IB

What is an IPO?

An Initial Public Offering or IPO is the very first sale of stock to the public by a private company. This is also known as "going public". Two kinds of companies will undertake an IPO: Startup companies looking to raise capital and investors Large private companies looking to become publicly traded

If there was an earthquake in a country, what would happen next year to the country's GDP growth compared to the year of the earthquake?

An earthquake would cause the country's GDP to immediately decline sharply due to the immediate effects of the earthquake as a lot of productive resources may be put out of use. But then the GDP growth will start to increase to an above-average level as there would be an increased amount of spending on rebuilding the infrastructure.

Can a company have a negative book equity value?

Book equity value is the accounting value of equity derived by subtracting the value of a company's liabilities from its total assets. It is the total shareholder's equity, an amount shown as "Total Equity" in the Balance Sheet of the company. Sample Answer: Yes. If there are large cash dividends or if the company has been operating at a loss for a long time.

What is the difference between cash-based accounting and accrual-based accounting?

Cash-based accounting recognizes sales and expenses when cash flows in and out of the company. Accrual-based accounting recognizes revenues and expenses as they are incurred regardless of whether cash flows in or out of the company at that exact time. Accrual-based accounting is the more common method for large corporations.

Would you be calculating enterprise value or equity value when using a multiple based on free cash flow or EBITDA?

EBITDA and free cash flow represent cash flows that are available to repay holders of a company's debt and equity, so a multiple based on one of those two metrics would describe the value of the whole business from the perspective of all its investors. A multiple such as the P/E ratio, based on earnings alone, represents the amount available to common shareholders after all expenses are paid, using which you would be calculating the value of the firm's equity.

Are there any special multiples that only apply to some industries or sectors?

Examples of industry-specific multiples are: Retail or Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rental Expense) Energy: EV / EBITDAX (Earnings Before Interest, Taxes, Depreciation, Amortization & Exploration Expense), EV / Daily Production, EV / Proved Reserve Quantities Technology (Internet): EV / Unique Visitors, EV / Page views Note: Feel free to use multiples that you have picked up from other sources. These are for illustrative purposes.

What is the purpose of tapering? What must the federal reserve consider when implementing it?

Tapering is a balancing act to reverse the effects of quantitative easing once its objectives have been achieved. The Fed must consider the right rate of implementation so as to not lead the economy into a recession.

If assets increase by X amount what would happen to shareholders equity? Are assets recorded at cost, market value, or book value?

The increase in shareholders equity would be equivalent to the increase in assets (x), due to the effect of the equation below:Assets = Liabilities + Shareholders equity. Assets are recorded at cost (what you paid for them).

Why would a company issue equity rather than debt to fund its operations?

There are many reasons why a company would want to issue equity instead of debt. Some of them are: -If the company feels its stock price is inflated, it can raise a relatively large amount of capital with comparatively minimal dilution to existing shareholders. -If the projects the company is looking to invest in do not produce immediate or consistent cash flows to pay its debt. -If the company wants to adjust the cap structure or pay down debt. -If the owners of the company want to sell off a portion of their ownership.

How do credit card companies make money? What are the costs?

They earn revenue through APR, interchange, late fees, and subscription fees and their primary costs are operations and marketing-related expenses.

3 main financial statements?

1)Income statement - shows revenues and expenses which produce net income 2)Balance sheet - show the companys assets, liabilities, and equity 3) Statement of cash flows - starts with net income form the income statement, then adjusts for non cash expenses, non operating expenses like capital expenditures, changes in working capital, and debt repayment to arrive at the companies closing cash balance

Walk me through a DCF and a DDM for FIG and explain how they are different.

A DCF involves predicting the unlevered free cash flows that a business will generate, discounting it into the present and then adding it up to get the enterprise value. A DDM on the other hand only looks at dividends the company pays, and then divides it using the required rate of return to find the value of equity. A DCF typically spits out an enterprise value whereas DDM is an equity value based on the present value of projected free cash flow to equity (% of dividends for a bank since they have regulatory capital requirements, which is a limiter on growth assumptions on a bank DDM).

