Finance Interview Questions


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Daily Finance Interview Question – 11.28.2022

Question: Historical Beta can accurately predict how volatile a company’s shares will be in the future.

  • True
  • False

This is False. 

Historical Beta (usually a 5 Year Monthly Beta) is based on past performance of the Stock Market versus past performance of a Company’s Stock. While historical values are a good starting point and are usually the only available points of data, they are not perfect at predicting future volatility. 

For example, Company’s Capital Structure (i.e. Debt level) might change significantly in the future, increasing the Company’s risk profile (i.e. more Debt could mean a higher chance of Bankruptcy) and therefore becoming more volatile. Historical Beta would not have that change captured.

Daily Finance Interview Question – 11.25.2022

Question: What items do we have to account for in working from Enterprise Value to Equity Value?

  • Debt only
  • Debt and Cash only
  • Cash and Minority Interests
  • Debt, Cash, Minority Interests

Equity Value (‘Market Capitalization’ or ‘Market Cap’ or ‘EqV’) is the term we use to describe Equity Value for a Public Company.

Equity Value reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and collecting Extra Cash. 

Enterprise Value (‘EV’) is the total value of the Business. In other words, what you would need to pay to acquire the entire Business. 

The formula that connects Enterprise Value and Equity Value is: 

Enterprise Value = Equity Value + Debt + Preferred Stock + Minority Interest – Cash

Generally, you add any claims on the Company’s Assets, such as Debt, Unfunded Pension Liabilities, Preferred Stock, and etc. 

You subtract any Non-Operating items, such as Cash, Equity Investment, and etc. 

Daily Finance Interview Question – 11.24.2022

Question: Asset Value is the root of most Business Valuations.

  • True
  • False

The answer is False.

Asset Value (‘Net Asset Value’ or ‘NAV’) is a Valuation Method in which we calculate how much we would pay for a Business today as Total Assets less Total Liabilities. 

It is not the main Valuation Method used. The three main methods are DCF (‘Discounted Cash Flow’), Precedent Transaction, and Comparable Companies Analysis.

Daily Finance Interview Question – 11.23.2022

Question: Cost Synergies are generally given more credit than Revenue Synergies by Investors.

  • True
  • False

This is True. 

Synergies refers to benefits that a Company is able to experience after an M&A Transaction. The two main types of Synergies are: 

Cost Synergies – cost savings. For example, a Company can combine accounting departments, simplify processes, reduce headcount, and save money that way after the acquisition. Cost Synergies is the most achievable (i.e. realistic) and common form of Synergies. 

Revenue Synergies – opportunity to have higher revenue. For example, two Companies might have complimentary products – Company A sells bicycles, and Company B fixes bicycles. If Company A buys Company B, they can ‘package’ their offering together (ex. sell a bicycle and offer a one year repair warranty) and reach more customers. Revenue Synergies are less predictable and likely to happen than Cost Synergies. 

Overall, because Cost Synergies are more predictable and likely to occur than Revenue Synergies, Cost Synergies usually receive more credit. 

Daily Finance Interview Question – 11.22.2022

Question: Accretion/Dilution in Public Company M&A typically describes increases or decreases in EBITDA post-merger.

  • True
  • False

This is False. 

Accretion is a term that refers to increases in EPS (‘Earnings per Share’ or ‘Net Income per Share’) post-merger (i.e. after the Deal is closed). 

Dilution is a term that refers to decreases in EPS post-merger. Reasons for Dilution include Buyer overpaying in the first place, lower than expected cost savings (‘Synergies’), mismatched cultures that lead to inefficiencies and losses, etc. 

Daily Finance Interview Question – 11.21.2022

Question: Which of the following describes the Section(s) in which each party states the information they certify as correct/valid?

  • Reps & Warranties
  • Covenants
  • Indemnities & Survival
  • The ‘Outs’

Purchase Agreement is a legal contract that documents everything that the Seller and the Buyer have agreed on in an M&A Transaction, including the Purchase, Representations and Warranties (‘Reps & Warranties’), Indemnities & Survival, Covenants, Conditions to Close, and Termination.

Representations and Warranties indicate what each Party (i.e Buyer and Seller) indicates as true facts and what guarantees they are making.

Specifically, Representations are assertions of fact and Warranties are a promise to resolve any issue with a Representation.

For example, a Representation might be a promise that Company A sells you a car with an engine. A Warranty would promise you that Company A is responsible to do something about it if the car doesn’t run.

Looking further at other answer choices and sections of the Purchase Agreement:

Indemnities & Survival indicate who and for how long is liable if things go wrong Post-Close (i.e after the Deal is done).

Purchase indicates how much will be paid and how the Transaction will be executed.

Covenants include actions required for each Party.

Conditions to Close (‘Outs’) include what needs to be completed in order to Close (i.e make the Deal happen).

