JP Morgan Superday Prep
How many times does a ball get hit in the average game of tennis?
"At all Tier levels for all matches in both Qualifying Singles and Main Draw Singles and Doubles, six (6) balls shall be used and changed after the 1st seven (7) games and thereafter every nine (9) games." If the match were to last 29 games (6-3, 4-6, 6-4), 24 balls would be used.
where do you see the interest rate on US 10 yr treasury bonds going
1.35%
how would you value a company with negative historical cash flow
DCF, EV/Sales
Would you use EBIT or EBITDA to value a capital-intensive company?
EBITDA, since high annual depreciation or amortization
You have a 3 liter and a 5 liter bottle. How do you measure 4 liters of water exactly?
Empty the 3-liter bowl, and then transfer the 2 liters from the 5-liter bowl into it. Now fill the 5-liter bowl again, then pour water carefully from the 5-liter bowl into the 3-liter bowl until it is full - exactly one more liter. The 5-liter bowl now has exactly 4 liters.
Walk me through some of the ways you value a company.
LBO, DCF, comparable transactions, publicly traded comparable company analysis
What's the difference between LIFO and FIFO? Can you walk me through an example of how they differ?
LIFO stands for "Last-In, First-Out" and FIFO stands for "First-In, First-Out" - they are 2 different ways of recording the value of inventory and the Cost of Goods Sold (COGS). With LIFO, you use the value of the most recent inventory additions for COGS, but with FIFO you use the value of the oldest inventory additions for COGS.
Under what circumstances would Goodwill increase?
The company gets acquired or bought out and Goodwill changes as a result, since it's an accounting "plug" for the purchase price in an acquisition.
If you had a Rubik's cube with 10 little squares on each side, and peeled off the outer layer, how many little cubes would you end up with?
The whole cube is made from 10³ = 1000 small cubes, but it would not be possible to make a practical mechanism for rotating the faces.Peeling off the outer layer of cubes leaves 8³ = 512 small cubes.
if depreciation is a non cash expense, why does it affect the cash balance?
it is tax-deductible, and since taxes are a cash expense, depreciation affects cash by reducing the amount of taxes you pay
inside basis
the tax basis that a corporation has in its assets
outside basis
the tax basis that a shareholder has in the stock of the corporation
market risk premium
(rm - rf) represents the excess returns of investing in stocks over the risk free rate
About JP Morgan
- an international company providing financial services to consumers, small businesses, large corporations, and governments. - largest segment contributing to revenue is consumer & community banking: 41% - corporate & investment banking largest source of net income though and growing fast: 40% of revenue - Jamie Dimon: CEO and chairman - Jeremy Barnum: CFO - John Horner: Chief investment officer
What do investment banks do?
- they offer advice to companies on mergers and acquisitions - they help companies raise capital by underwriting stock and bond issuances - they have trading operations
How is GAAP accounting different from tax accounting?
1. GAAP is accrual-based but tax is cash-based. 2. GAAP uses straight-line depreciation or a few other methods whereas tax accounting is different (accelerated depreciation). 3. GAAP is more complex and more accurately tracks assets/liabilities whereas tax accounting is only concerned with revenue/expenses in the current period and what income tax you owe.
two companies are identical in earnings, growth prospects, leverage, returns on capital, and risk. Company A is trading at a 15 P/E multiple, while the other trades at 10 P/E. which would you prefer as an investment?
10 P/E: an investor would rather pay less per unit of ownership
What's the probability that a pregnant woman has a baby boy?
About 51% due to the sex ratio
What are assets on the balance sheet of a financial institution?
Assets are items that a financial institution owns, so this includes loans, securities, and reserves.
How long does it usually take for a company to collect its accounts receivable balance?
Generally the accounts receivable days are in the 30-60 day range
You're in the middle of an urgent task and someone more senior demands some instant information. What do you do?