What is typical of an LBO (leveraged buyout) transaction?

A firm (usually a PE firm) uses a high amount of debt (70 - 90%) to finance the purchase of a company, then uses the company's cash flows to pay off that debt over time. The acquired company's assets may be used as collateral. Ideally, the original debt of the acquired company would have been partially retired at the time of exit. In the context of a private equity investment, the debt acts as a way to magnify returns (boost IRR for the fund), but it can also backfire if the acquisition turns south.

What is the difference between a strategic buyer and a financial buyer?

A strategic buyer is generally a corporation that wants to acquire another company for strategic business reasons such as synergies, growth potential, etc. An example of this would be an automobile maker purchasing an auto parts supplier in order to gain more control of their COGS and keep costs down. A financial buyer is generally a firm looking to acquire another company purely as a financial investment. An example is a private equity fund doing a leveraged buyout of the company.

What is the difference between accounts receivable and deferred revenue?

Accounts receivable is revenue, which has been earned and recognized because the product has been delivered, but the customer has not yet paid the cash. Deferred revenue is cash that has been collected for products that have not yet been delivered, so the revenue has not yet been recognized. Accounts receivable is an asset on the Balance Sheet, whereas deferred revenue is a liability.

How do interest rates affect the market?

An increase in the interest rates will affect the cost of borrowing for companies. This means a lesser amount of funding from banks, which leads to companies having slower growth on average as compared to before the interest rate hike. The higher cost of borrowing will also affect DCM. I would expect companies to issue fewer bonds or maintain the same capital structure but cut back on other expenses e.g. layoffs. Given the slower growth of companies, I would expect lesser interest from investors on IPOs. The slower growth and low valuations will then lead to an increase in M&A by strategics. On the other hand, the higher cost of borrowing might reduce the amount of leveraged M&A activity at the same time. Overall, I feel that the increase in interest rates will affect M&A and capital markets negatively, and thus hiring will be down next year.

Given an operating income of 40, depreciation of 10, a tax rate of 40%, interest expense of 15, and CAPEX of 15, what's the levered FCF?

Assuming operating income is EBIT, add back depreciation (a non-cash expense) and deduct CAPEX to get Unlevered Free Cash Flow (UFCF) = 35. Then deduct the interest expense but add back interest tax shield, for the net expense of $9 (15 * (1 - 40%)) assuming 40% tax rate. This gives us a Levered Free Cash Flow (LFCF) of $26.

Walk me through a Leveraged Buyout (LBO) model.

At a high level, there are 5 steps to an LBO: 1) Calculate the total acquisition price, including the acquisition of the target's equity, repayment of any outstanding debt, and any transaction fees (such as the fees paid to investment banks and deal lawyers, accountants, consultants, etc.) 2) Determine how that total price will be paid, including:- Equity from the PE sponsor, - Roll-over equity from existing owners or managers, - Debt, seller financing, etc.​ 3) Project the target's operating performance over ~5 years and determine how much of the debt principal used to acquire the target can be paid down using the target's FCF over that time. 4) Project how much the target could be sold for after ~5 years in light of its projected operating performance; Subtract any remaining net debt from this total to determine projected returns for equity holders. 5. Calculate the projected IRR and MoM return on equity based on the amount of equity originally used to acquire the target and the projected equity returns upon exit.

What is Beta?

Beta is a measure of the volatility of an investment compared with the market as a whole. The market has a beta of 1, and hence, investments that are more volatile than the market have a beta greater than 1 while those that are less volatile have a beta less than 1.

