablecompaniesused,dependsonwhetherthemarketishot/coldandthe

companiesareovervalued/undervaluedfornogoodreason.Generally,however,

transactioncompswouldgivethehighestvaluation,sinceatransactionvaluewould

includeapremiumforshareholdersovertheactualvalue.Thesecondhighest

valuationwouldprobablybetheDCF,sincetherearealotmoreassumptionsthatare

involved(growthrate,discountrate,terminalvalue,taxrates,etc),butitcanalsobe

themostaccuratedependingonhowgoodtheassumptionsare.

Ifyouhadtopickonestatementtolookat(balancesheet,cashflow,income

statement),whichonewoulditbeandway?

Norightanswer-cangowithwhicheveroneyoulike.Eachhasitsadvantages:

incomestatement-showstheprofitabilityofacompany,trendsinsales/expenses,

margins,etc;balancesheetisagreatwaytoseewhatitemsmakeupthecompany's

assetsandwhothecompanyneedstopaybackforthoseassets.Personally,Iwould

gowiththecashflowstatement.Attheendoftheday,cashisking.Acompanythat

haspositiveincomebutverylittlecashisindeeptrouble.Cashflowsareusedfor

DCFmodels,notnetincome.Thecashflowstatementallowsobservingimportant

performancemetricsfrombothincomestatementsandbalancesheetssuchasnet

income,depreciation,sourcesandusesoffunds,changesinassetsandliabilities.

Nametwocommonwayscompaniescanmanagetheirearnings?

1)ChangingaccountingpracticesunderGAAP(e.g.switchingbetweenS-L

DepreciationandDoubleDecliningBalance;changingbetweenLIFOandFIFO;

etc...).

2)“Bigbath,5(takingnegativehitsinanalreadybadyearandbasicallyjustwriting

theyearoff)or“CookieJarAccounting”(reducingtop-linerevenuesingoodyears

andkeepingthemonreserveforbadyears).

WhattypeofacompanywouldbeagoodcandidateforanLBO?

ItisdifficulttodefinethecharacteristicsofatypicalLBOcandidate,butthe

followingthingsareveryimportant:

■Goodmanagement(MOSTIMPORTANT):couldbeneworold,buttheyneedtobe

motivated,competent,qualified,andcorrectlyincentive.Ifthemanagementis

old,youprobablywanttogivethemsomeequityinterestinthecompanyasan

incentivizingtool.Ifthemanagementisnew,youneedtofindtheright

incentives.

■Strongcashflow:cashflowshouldbehealthy,steady,andpredictabletoallowfor

easyborrowingfromcreditors.

■MassiverequiredcashoutflowsforCapExandR&Dshouldn'tbenecessarytothe

ongoingsuccessofthecompany.

■Exitstrategy:Financialsponsorshouldhaveastrategyforexitingthecompany

withinanappropriatetimeframebyeither:sellingthecompanytoastrategic

orfinancialbuyerorIPOingthecompany.Theexitmultipleshouldbeatleast

theacquisitionmultipleassumingthesponsorhasimprovedtheprofitability

oftheprofitabilityoftheportfoliocompany.

■Marketniche:goodnicheinthemarketsfortheirproductlines.

■Steadystreamofrevenuesandaclientbasethatisnotoverlydependentonafew

largecustomers.

■Steadygrowthpattern,asgrowthinprofitabilitywillacceleratetherepaymentof

debt;growthwillalsohelpthevaluationofthecompanyifthesponsoris

lookingtoIPOthecompany.

■Workforce:mustbeflexibleandwillingtoparticipate,asbusinessplanschange

andassetsareoftenredeployedafteranLBO.

■Skeletonsintheboardroom:litigationorenvironmentalconcernscouldbe

dealbreakerssincetheseissuescouldmakeitdifficulttoattainfinancing.

■Technology:state-of-the-arttechnologyhelpsensuremaximumefficiencyand

profitability;alsodecreasesneedforlargeCapExinthefuture.

■Buriedtreasure:deal-makersarealwayslookingforuntappedorhiddenresources

suchas,realestate,exclusivelicenses,rights,patents,contracts,franchises,

etc...fromwhichmaximumvaluehasyettobeunleashed.

■Costs:acompanymusthavethecapacityandwillingnesstocutcosts.

DefineBetaforalayman

Betatellsyouhowmuchthepriceofagivensecuritymovesrelativetomovements

intheoverallmarket.

ABetaof1meansthatifthemarketmoves,thestockmovesinunisonwiththe

market.

ABeta<1meansthatifthemarketmovesacertainamount,thestockwillmoveless

thanthatamount

ABeta>1meansthatifthemarketmovesacertainamount,thestockwillmove

morethanthatamount.

WhatkindofmultiplesshouldIusetodoacomparablecompanyanalysisonABC

company?HowwouldIcalculatethem?

Commonratiosusedtocompareequityperformance:

-Price/EPS

■MarketValue/NetIncome

■MarketValue/BookValue

■PricetoEarnings/GrowthRate("PEGRatio”)

Commonratiosusedtocompareenterpriseperformance:

■EnterpriseValue(EV)/EBITDA

-EV/EBIT

■EV/Sales(generallyonlyappropriateforvolumedrivenbusinessesorthosewith

negativeearnings)

Howwouldyouevaluatethecreditworthinessofacompanyifyouwereabank?

Acreditor'smeasureofanindividuaFsorcompany'sabilitytomeetdebtobligations.

Lenderswilltradeoffthecost/benefitsofaloanaccordingtoitsrisksandthe

interestcharged.Butinterestratesarenottheonlymethodtocompensateforrisk.

Protectivecovenantsarewrittenintoloanagreementsthatallowthelendersome

controls.Thesecovenantsmay:

■Limittheborrower'sabilitytoweakentheirbalancesheetvoluntarilye.g.,by

buyingbackshares,orpayingdividends,orborrowingfurther.

■Allowformonitoringthedebtrequiringauditsandmonthlyreports

■Allowthelendertodecidewhenhecanrecalltheloanbasedonspecificeventsor

whenfinancialratioslikedebt/equity,orinterestcoveragedeteriorate.

Creditscoringmodelsalsoformpartoftheframeworkusedbybanksorlending

institutionstograntcredittoclients.Forcorporateandcommercialborrowers,these

modelsgenerallyhavequalitativeandquantitativesectionsoutliningvariousaspects

oftheriskincluding,butnotlimitedto,operatingexperience,management

expertise,assetquality,andleverageandliquidityratios,respectively.

Visualizetheincomestatementofanycompanyyouhaveaudited.Takemethrough

itskey