Get an immediate estimate of the time required to do the information. if there isnt enough time then I will immediately tell my boss, "in order for me to complete the job within the deadline I will need......some help from another team member" if that's not possible then I will tell him how much time I realistically need for the job. If he insists to do it in less. I will say, "I will do my best to complete it within the time you have asked, however, can only commit........... (my estimate). I will keep you updated on the progress."
Describe a time you led a team and dealt with a difficult individual in that team.
I think the most relevant example of this is in my ____ internship, I recently was putting together a large spreadsheet with extensive data and had a partner who was supposed to be splitting work 50/50, unfortunately I have worked with this team member before and I knew his work style was to put things off until the date of the deadline and figuring that he would not be able to complete his work I prepped for this in advance.....
What's the square root of two?
I would find the square root of 4 which is 2, then divide that in half and you'll know that the square root of 2 is about 1 but knowing that this is on the low side because the square root of 1 is 1
How would you value the pizza shop on the corner?
I would look at precedent transactions and compare to other pizza shops, a DCF is also a good way to value it.
What's your greatest achievement?
My greatest achievement is sector leader
What does negative Working Capital mean? Is that a bad sign?
Not necessarily. It depends on the type of company and the specific situation - here are a few different things it could mean: 1. Some companies with subscriptions or longer-term contracts often have negative Working Capital because of high Deferred Revenue balances. 2. Retail and restaurant companies like Amazon, Wal-Mart, and McDonald's often have negative Working Capital because customers pay upfront - so they can use the cash generated to pay off their Accounts Payable rather than keeping a large cash balance on-hand. This can be a sign of business efficiency. 3. In other cases, negative Working Capital could point to financial trouble or possible bankruptcy (for example, when customers don't pay quickly and upfront and the company is carrying a high debt balance).
What would you do if you knew your boss to completely wrong about a work issue?
Speak with the boss privately to make them aware of any concerns they might have overlooked, come prepared to back up my concerns, but if it's not a very large work issue I might not do anything particularly if there are larger work projects or deadlines approaching. If it is something that a client would see directly then I would approach and bring it up, but otherwise no mention.
There are two firms. One has 100% equity and the other has 50% equity and 50% debt. Which one will have the lowest WACC? Why?
The 50/50 one because debt is cheaper than equity and you get a tax shield
What is the biggest risk you have ever taken in your life?
The biggest risk I took was adding on some of my recent internships, not knowing if I had the full time to dedicate or if I would become too overwhelmed with academics doing multiple degrees and that would impact my work in these internships. However, I made sure as I began the school year to keep a very systematic and ordered schedule in order to keep track of activities, meetings, and deadlines in order to ensure that I stayed caught up.
Which books do you like reading?
Tuesdays with Morrie, The Magic Strings of Frankie Presto, the Last Lecture
If cash collected is not recorded as revenue, what happens to it?
Usually it goes into the Deferred Revenue balance on the Balance Sheet under Liabilities.
How do you work out the best discount rate to use in a DCF?
WACC for unlevered, cost of equity levered
what's the connection between interest rates and equity prices
When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.
what do you think this job will entail?
a lot of financial modeling to support analysts and associates, exposure to a wide variety of deal types, direct experience with LBOs and M&As.
Where do you see yourself in five years' time?
as an associate at JP morgan
How many windows are there in NYC
clarify the question: do you mean only building windows, or are you also thinking subways, computers, and exhibits? If just buildings - divide into 3 categories, residential, retail, office. make sure to give a roadmap - give assumptions like I am assuming x million people, if there is an average of X residential areas with X windows in each that will give ___. Then there's an average of X windows for every office building, so multiply that by the number of X buildings and you get ___. Etc.
what is more expensive, debt or equity
cost of equity
Within WACC, what is Cost of Equity and how do you calculate it?
cost of equity = beta + risk free rate (risk free premium)
Tell me about a class you did poorly in.
honors gen chem
You're the CEO of a company. Would you rather raise debt, or equity? Why?
it depends on if it is a beginning company or an established one. If it is established, I would rather raise debt because while the payments do need to be made on time, it is tax deductible, and generally it allows for more rapid growth than what would be otherwise possible.
describe a task that really tested your analytical abilities
large data sheet of R1 & R2 universities for start up
what happens when inventory goes up by $10
no change to IS, BS inventory goes up by $10 but cash is down by $10 so it balances out, CF inventory goes down as does the net change in cash at the bottom
What does PIK interest mean? How does it work?
paid in kind so it enables a company to defer interest payments until the bond matures.