Walk me through the full math for the deal now. Assume that Company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10. It acquired Company B for a Purchase Equity Value of $150. Company B has a Net Income of $10 as well

Company A's EPS is $10 / 10 = $1.00. To complete the deal, Company A must issue 6 ($150 / $25.00) new shares which means that the combined share count after the deal is 16 (10 + 6). Since no cash or debt was used and the tax rates are the same and the combined net income = Company A net income + Company B net income = $10 + $10 = $20. The Combined EPS, therefore, is $20 / 16 = $1.25, which is an increase of 25% in the EPS, and this is what is called accretion.

What is EBITDA?

EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization.It gives us a good idea of a company's profitability and is a quick metric for free cash flow because it will allow you to determine how much cash is available from operations to pay interest, CAPEX, etc. EBITDA = Revenue - Expense (except depreciation and amortization) It is also often used for rough valuations in a comparable company or precedent transaction analysis as part of the EV/EBITDA multiple.

Why might there be multiple valuations of a single company?

Each method of valuation will generate a different value because it is based on different assumptions, different multiples, or different comparable companies and/or transactions. Generally, the precedent transaction methodology and discounted cash flow method lead to higher valuations than comparable companies' analysis or market valuation does. The precedent transaction result may be higher because the approach usually will include a "control premium" above the company's market value to entice shareholders to sell and will account for the "synergies" that are expected from the merger. The DCF approach normally produces higher valuations because analysts' projections and assumptions are usually somewhat optimistic.

What is Enterprise Value?

Enterprise Value (EV) is the value of an entire firm, both debt, and equity. This is the price that would be paid for the company in the event of acquisition without a premium. EV = Market Value of Equity + Debt + Preferred Stock + minority interest - Cash

If enterprise value (EV) is $80mm, and equity value is $40mm, what is the net debt?

Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest. Sample Answer:If we assume there is no minority interest or preferred stock, then Net Debt will be $80mm - $40mm, or $40mm.

What might cause a company's Present Value (PV) to increase or decrease?

Factors that may cause a company's PV to increase: -An increase in cash flow causes an increase in future value (FV) -An increase in the growth rate of future cash flows Factors that may cause a company's PV to decrease: Increased discount rate -Delay in receiving future cash flows -Reduction in the growth rate of future cash flows

If you were the Chief Financial Officer (CFO) of a Fortune 500 company, what would be your concerns? Explain from a high level what the long-term financial implications are for your company.

Fortune 500 companies are usually in the mature stage of their business lifecycle. This means they have stable growth accompanied by a good amount of stable cash flows and balances. As a CFO of one, I would look out for signs of declining products or services to be discontinued while also actively keeping an eye out for opportunities to expand and grow, either through mergers and acquisitions or by increasing the spending on internal research and development. To this end, the following figures from the three financial statements will be the ones I will be keeping a​ close eye on: -Income statement - product-wise revenue growth, cost, and margins, profits, R&D expenses -Balance sheet - liquidity ratios, capital assets, credit ratings -Cash flow statement - cash flows in the short and long term, raising money for new acquisitions

Which of the valuation methodologies will result in the highest valuation?

Here is a list of the four valuation methodologies organized from highest valuation to lowest valuation: -Precedent Transaction - Since a company will pay a control premium and a premium for synergies coming from the merger, values tend to be high. -Discounted Cash Flow - Those building the DCF model are frequently optimistic in their projections. -Market Comps - Based on other similar companies and how they are trading in the market. No control premium or synergies. -Market Valuation - Based on how the target is being valued by the market. Just equity value, no premiums or synergies.

How would you forecast the forward-year production of an E&P company with a well-established production history?

If we assume it's a single asset company, we can estimate the capital efficiency based on historical data and apply it against the company's CAPEX forecast to reach a "new additions" production estimate. From there, applying the historical asset production decline rate against "base" production and summing the numbers together leads us to a forward estimate.

Walk me through a DCF.

