Investment Banking Interview Questions Flashcards
What is EBITDA?
What is EBITDA?
What does it stand for?
EBITDA = Earnings Before Interest, Taxes, Amortization
Why do you use EBITDA?
It is helpful to understand how much cash a company creates, irrespective of how it is financed (i.e., if it has interest payments) or where it is headquartered (i.e., to what extent it is taxed).
Why do you subtract Depreciation & Amortization?
B/c D&A is a non-cash expense, and we want to know how much cash a company is generating.
Million-Dollar Question: “What is EBITDA useful for”?
It is a good proxy for how much cash the company generates from its operations (i.e., cash from operations). Is good for comparing companies.
What are the 3 financial statements? Can you walk me through them?
Three Financial Statements?
The Statement of Cash Flows
The Balance Sheet
The Income Statement.
How does the income statement work? Revenues Less COGS (direct expenses) = Gross Profit Less SG&A (indirect expenses) = Operating Profit \+ Non-Operating Income = EBIT - Interest - Taxes = Net Income
How does the balance sheet work?
Assets = Current Assets + Non-Current Assets
Liabilities = Current Liabilities + Non-Current Liabilities
Equity = Stakeholder Equity + Non-Controlling Interest
How does the cash flow statement work? Starts w/ Net Income Add back non-cash expenses (i.e., D&A) Subtract change in Working Capital (WC = Curr. Assets - Curr. Liabilities) Cash Flow from Operations
Cash from Investing
Cash from Financing
= Net Change in Cash
How do these all connect?
Income Statement connects to Cash Flow Statement via Net Income
Cash Flow Statement connects to Balance Sheet via Cash Balance
Income Statement connects to Balance Sheet via Retained Earnings
What does alpha mean?
For a given level of risk, to what extent does your portfolio outperform the market?
What is investment Banking?
Investment banking is a broad term for an industry which provides services to companies. Services include the following:
M&A Advisory (i.e., bankers help a company determine who to acquire)
Creation of Stock (i.e., bankers set up the IPO)
Create of Bonds (i.e., bankers help create the companies bonds)
Time that I’ve Failed
I was unable to secure an internship following my freshman year. From that, I learned how important it is to prepare for interviews, learn about companies that I’m interviewing at, and to be assertive.
What is Accounts Receivable?
What is it?
The value of sales that have been realized, but cash has not been received.
Why does it exist?
Helps reconcile a cash-only accounting system with a recognition-based accounting system. At the end of the day, cash is king. So, when someone pays for something with A/R, we do not recognize this as a cash inflow, since no cash has been received.
What is Depreciation?
Depreciation is a way of recognizing the expense related to an asset over the period in which the asset is used.
For example, if you buy a $1000 piece of equipment that is used for 10 years, you would recognize depreciation of $100 per year.
A/R vs. Deferred Revenue
A/R - Sales that have occurred and are recognized.
Deferred Revenue - Sales that have not occurred, but cash has been provided.
They are literally the opposite of one another.
For example, if I give you $100 to do work for me in 3 months, that $100 will go towards deferred revenue since you haven’t actually done the service yet, because you cannot recognize the revenues.
Pitch a stock?
Netflix
Current P/E ratio = 16.3x
2Y High P/E ratio = 35x
2Y Avg P/E ratio = 25x
I think Netflix is undervalued at 16.3x P/E ratio. I think it should be valued at 25x, which is just ahead of Disney’s current P/E ratio of 24x. As such, after the ad-supported tier is implemented, I expect Netflix share price to rebound closer to its 2Y average.
As such, Netflix, which is trading at $223/share, should be trading at $342/share.
What is a stock?
A stock is an investment instrument that allows a company to raise money via selling direct ownership (i.e., shares). Stock shows up in the “equities” section of a company’s balance sheet.
What is a bond?
A bond is an investment instrument that allows a company to raise money via a loan (i.e., debt). A bond shows up in the ‘liabilities” section of a company’s balance sheet.
What is debt?
An amount of money that is owed to someone
Represents a “liability” on the balance sheet
Most common forms: Notes (such as notes payable) and Bonds
What is P/E Ratio?
The P/E ratio stands for “price to earnings” ratio.
It is calculated by:
P/E = [Market Value of Company] / [Company’s Recent Earnings]
P/E = [Price of Stock] / [Earnings per Share]
Example 1:
So, if we have a $40Bn company that generated $10Bn in earnings, its P/E
Ratio would be 4x.
Example 2:
If the stock is valued at $50 and generated $2 in earnings per share (EPS), its P/E ratio would be 25x.