What does JP Morgan's investment bank do
provides corporate strategy and structure advisory, equity and debt markets capital raising services, cash securities, risk management solutions, prime brokerage, and research
What is the risk free rate
reflects yield to maturity of a default free government bonds - treasury bonds are the preferred proxy for the risk free rate for US companies
what is the most valuable statement?
the CF statement because it gives a true picture of how much cash the company is actually generating.
if I could only look at 2 statements to assess a company's prospects, which 2 would i use and why?
the IS and BS, because you can create the CF statement from both of those
tax basis
the carrying cost that an asset has on the tax balance sheet of a business
walk me through the 3 financial statements
the three major financial statements are the income statement, balance sheet, and cash flow statement. the income statement is profitability of a company over a period of time, giving the revenue and expenses, and going to the net income. The balance sheet shows the company's assets - its resources such as cash, inventory, and PP&E, as well as its liabilities and shareholders' equity. the cash flow statement begins with net income, adjusts for non cash expenses and working capital changes, then lists cash flow from investing and financing activities and then you see the net change in cash.
how do the 3 financial statements link together
to tie the statements together, net income from the IS flows into shareholders equity on the BS, and into the top line of the CF statement.
What happens to enterprise value when you issue or repurchase shares?
will make no impact on it.
How would you go about valuing Apple?
you would look at its assets minus its liabilities.
Walk me through a basic merger model.
"A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and determines whether the buyer's EPS increases or decreases. Step 1 is making assumptions about the acquisition - the price and whether it was cash, stock or debt or some combination of those. Next, you determine the valuations and shares outstanding of the buyer and seller and project out an Income Statement for each one. Finally, you combine the Income Statements, adding up line items such as Revenue and Operating Expenses, and adjusting for Foregone Interest on Cash and Interest Paid on Debt in the Combined Pre-Tax Income line; you apply the buyer's Tax Rate to get the Combined Net Income, and then divide by the new share count to determine the combined EPS."
What is an "ideal" candidate for an LBO?
"Ideal" candidates have stable and predictable cash flows, low-risk businesses, not much need for ongoing investments such as Capital Expenditures, as well as an opportunity for expense reductions to boost their margins. A strong management team also helps, as does a base of assets to use as collateral for debt.
Walk me through a basic LBO model.
"In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity ratio, Interest Rate on Debt and other variables; you might also assume something about the company's operations, such as Revenue Growth or Margins, depending on how much information you have. Step 2 is to create a Sources & Uses section, which shows how you finance the transaction and what you use the capital for; this also tells you how much Investor Equity is required. Step 3 is to adjust the company's Balance Sheet for the new Debt and Equity figures, and also add in Goodwill & Other Intangibles on the Assets side to make everything balance. In Step 4, you project out the company's Income Statement, Balance Sheet and Cash Flow Statement, and determine how much debt is paid off each year, based on the available Cash Flow and the required Interest Payments. Finally, in Step 5, you make assumptions about the exit after several years, usually assuming an EBITDA Exit Multiple, and calculate the return based on how much equity is returned to the firm."
Do you prefer small, mid or large cap companies
- Depends on time frame, volatility acceptance, risk profile- Small last choice- too risky unless invest a lot into indepth research- Med is what i prefer - still growing with less risk than small cap- Large is second - already established business line and already shown success, main goal is to continue by expanding product lines or acquiring mid cap
JP Morgan values
- Operation Excellence: measure performance with a detailed, balanced scorecard - Exceptional Client Service: offer high-quality, competitively priced products and services, never allow short-term profit considerations to get in the way of doing what's right for the customer - A committment to integrity, fairness, and responsibility
Describe why one would invest in stocks as oppose to bonds?