In an interview, it is important to keep your technical overview at a high level. Start with a high-level overview and be ready to provide more detail upon request. Sample Answer: -Project out cash flows for 5 - 10 years depending on the stability of the company -Discount these cash flows to account for the time value of money -Determine the terminal value of the company - assuming that the company does not stop operating after the projection window -Discount the terminal value to account for the time value of money -Sum the discounted values to find an enterprise value -Subtract the present value of debt (this is generally the market value of debt) and then divide by diluted shares outstanding to find an intrinsic share price Common questions that follow this are: -Why do you multiply by (1-tax rate)? Sample Answer:You do this because interest expense (the cost of debt) is tax-deductible so you need to account for the benefit provided by this "debt tax shield." - -What is the cost of equity? Sample Answer:The cost of equity is usually calculated using the Capital Asset Pricing Model (CAPM).CAPM = Risk-free rate + Beta * (Expected market return - Risk-free rate) What is the exit multiple method for determining the terminal value? Sample Answer:Find an industry average multiple and multiply it by final year revenue (if using EV/Revenue) or final year EBITDA (if using EV/EBITDA).

How would a $10 increase in depreciation expense affect the three financial statements (assuming a 40% tax rate)?

In the income statement, the depreciation increase of $10 is set off by a reduction of $4 on taxes as depreciation is a tax-deductible expense for the net reduction in net income of $6. In the cash flow statement, net income is reduced by $6, depreciation is increased by $10, net cash from operations and total cash is increased by $4. This increase in cash is because depreciation is a non-cash expense that has no impact on cash while the reduction in taxes affects the cash flow. In the balance sheet, property, plant, and equipment balances reduce by $10, cash balance increases by $4, and retained earnings reduce by $6 due to the reduction in net income. The following points summarize this: On the income statement $10 depreciation expense, 40% tax rate Reduction in net income of $10 x (1 - 40%) = $6 Reduction in net income flows to cash from operations Net income reduced by $6 Depreciation increases by $10 Net increase in cash from operations of $4 Ending cash increases by $4 Ending cash flows onto the balance sheet Cash increases by $4 Property, plant, and equipment lose $10 in value Net decrease in assets of $6, matches the net drop in shareholder equity due to the reduction of retained earnings from the $6 is net income

What happens to free cash flow if net working capital increases?

Intuitively, you can think of working capital as the net dollars tied up to run the business. As more cash is tied up (either in accounts receivable, inventory, etc.), free cash flow will be reduced. Remember that if the assets go up in value (denoting a purchase of assets), this is a use of cash; and if a liability goes up (denoting funds received), it is a source of cash. Sample Answer:You subtract the change in Net Working Capital when you calculate Free Cash Flow, so if Net Working Capital increases, your Free Cash Flow decreases and vice versa.

Is it right to use WACC as the discount rate in a DCF model?

It depends, if the product portfolio of the company is vastly different with varying risk profiles, then it would not be right to use WACC as the discount rate. The discount rate is the cost of capital. If the risks in each product line are vastly different, so should the cost of capital. Using a broad stroke denominator such as the company's WACC would not be right in this case.

What is the difference between a levered and unlevered beta?

Levered beta measures the risk of a firm with debt and equity in its capital structure to the volatility of the market. Unlevered beta removes the debt component.

If a REIT is trading below NAV, what strategic options would you provide them as a banker?

M&A seems to be off the table because REITs have low cash balances and can't do stock issuances because they would be dilutive. Therefore, my advice would be to basically sell assets in non-core markets to raise cash.

What is the difference between MOIC and IRR?

MOIC's simplistic calculation tells investors how much money they're ultimately receiving from an investment while IRR includes the impact of time over which the returns were generated.

What are the major factors that drive mergers and acquisitions?

