25 IB INTERVIEW QUESTIONS Flashcards
Tell me about financial statements and why they are important.
3 financial statements- bank balance sheets, income statements, and cash flow statements
balance sheets show a company’s assets and liabilities, including shareholder equity, debt, and accounts payable ($ company owes to vendors or customers)
income statements display a company’s net income over a period of time and shows revenue and expenses
cash flow statements shows a company’s cash flow from operating, financing, and investing activities
What is enterprise value versus equity value?
Enterprise value is the overall current value (true price to buy the company) of the company while equity value is the value of the company’s shares and loans (sticker price), which can give an idea of the company’s current and future value.
What is the formula for Enterprise Value?
Enterprise Value = Market Capitalization +Total Debt - Cash
Enterprise Value = Equity Value + Debt + Preferred Stock + Noncontrolling Interests –
Cash & Cash-Equivalents.
What are the main components of WACC and how do you calculate it?
Weighted Average Cost of Capital (WACC) determines the return on investment in a company
-it’s the sum of a company’s proportional debt and equity, multiplied by the cost of debt and cost of equity, respectively.
WACC = (E/V x Re) + (D/V x Rd x (1-Tc))
Equity (E) is the market value of the company’s outstanding shares, so E/V is the percentage of the company’s value that is equity.
Debt (D) is the market value of the company’s debt, so D/V is the percentage of the company’s value that is debt.
Value (V) is the value of the company’s capital, or E+D.
Re is the cost of equity
Rd is the cost of debt
Tax (Tc) is the corporate tax rate.
What is EBITDA?
EBITDA is an acronym that stands for earnings before interest, taxes, depreciation and amortization. It is a measure of financial performance and helps determine a company’s earning potential.
How do you Value a company?
3 main ways: comparable company analysis, discounted cash flow analysis, and precedent transaction analysis
Comparable company analysis: finding companies who are similar to the one you are trying to value and comparing their EBITDA, stock price, and price to earnings, among other variables.
Discounted cash flow (DCF): using how much the company is projected to make in the future discounted to present values.
Precedent transaction analysis: similar to a comparable company analysis, except you find how much similar companies have SOLD FOR to determine the worth of the company you’re valuing.
How do you calculate terminal value?
Terminal value (TV) is the estimated value of a company after a specific period of time, and it is a core element of DCF analysis. There are two ways to calculate terminal value: the growth in perpetuity approach or the exit multiple approach.
What is the growth in perpetuity approach?
The growth in perpetuity approach involves assuming that cash flows grow at a stable rate indefinitely.
What is the exit multiple approach?
The exit multiple approach does not assume perpetual growth, and instead looks at the net value of a company’s assets at a given moment in time. It is used for a company that is going to be acquired or liquidated in the future.
How do you do a DCF valuation?
At a high-level, DCF valuation involves determining how much a company is set to make over a 5-to-20-year period and then calculating a terminal value.
-you need to project unlevered future cash flows (cash flows that do not take into account any debt the company has),
-determine a discount rate, and calculate a terminal value.
-Then, you discount the unlevered free cash flow and terminal value to present value to determine enterprise value.
-By subtracting net debt from the company’s enterprise value, you calculate the equity value.
What is the discount rate you should use in an unlevered DCF analysis?
The discount rate is the required rate of return of both debt and equity, so the rate should be the weighted average cost of capital (WACC).
What is Beta and why would you unlever it?
Beta, symbolized by the Greek character β, is an estimate of how volatile a security (or tradeable asset) is compared to the overall market (often the S&P 500). The baseline for beta is 1.0, so anything above 1.0 is more volatile and holds more inherent risk.
best to use an unlevered beta when comparing a company that is not on the market yet
Because an unlevered beta does not consider debt, it allows you to see the volatility of the company’s equity alone, as if the company had not taken on any debt.
levered beta: considers both equity and debt in a firms capital structure when measuring risk of a firm
What’s more expensive: the cost of debt, or the cost of equity?
The cost of equity is how much shareholders are expected to make from their investment in a company.
The cost of debt is the rate of return that bondholders expect from investing.
The cost of equity is typically higher, since shareholders are not guaranteed fixed payments and they assume a higher risk when investing.
Additionally, the cost of debt is lower because the interest expense when borrowing debt is tax-deductible. (Banks and Bondholders are paid before stockholders when a company goes out of business)
Why would a mergers and acquisition take place?
-Saving money
-Improving financial health and overall metrics
-Eliminating competition from the market
-Gaining more power over pricing by buying-out a distributor or supplier
-Diversifying or specializing — expanding the company’s product or finding ways to make it more niche for a specific market
-Expansion of technological abilities, or absorbing new technologies from acquired companies
When should a company issue debt instead of equity?
Since the cost of debt is generally cheaper than the cost of equity, there are quite a few situations where issuing debt makes more sense than issuing equity.
Issuing debt instead of equity makes sense if:
-The company can get tax shields from issuing debt.
-The company has stable cash flows and can make interest payments.
-It results in a lower WACC.
The company can get a better return on investments with more financial leverage.