- Potential for higher returns- Long term, historically produce much higher returns. Looked at various 25 year periods and stock returns between 6% and 18%, bonds between 2% and 10%- Every period stocks did better
What interests you about finance
- ever changing - mix of math and people - it applies to everything, everyone needs finance
Issues facing JP Morgan
- net income has been adversely impacted by a significant increase in provision for credit losses due to economic uncertainty triggered by the pandemic, even though they have had a rising revenue - if inflation and interest rates rise too quickly it can create issues with loan growth as consumers may avoid borrowing which would hurt their commercial banking - fintech is a growing threat. Banks are hindered by strict regulation that stops innovation, and fintech is not limited by this allowing them to grow, merge with social media and integrate other platforms rapidly allowing them to win significant market share, especially with millennials.
How do you select Comparable Companies / Precedent Transactions?
1. Industry classification 2. Financial criteria (Revenue, EBITDA, etc.) 3. Geography
Two companies have the exact same financial profiles and are bought by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction - how could this happen?
1. One process was more competitive and had a lot more companies bidding on the target. 2. One company had recent bad news or a depressed stock price so it was acquired at a discount. 3. They were in industries with different median multiples.
I have a set of precedent transactions but I'm missing information like EBITDA for a lot of the companies - how can I find it if it's not available via public sources?
1. Search online and see if you can find press releases or articles in the financial press with these numbers. 2. Failing that, look in equity research for the buyer around the time of the transaction and see if any of the analysts estimate the seller's numbers. 3. Also look on online sources like Capital IQ and Factset and see if any of them disclose numbers or give estimates.
A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?
1. The company is spending too much on Capital Expenditures - these are not reflected at all in EBITDA, but it could still be cash flow negative. 2. The company has high interest expense and is no longer able to afford its debt. 3. The company's debt all matures on one date and it is unable to refinance it due to a "credit crunch" - and it runs out of cash completely when paying back the debt. 4. It has significant one-time charges (from litigation, for example) and those are high enough to bankrupt the company.
Walk me through an IPO valuation for a company that's about to go public.
1. Unlike normal valuations, in an IPO valuation we only care about public company comparables. http://breakingintowallstreet.com http://www.mergersandinquisitions.com 44 2. After picking the public company comparables we decide on the most relevant multiple to use and then estimate our company's Enterprise Value based on that. 3. Once we have the Enterprise Value, we work backward to get to Equity Value and also subtract the IPO proceeds because this is "new" cash. 4. Then we divide by the total number of shares (old and newly created) to get its per-share price. When people say "An IPO priced at..." this is what they're referring to.
When would a company collect cash from a customer and not record it as revenue?
1. Web-based subscription software. 2. Cell phone carriers that sell annual contracts. 3. Magazine publishers that sell subscriptions.
5 questions to answer in most M&A transactions
1. will the buyer be able to step up the tax basis of the assets to reflect the purchase price? 2. will a seller recognize taxable gain or will it be able to defer some or all of its gain? 3. if a seller recognizes gain or loss how will that gain or loss be calculated? 4. is there anything about the target's tax attirubtes or the nature of the target's business that needs to be taken into account in projecting the target's tax liability going forward? is there any other tax-efficient way to sell the business
What is the angle formed by the hands of the clock when it is 1:45?
142.5 degrees. If we just think of the clock hour hand at 1 and the minute hand at the 45 position (near 9 o'clock), that is 120 degrees since they are 4 "numbers" apart, and each number on the clock represents 30 degrees (360/12). However, recall that the hour hand has already moved by the time the minute hand has reached the 45 position - it is now closer to 2 o'clock. 45 represent 3⁄4 of an hour, so the hour hand will have moved 3⁄4 of 30 degrees, or 22.5 degrees. If we add them together, we see that 120 + 22.5 = 142.5 use the formula: 30(hour hand) - 11(minute hand)/2.