Major factors that justify mergers and acquisitions are:​ -Achieving synergies (cost savings) -Diversifying or sharpening the focus, market, or products of the company -Gaining access to new technologies -Eliminating a competitor from the market or growing market share -Increasing Supply-Chain pricing power by buying a supplier or distributor -Improving financial metrics and numbers

Pitch me a stock

Many interviewers will ask you in one way or another to pitch a stock if you have any experience with trading, a private wealth management internship, a hedge fund internship, or anything that deals with market transactions. If this is you, spend 30 minutes to a couple of hours finding a stock you like and why. Even if it doesn't get asked, it's always better to be safe than sorry. Here's a good explanation of how to answer this question. You have to follow the market a little bit but understand that the underlying concept they are trying to get out of you is whether you know what drives a business. What are the key drivers of the business (both revenue and cost)? Why is it a good investment? What are the potential opportunities available? What's their competitive advantage? What are the primary risks? etc.

What is net working capital?

Net Working Capital = Current Assets - Current Liabilities Current assets include items on the Balance Sheet like inventory, accounts receivable, prepaid expenses, and other short-term assets. Current liabilities include items such as accounts payable, accrued expenses, deferred revenue, and other short-term liabilities. An increase in net working capital means more cash is tied up in the operations. This could be from increasing current assets like inventory or accounts receivable. If you increase inventory, for example, it is not (yet) a cost on the Income Statement, but still blocks the cash that was used for purchasing the inventory which needs to be accounted for on the CF statement. This is why in calculating free cash flow you subtract an increase in net working capital. A decrease in net working capital means less cash is tied up in operations. This could happen due to changes such as increasing accounts payable or reducing inventory. If you reduce inventory, it means you are selling more goods than you are producing, which means you are realizing a cost on your Income Statement. If you are increasing accounts payable, you are preserving your liquidity by taking a little bit longer to pay your vendors for your raw materials/inputs. Sample Answer:Net Working Capital is calculated as current assets minus current liabilities. It is a measure of a company's ability to pay off its short-term liabilities with its short-term assets. A positive number means they can cover their short-term liabilities with their short-term assets. A negative number indicates that the company may have trouble paying off its creditors, which could result in bankruptcy if cash reserves are insufficient and further financing cannot be arranged.

How are the 3 financial statements connected?

Net income flows from Income Statement into the Cash Flow Statement (CFS) as Cash Flow from Operations. Net income less dividends are added to retained earnings from the prior period's Balance Sheet (BS) to come up with retained earnings as on the date of the current period's BS. The opening cash balance on the CFS is from the prior period's Balance Sheet while the closing cash balance on the CFS is the balance on the current period's Balance Sheet."

How would a significant event impact financial markets?

Sample Answer 1: The COVID-19 Delta Variant is predicted to cause an upsurge in total worldwide cases, therefore volatility would increase within the stock market as speculating investors debate the impact of the variant. This may cause a runover effect with the Federal Reserve System keeping interest rates low moving forward. Sample Answer 2: The Nigerian election takes place in February. Four years ago, President Muhammadu Buhari gained power on a surge of optimism, pledging to restore security and end corruption. His Presidential record has been mixed, and his popularity and health have declined (he recently denied rumors of being replaced by a body double). The old regime may regain political power, impacting the free flow of goods through the country.

What is an Initial Public Offering (IPO)?

Sample Answer 1:An IPO is the first public sale of stock in a previously private company. This is known as "going public." The IPO process is incredibly complex, and investment banks charge high fees to lead companies through it. Companies go public for several reasons-raising capital, cashing out for the original owners, and investor and employee compensation.Some negatives against "going public" include sharing future profits with public investors, loss of confidentiality, loss of control, IPO fees to investment banks, and legal liabilities. Sample Answer 2:IPO is the acronym for Initial Public Offering. It is the first time a privately-held company sells shares of stock to the public market. Usually, a company goes public to raise capital for growing the business or to allow the original owners and investors to cash out some of their investment.

All else equal, should the WACC be higher for a company with a $100 million market cap, or a company with a $100 billion market cap?

