We were able to get our hands on a cheat sheet of actual interview questions asked of prospective investment bankers. The questions were compiled by MBA students at the University of Virginia Darden School of Business with, what we were told, the help of some other Ivy League students who have been interviewing on Wall Street.
The students put together what they felt were the most appropriate answers. How’d they do?
Suppose your client had significant excess cash on the balance sheet. How would you recommend its use?
First, you must define what you think is significant excess cash. For companies that are in cyclical industries, paying out large amounts of cash might leave the company unprepared for a subsequent market downturn. Once you have established that your client does indeed have excess cash on the books, there are a few tried and tested uses for excess cash.
How do you determine the debt capacity of a company?
Brief Answer: “IT DEPENDS”… Sales are the biggest unknown factor when determining debt capacity. Debt capacity is determined by borrower’s repayment ability, which depends on its ability to cover interest and principal payments out of cash flows. This depends on cash flows in both good and bad times.
REMEMBER: Company source of repayment will not be from profits but rather its cash remaining after meeting company’s asset investment requirements (including net working capital and fixed assets and dividends). Need to perform sensitivity analysis on the upsides and downsides of sales, variable operating expenses, networking capital, additions to fixed assets. Also depends on attitude toward risk by company’s managers, owners and lenders.
BEWARE of using debt‐to‐equity ratios of comparable companies because two companies can have identical debt-to-equity ratios but significantly different cash flow operating and loan capabilities because of differences in growth rates and cost structures.
What are the drivers to value a company?
When thinking through how to value a firm, there are three key areas that drive value.
Those key drivers of value are the things in your business that:
If you were looking for a company for your client to acquire, how would you go about doing it?
There are five common valuation methodologies:
In addition, valuation can be framed through:
If a company was looking to raise debt or equity, what are the 3 most important questions to ask?
1.) Whether they will generate enough cash flows to cover interest obligations. How many multiples in excess of current interest payments is their operations generating in cash flow?
2.) What is their current capital structure and can they bring on more debt and leverage the company further without being too levered versus industry and peers so that their credit rating and stock price isn’t negatively impacted.
3.) What is the current equity value, if the stock price is appropriately valued or has a potentially high value, then equity might be better.
A company with a lower P/E is buying a company with a higher P/E. What is the effect of this transaction? Is it "accretive” or “dilutive"? Explain.
As a general rule, a dilutive merger or acquisition occurs when the P/E ratio of the acquiring firm is less than that of the target firm.
What kind of financial modeling have you done in the past?
I used to walk the runway wearing nothing but cashmere socks and wingtips.
Editor’s Note: Ah, Wall Street humor