What is the sum of the numbers from one to 100?
5050 you use the formula S = n/2[2a + (n-1) x d]
Recent deals for JP Morgan
55ip: a fintech that provides automated tools to financial advisors to help them reduce investors tax liabilities. Gives JP the capability to deliver their model portfolios and their asset management capabilities in a new way. Announced: Dec. 2020 Structure of the deal: buyout most likely OpenInvest & Frank: both fintech start-ups which will allow JP to compete with other fintechs InstaMed: back in 2019, allows JPMorgan to expand into the US healthcare payments market Not a deal but in Aug 2021 JP received regulatory approval to obtain full ownership of its China securities joint venture JP Morgan Securities (China) Co. which allows the opportunity to expand into the $53 trillion financial market
what was JP Morgans P/E ratio in the past quarter?
9.99 trailing, 13.21 forward
can you describe how swaps work
A swap is an agreement for a financial exchange in which one of the two parties promises to make, with an established frequency, a series of payments, in exchange for receiving another set of payments from the other party
what are the three top stocks to buy now? why?
Accenture because it's doubling down on cloud and cyber business, and has high exposure to digital innovation and AI. NextEra Energy because of the push by governments for renewable energy, and the approved 2022 agreement to acquire 50% interest in a very large portfolio of long term contracted renewable projects. ConocoPhillips because it has consistent dividend growth and current yields stand at 2.51%. they beat recent EPS by 0.25c, and the stock has been delivering an 83% return to shareholders this year. and just two days ago it completed a $9.5Bn acquisition of Shell's permian assets. C3.ai: it has partnerships in a range of industries, including with Shell and General Motors, since 2019 it has doubled it's revenue and while it does have a negative EV/EBITDA that doesn't necessarily mean much because it is still starting up.
What's the difference between accounts receivable and deferred revenue?
Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred revenue represents how much it has already collected in cash but is waiting to record as revenue.
Why would an acquisition be dilutive?
An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the buyer's foregone interest on cash, additional interest paid on debt, and the effects of issuing additional shares. Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
How do you calculate unlevered beta for a company from levered
B unlevered = B(levered)/(1 + (1-T) x (debt/equity)
Walk me through how you create a revenue model for a company.
Bottoms-Up: Start with individual products / customers, estimate the average sale value or customer value, and then the growth rate in sales and sale values to tie everything together. http://breakingintowallstreet.com http://www.mergersandinquisitions.com 20 • Tops-Down: Start with "big-picture" metrics like overall market size, then estimate the company's market share and how that will change in coming years, and multiply to get to their revenue.
What's the difference between cash-based and accrual accounting?
Cash-based accounting recognizes revenue and expenses when cash is actually received or paid out; accrual accounting recognizes revenue when collection is reasonably certain (i.e. after a customer has ordered the product) and recognizes expenses when they are incurred rather than when they are paid out in cash.
Where do you see the banking industry in 50 years time?
China will likely overtake the US in terms of the size of their domestic banking sectors, emerging economies banking sectors are expected to outgrow those in the developed economies by a large margin, India has the potential to become the third largest domestic banking sector by 2050, and Brazil will likely be in the top 5. Fintech will spur a need for traditional banks to transfer to digital faces in order to stay afloat.
who are JP Morgans top competitiors
Citigroup, Bank of America, Goldman, Wells Fargo
Walk me through the major items in Shareholders' Equity.
Common Stock - Simply the par value of however much stock the company has issued. • Retained Earnings - How much of the company's Net Income it has "saved up" over time. • Additional Paid in Capital - This keeps track of how much stock-based compensation has been issued and how much new stock employees exercising options have created. It also includes how much over par value a company raises in an IPO or other equity offering. • Treasury Stock - The dollar amount of shares that the company has bought back. • Accumulated Other Comprehensive Income - This is a "catch-all" that includes other items that don't fit anywhere else, like the effect of foreign currency exchange rates changing.