Sample Answer 1:Normally, the larger company will be considered "safer" and therefore will have a lower WACC all else being equal. However, depending upon their respective capital structures, the larger company could also have a higher WACC. Sample Answer 2:Without knowing more information about the companies, it is impossible to say. If the capital structures are the same, then the larger company should be less risky and therefore have a lower WACC. However, if the larger company has a lot of high-interest debt, it could have a higher WACC.

How would you calculate the WACC of a private company?

Since a private company has no market capitalization and no beta, you would most likely use the WACC for a comparable public company adjusted upwards for the lack of liquidity.

How do you calculate Terminal Value?

Terminal Value or TV is the value of any investment at the end of the investment period. This will usually assume a constant growth rate into the future. it can be calculated by applying an exit multiple to the company's last projected year's EBITDA, EBIT, or Free Cash Flow (multiples method). Alternatively, the Gordon Growth method can be used to estimate TV based on its growth rate into perpetuity. The formula for calculating TV without accounting for growth is:Expected cash flow / (1 + Required rate of return)^Time The formula for calculating TV using Gordon Growth is:Terminal Value = Expected dividend / (Required rate of return - Growth rate).

If the CFO of the company needs to increase their margins for the quarter but revenue is lower than in the past, what would you recommend doing?

The answer to increasing your margins while having lower revenue is to cut back on expenses. Revenue - expenses = gross profit and gross profit/revenue = gross margins.

If you could use only one financial statement to evaluate the financial state of a company, which would you choose?

The cash flow statement because it shows the actual liquidity of the company and how it is generating and using cash. The balance sheet just shows a snapshot of the company at a point in time, without showing the performance of the company, and the Income statement has several non-cash expenses that may not be affecting the company's health and can be manipulated. Overall, the key to a great company is generating significant cash flow and having a healthy cash balance, both of which are disclosed in the CF statement.

Walk me through the Income Statement

The first line of the Income Statement represents revenues or sales. From that, we subtract the cost of goods sold, which gives gross margin. Subtracting operating expenses from gross margin gives us operating income (EBIT). We then (add/subtract) interest expense (income), taxes, and other expenses (income) to arrive at Net Income.

What does an investment banking division do?

The investment banking division is sometimes referred to as corporate finance and is broadly split into 2 sectors, products and industries. The purpose of both is to provide advisory on transactions, mergers, and acquisitions and to arrange (and sometimes even provide) financing for these transactions. Investment banking product groups are broken down into: -Mergers and Acquisitions (M&A): Advisory on sale, merger, and purchase of companies. -Leveraged Finance (LevFin) - Issuance of high-yield debt to firms to finance acquisitions and other corporate activities. -Equity Capital Markets (ECM) - Advice on equity and equity-derived products (IPOs, shares, capital raises, secondary offerings, etc.) -Debt Capital Markets (DCM) - Advice on raising and structuring debt to finance acquisitions and other corporate activities. -Restructuring - Improving the structures of a company to make it more profitable or efficient.

What are some reasons that would incentivize two companies to merge?

The main reason two companies would want to merge would be the synergies the companies could create by combining their operations. However, some other reasons include gaining a new market presence, an effort to consolidate their operations, gaining brand recognition, growing in size, or gaining the rights to some property (physical or intellectual) that they couldn't gain as quickly by creating or building it on their own.

What are some possible regulatory issues facing the power sector?

The main regulatory hurdle that the power sector faces is distributed electricity generation. Distributed generation poses a threat to existing power utilities because it takes away power demand from them. However, there are a number of ways in which to handle this emerging trend. One way is to structure tariffs in a way that increases affordability. The other is to offer time-of-use tariff structures that can flatten the duck curve, which occurs when renewables ramp down in the evenings, exactly when electricity demand is highest.

If the price of a bond increases, what happens to the yield?