What are deferred tax assets/liabilities and how do they arise?
Deferred Tax Liabilities arise when you have a tax expense on the Income Statement but haven't actually paid that tax in cold, hard cash yet; Deferred Tax Assets arise when you pay taxes in cash but haven't expensed them on the Income Statement yet.
What's the formula for Enterprise Value?
EV = Equity Value + Debt + Preferred Stock + Noncontrolling Interest - Cash
Why do we look at both Enterprise Value and Equity Value?
Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value.
When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?
Enterprise Value, because that's how much an acquirer really "pays" and includes the often mandatory debt repayment.
You have a hose along with a 3 liter bucket and a 5 liter bucket. How do you get exactly 4 liters of water?
First, fill the 3 liter bucket and pour it into the 5 liter one. Then, re-fill the 3 liter bucket and pour it into the 5 liter bucket until it's full - that leaves 1 liter in the 3 liter bucket and 5 in the 5 liter bucket. Then, pour out the 5 liter bucket so nothing is left and pour the 1 liter of water from the 3 liter bucket into the 5 liter bucket. Finally, fill the 3 liter bucket completely and pour it into the 5 liter bucket - since it already has 1 liter of water, you'll get exactly 4 liters. For this type of question, it's easiest to use deductive reasoning to get the answer. You know you can't possibly get 4 liters of water in the 3 liter bucket - it has to be in the 5 liter bucket.
Can you explain how the Balance Sheet is adjusted in an LBO model?
First, the Liabilities & Equities side is adjusted - the new debt is added on, and the Shareholders' Equity is "wiped out" and replaced by however much equity the private equity firm is contributing. On the Assets side, Cash is adjusted for any cash used to finance the transaction, and then Goodwill & Other Intangibles are used as a "plug" to make the Balance Sheet balance.
Why JP Morgan?
I have had finance centered internships and have worked in both venture capital and an investment group so I know that investing is what i want to pursue. Speaking with banks with much leaner teams, and smaller boutiques, I know that I want to be a part of a larger company where I can interact and learn from a range of experts with diverse backgrounds. I know that JP Morgan invests in new tools and trainings each year and has managed to merge commercial banking and investment banking in ways that other investment groups haven't, so I think that the experience I would have as an intern here would be invaluable, and something I cannot get anywhere else. At JP Morgan I would be exposed to a dynamic and fast paced environment, and it would offer me a career and experience that is incredibly stimulating and interesting, and will provide a catalyst for a successful investment banking career.
walk me through how depreciation going up by $10 would affect the statements
IS: operating income would decline by $10 and assuming a 40% tax rate net income would go down by $6 BS: plants, property, and equipment goes down by $10 on the assets side bc of depreciation, and cash is up by $4 from the changes on the CF statement. CF: the net income at the top goes down by $6, but the $10 depreciation is added back so overall CF from operations goes up by $4
You're about to give a PowerPoint presentation in a meeting and you notice it has a mistake in it. What do you do?
If you have time, fix the error. If you only notice it at the last second, give the presentation anyway. Be truthful and give the correct information. At worst, the audience consider you sloppy for not checking your presentation thoroughly. Which will be somewhat true. At best, they will respect your courage for not misleading them with false data, in spite of personal risk.
What's the difference between a merger and an acquisition?
In a merger the companies are close to the same size, whereas in an acquisition the buyer is significantly larger.
Why do most mergers and acquisitions fail?
In practice it's very difficult to acquire and integrate a different company, actually realize synergies and also turn the acquired company into a profitable division. Many deals are also done for the wrong reasons, such as CEO ego or pressure from shareholders. Any deal done without both parties' best interests in mind is likely to fail.
describe a recent news article that interested you and how does that affect JPM
Jack dorsey stepping down from twitter, that raised stock prices until the new CEO's past statements about free speech came up and then Twitter dropped more. Another one is Nvidia being sued by the SEC for their arm acquisition, stating that it could monopolize. JPM has over 17mil shares in NVDA, so if their stock falls due to this lawsuit that affects JPM.
What's the relationship between debt and Cost of Equity?
More debt means that the company is more risky, so the company's Levered Beta will be higher - all else being equal, additional debt would raise the Cost of Equity, and less debt would lower the Cost of Equity.
Could a company have a negative Equity Value? What would that mean?
No. This is not possible because you cannot have a negative share count and you cannot have a negative share price.
What's the difference between capital leases and operating leases?
Operating leases are used for short-term leasing of equipment and property, and do not involve ownership of anything. Operating lease expenses show up as operating expenses on the Income Statement. Capital leases are used for longer-term items and give the lessee ownership rights; they depreciate and incur interest payments, and are counted as debt.
Walk me through what flows into Retained Earnings.
Retained Earnings = Old Retained Earnings Balance + Net Income - Dividends Issued
How many trees are there in Central Park?
Segment New York into blocks using the number of streets and avenues. Calculate separately the area of the parks Assume a certain number of trees per block and separately for the parks Multiply and sum up
Walk me through how you get from Revenue to Free Cash Flow in the projections.
Subtract COGS and Operating Expenses to get to Operating Income (EBIT). Then, multiply by (1 - Tax Rate), add back Depreciation and other non-cash charges, and subtract Capital Expenditures and the change in Working Capital. Note: This gets you to Unlevered Free Cash Flow since you went off EBIT rather than EBT. You should confirm that this is what the interviewer is asking for.
What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?
Take Cash Flow From Operations and subtract CapEx and mandatory debt repayments - that gets you to Levered Cash Flow. To get to Unlevered Cash Flow, you then need to add back the tax-adjusted Interest Expense and subtract the tax-adjusted Interest Income.
What are some examples of industry-specific multiples?
Technology (Internet): EV / Unique Visitors, EV / Pageviews Retail / 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 Real Estate Investment Trusts (REITs): Price / FFO per Share, Price / AFFO per Share (Funds From Operations, Adjusted Funds From Operations) Technology and Energy should be straightforward - you're looking at traffic and energy reserves as value drivers rather than revenue or profit.
Why do you use 5 or 10 years for DCF projections?
That's usually about as far as you can reasonably predict into the future. Less than 5 years would be too short to be useful, and over 10 years is too difficult to predict for most companies.
What are the most common multiples used in Valuation?
The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price / Earnings per Share), and P/BV (Share Price / Book Value per Share).
How would you value an apple tree?
The same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree's cash flows (intrinsic valuation).
A car drives 60 miles at an average speed of 30 miles per hour. How fast should the driver drive to travel the same 60 miles in the same time period, but at an average of 60 miles per hour?
This is not possible. To travel 60 miles at an average speed of 30 miles per hour, 2 hours are required; to travel at an average of 60 miles per hour in those same 2 hours, you'd need to go 120 miles rather than 60 miles.
Walk me through how you create an expense model for a company.
To do a true bottoms-up build, you start with each different department of a company, the # of employees in each, the average salary, bonuses, and benefits, and then make assumptions on those going forward. Usually you assume that the number of employees is tied to revenue, and then you assume growth rates for salary, bonuses, benefits, and other metrics. Cost of Goods Sold should be tied directly to Revenue and each "unit" produced should incur an expense. Other items such as rent, Capital Expenditures, and miscellaneous expenses are either linked to the company's internal plans for building expansion plans (if they have them), or to Revenue for a more simple model.
Rank the 3 valuation methodologies from highest to lowest expected value.
Trick question - there is no ranking that always holds. In general, Precedent Transactions will be higher than Comparable Companies due to the Control Premium built into acquisitions. Beyond that, a DCF could go either way and it's best to say that it's more variable than other methodologies. Often it produces the highest value, but it can produce the lowest value as well depending on your assumptions.
What's the square root of 0.1?