The price and yield of a bond move inversely to one another. Therefore, when the price of a bond goes up the yield goes down. The reason for this is that the return on a bond (when annualized, this is called yield) is the difference between its current price and future repayment (generally bonds are redeemed at par). The lower the price, the higher is the return as the repayment is constant regardless of its price. As the price increases, the return reduces thereby reducing the yield. Let's understand this better with the help of an example. Let's assume a bond can be redeemed at a par value of $100 on maturity (one year from now). Let's now assume that the bond is trading at $80. The yield on the bond can be calculated as 25% ((100/80) - 1). What if the price instead was $90? The yield reduces to 11.11% ((100/90) - 1). Hence, higher prices mean lower yields and vice versa.

If I have a credit card loan, a car loan, and a mortgage, explain and rank their relative interest rates.

The rank of each with respect to the interest rates they carry, from higher to lower are: -Credit card -Car loan -Mortgage A car loan and a mortgage are less riskier than credit cards as they are both secured by some collateral. With the credit card, VISA can't chase you down to get the takeout meal you purchased with it, so there are no assets to collateralize against. A car loan is riskier than a home loan because a car loses its value much quicker. To compensate for the higher risk profile and lack of collateral, credit card companies charge much higher interest rates when compared to a typical car loan and mortgage while the risk associated with a lower value of collateral in car loans is why they carry higher interest rates compared to mortgages.

If I have a hardware and a software company, both with the same revenue and EBITDA, which can I lever up more and why?

The software company because of recurring revenues from annual contracts that are even more guaranteed than a hardware store, assuming that both companies are mature.

What are some ways you can value a company?

The three most common ways of valuing a company are: Comparable companies or multiples analysis: This is the most common way to value a company. This method attempts to find a group of companies that are comparable to the target company and to work out a valuation based on what they are worth. The idea is to look for companies in the same sector and with similar financial statistics (Price to Earnings, Book Value, Free Cash Flow, EBITDA, etc) and then assume that the companies should be priced relatively similarly. Market valuation or market capitalization: In this method, the market value of equity is used and hence can only be used for publicly traded companies. It is calculated by multiplying the number of shares outstanding by the current stock price. Discounted cash flow analysis: This method involves calculating the sum of the present values of all future cash flows to give the value of the entire company including debt and equity, which is also called enterprise value.

How can a company raise its stock price?

There are many ways a company can raise its stock price, a few of which are: -A company can repurchase stock, which lowers the number of shares outstanding and therefore increases its value per share. -It can improve operations to produce higher earnings, causing its EPS to be higher than anticipated by industry analysts, which will send a positive signal to the market. -It can announce a change to its organizational structure such as cost-cutting or consolidation, which would lead to increased earnings in general. -It could announce the institution of a dividend policy or an increase in an existing dividend. -It can announce an accretive merger or an acquisition that will increase earnings per share.

What are some of the major macro factors that can affect the spreads on corporate bonds? Explain their effects.

Think about how bonds are priced - based on their discounted future cash flows. If any of those cash flows is in doubt, then the bond's value falls accordingly. (Think of a UST bond as being priced with risk-weighted cash flows of 100%. A BBB bond might be priced with risk-weighted cash-flows of 95%, just as an example - although in reality the bonds are priced with a spread/all-in yield that implicitly contains the risk, rather than calculating the risk % driving the spread). So any macro event that would impact companies' profitability/cash flow would affect the price of corporate bonds. That said, corporate bond spreads are more driven by micro factors than by broader economic trends unless those economic/systemic factors are very pronounced.

Company A is acquiring Company B; firm A has a stock price of $10/share, B's share price is $20/share. A has a $4 Cash Flow (CF)/share and B $8 CF/share; is the deal accretive or dilutive if the transaction was all-stock?

Thinking of cash flow/share the same way as earnings per share, the PE for A is 2.5 and B is 2.5. As both their EPS are equal, the transaction is neither accretive nor dilutive.

If a firm has a leverage ratio of 5x and it has an interest coverage ratio of 5x, what is the firm's interest rate?

This depends on the formal definition of the leverage ratio, but assuming debt/EBIT is implied we can set up two simple equations: -Debt/EBIT = 5 -EBIT / (Debt * Interest rate) = 5 Solving these equations we find that the interest rate is 4%.

How is it possible for a company to have a positive net income but go bankrupt?

This is possible if working capital erodes (such as increasing accounts receivable, lowering accounts payable, lower inventory turnover) or the company is growing so fast that it's unable to raise enough capital to fund operations. Another possibility is the existence of financial fraud.

What is risk?

This question is a lot more broad, giving you a lot of room to work with. A common method of answering this question would be bringing up 2-3 different types of financial risk concepts, giving a straight definition as to what they are, and following up with an example to demonstrate applied understanding. Sample Answer:There are many different types of risks that businesses, and individuals alike, experience. Some examples of these risks would be: Credit Risk - This is the risk of a possible loss being incurred by a business or an individual, should their borrower fail to repay a loan or meet contractual obligations. It is impossible to quantify credit risk and precisely predict which borrowers will default on loans, but there are risk management teams built to minimize a business' risk and manage their credit exposure. An example of credit risk would simply be a bank lending a citizen a loan of $100,000 to start their business as an entrepreneur, on which the bank incurs the risk of not having the loan repaid should the citizen's business go bankrupt. Another related type of risk would be, Interest Rate Risk - This is the risk incurred where there may be a reduction in the value of investment assets should the interest rate environment change drastically in a short period. An example of this would be that if interest rates increased, the value of fixed-income investments would decrease.

How/why do you lever or unlever Beta?

Unlevering beta allows us to remove the effect of debt in the capital structure. This shows us the beta of the firm's equity had it not used any leverage in its capital structure. Also, if we are trying to do a market comparison with a company that's not on the market (so no beta), you can take a comparable company and unlever its beta and use this unlevered beta as a proxy for the unlisted company's beta.

In a high inflation environment, do you favor value or growth stocks?

Value, because the payoff will be quicker. In high inflation periods, short-duration equities are favored as cash flows are eroded less by the higher cost of capital imposed by higher inflation. Growth equities need a longer holding period before capital yielding projects are realized, at which point the discount factor will be higher making them subject to more erosion from inflationary pressure.

Graph the WACC as a function of the debt-to-equity ratio.

WACC decreases at low levels of leverage due to the tax shield created by interest payments and then increases exponentially due to the increasing riskiness of investing in a highly levered company.

What is WACC and how do you calculate it?

WACC is the acronym for Weighted Average Cost of Capital. It reflects the overall cost for a company to raise new capital, which is also a representation of the riskiness of investment in the company (higher the risk, higher the cost of capital). It is commonly used as the discount rate in a discounted cash flow analysis to calculate the present value of a company's cash flows and terminal value.

Can a company have a negative book equity value?

Yes, a company could have a negative book equity value if the owners are taking out large cash dividends or if the company has been operating for a long time at a net loss, leading to the company having to take on debt to fund loss of cash. Eventually, equity can be negative implying that the entire operation is funded by debt.

Company A has an Enterprise Value (EV) of $1B, an EBITDA of $200M and is leveraged 2.5x wants to buy company B which has EBITDA of $100M; A will finance the acquisition with $250M debt; how does this transaction affect leverage? What if the deal was e

You need to remember that the leverage multiple stands for Debt/EBITDA; so calculating out the leverage multiples, you will see both A and B are leveraged at 2.5, hence, the combined leverage multiple of A and B is still 2.5; if the transaction is equity-financed, the leverage would decrease and the company would be de-leveraged; deals are usually more accretive with debt due to tax deduction on interest expense.

When calculating enterprise value, do you use the book value or the market value of equity?

You should use the market value of equity always because the book value is not adjusted once it is recorded in the books at the time of issue of the shares. It is common to very often see a share priced in the hundreds or thousands having a face value of $1 or $10. This is due to the historical nature of accounting. Hence, the book value of equity is useless for any kind of valuation, and market value is the preferred metric to use.