We can do 0/1 = 1/10th, so sqrt(1/10) = (sqrt1)/(sqrt 10) = 1/sqrt 10, and we know that the sqrt 9 = 3 so sqrt 10 is close to 3 so it's about 1/3rd for the sqrt of 0.1
Why do you need to add the Noncontrolling Interest to Enterprise Value?
Whenever a company owns over 50% of another company, it is required to report the financial performance of the other company as part of its own performance. So even though it doesn't own 100%, it reports 100% of the majority-owned subsidiary's financial performance.
When would you not use a DCF in a Valuation?
You do not use a DCF if the company has unstable or unpredictable cash flows
What is the Statement of Shareholders' Equity and why do we use it?
You don't use it too much, but it can be helpful for analyzing companies with unusual stock-based compensation and stock option situations.
Let's go back to 2004 and look at Facebook back when it had no profit and no revenue. How would you value it?
You would use Comparable Companies and Precedent Transactions and look at more "creative" multiples such as EV/Unique Visitors and EV/Pageviews rather than EV/Revenue or EV/EBITDA.
Pick an industry, tell me how it's been doing for the past 5 years and how you think it will do for the next 10.
healthcare, it is generally a very stable growth industry, except for during the pandemic when many medical device and equipment companies in particular struggled due to the decrease in elective procedures. Diagnostic companies performed well, and sustained double digit organic sales growth in many cases. In the next 10 years, I think that for at least the next year or two the industry will be stabilizing and returning to a normal baseline as elective procedures begin again and diagnostic sales associated with COVID-19 decline. Through 2020 spending in this industry decreased by 2.6%, but the long term outlook is expected to rise with a CAGR of 4% compared to 2.8% in the past 5 years. Global spending will remain around 10.3% as a share of GDP.
How do you know if your DCF is too dependent on future assumptions?
if significantly more than 50% of the company's Enterprise Value comes from its Terminal Value, your DCF is probably too dependent on future assumptions.
What about WACC - will it be higher for a $5 billion or $500 million company?
it depends on whether or not the capital structure is the same for both companies. If the capital structure is the same in terms of percentages and interest rates and such, then WACC should be higher for the $500 million company for the same reasons as mentioned above. If the capital structure is not the same, then it could go either way depending on how much debt/preferred stock each one has and what the interest rates are.
What are synergies, and can you provide a few examples?
the buyer gets more value than out of an acquisition than what the financials would predict. There are 2 types: revenue synergies and cost (or expense) synergies. • Revenue Synergies: The combined company can cross-sell products to new customers or up-sell new products to existing customers. It might also be able to expand into new geographies as a result of the deal. • Cost Synergies: The combined company can consolidate buildings and administrative staff and can lay off redundant employees. It might also be able to shut down redundant stores or locations.
What are the flaws with public company comparables?
• No company is 100% comparable to another company. • The stock market is "emotional" - your multiples might be dramatically higher or lower on certain dates depending on the market's movements. • Share prices for small companies with thinly-traded stocks may not reflect their full value.
What are some flaws with precedent transactions?
• Past transactions are rarely 100% comparable - the transaction structure, size of the company, and market sentiment all have huge effects. • Data on precedent transactions is generally more difficult to find than it is for public company comparables, especially for acquisitions of small private companies.
What are examples of non-recurring charges we need to add back to a company's EBIT / EBITDA when looking at its financial statements?
• Restructuring Charges • Goodwill Impairment • Asset Write-Downs • Bad Debt Expenses • Legal Expenses • Disaster Expenses • Change in Accounting Procedures
Why would a company want to acquire another company?
• The buyer wants to gain market share by buying a competitor. • The buyer needs to grow more quickly and sees an acquisition as a way to do that. • The buyer believes the seller is undervalued. • The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them. • The buyer thinks the seller has a critical technology, intellectual property or some other "secret sauce" it can use to significantly enhance its business. • The buyer believes it can achieve significant synergies and therefore make the deal accretive for its shareholders.