Termination covers a situation if the Buyer or the Seller walks away from the Deal.

Daily Finance Interview Question – 11.18.2022

Question: Conditions to Close in a bid are often referred to as ‘Outs’.

  • True
  • False

This is True. 

In Sell-Side M&A, a Non-Binding Bid is an indication of interest from prospective Buyers to Purchase the Seller. As a part of the Bid, Buyers typically include Conditions that need to be satisfied in order to complete the Deal. 

The Conditions to Close are often referred to as ‘Outs’. Unless these Conditions are satisfied, the Buyer has an option to back out from purchasing the Seller. 

Below is a short overview of some common Outs: 

No major Diligence issues – if Buyers find any problems in their Diligence (i.e research) of the Seller, Buyers want to have an option to back out from the Deal.

Board / Investment Committee Approval – Buyers indicate that they need to secure permission to conduct a Deal (i.e purchase the Seller) from the Board of Directors or other relevant Parties. In case the approval is not received, the Buyers want to have an option to back out from the Deal.

Daily Finance Interview Question – 11.17.2022

Question: Which of the following parts of an NDA defines the time period for which the information shared remains confidential?

  • Non-Solicit
  • Agreement Length
  • Term
  • Confidentiality Length

Looking further at other answer choices:

Non-Solicit prevents prospective Buyers

A Non-Disclosure Agreement (‘NDA’) is a document that Parties, in Sell-Side M&A that is the Buyer and the Seller, sign to prevent Confidential Information from being shared with anyone else. 

It is impossible to keep that information “Confidential” for an infinite period of time, so an NDA defines a time period for which the information must remain Confidential – ‘Term’. 

Typically, the Seller wants the Term to be as long as possible (approximately two years), while the Buyer wants the term to be as short as possible (approximately one year). More often than not, the Buyer and the Seller end up agreeing on 18 months. 

 from hiring the Seller’s Employees (with certain exceptions, such as if an employee decides to leave the Seller themselves independent of the M&A Deal process).

Other terms are not relevant to Sell-Side M&A.

Daily Finance Interview Question – 11.16.2022

Question:  Which of the following is NOT a typical element of a Sell-Side M&A Kick-Off meeting?

  • Data Dump Process Discussion
  • Deal Process Timing
  • Buyer Reach-Out Strategy
  • Fee Discussion

Kick-Off Meeting is a part of the Pre-Launch step in the Sell-Side M&A Meeting. Kick-Off Meeting is needed to get everyone on the same page. 

Kick-Off Meeting topics to discuss typically include the following:

Deal Timing & Strategy – present proposed timing and strategy for Deal Process

Buyer Reach-Out – discuss which Buyers the Bankers are planning to reach out to and confirm that with the Seller 

Data Dump – coordinate the files that the Seller will share with the Investment Bank 

Fee Discussion happens earlier in a Pitch & Engagement step of the Sell-Side M&A Process. The Bank and the Seller agree on how much the Bank will be paid for their services. A Fee is a part of the Engagement Letter which is created when the Seller decides to work with the Bank. 

Daily Finance Interview Question – 11.15.2022

Question:  Which of the following describes an advisory engagement where an Investment Banker advises a Client on the Purchase of one or more Target Companies?

  • Sell-Side Engagement
  • Buy-Side Engagement
  • Purchase Engagement
  • Friendly Acquisition Engagement

Investment Banks provide services on Capital Raising and Advisory. 

Within Capital Raising, Banks help their Clients find Investors (i.e Equity Raises) and Lenders (i.e Debt Raises) to fund the Client’s Business. 

Within Advisory, Banks provide advisory on Selling or Buying a Business (i.e Mergers and Acquisitions or ‘M&A’) and help the Business in a Financial Distress/Bankruptcy (i.e Restructuring or “RX’). 

Taking a closer look at M&A, Banks usually advise their Clients on either Selling their Business (i.e Sell-Side Advisory) or on Purchasing another Business (i.e Buy-Side Advisory). 

In other words – in Sell-Side, Bankers market their Client to find the best potential Buyer. In Buy-Side, Bankers help their Clients evaluate potential Acquisition (or Merger) targets, usually for strategic purposes. 

Daily Finance Interview Question – 11.14.2022

Question:  A PE fund acquires a Business with Revenue of $1,000M and $100M of LTM EBITDA. Equity Value is $200M, Net Debt is $300M, and Minority Interest is $100M. Following the acquisition, the company generates synergies that improve margins to 15%. What’s the Stated/Optical LTM EV/EBITDA Purchase Multiple?

  • 4.0x
  • 5.0x
  • 6.5x
  • 4.5x
  • 6.0x

Stated/Optical reflects values at the time of the Deal and assumes no future Synergies. 

To calculate the Stated EV/EBITDA, we need to find Purchase EV (‘Enterprise Value’) and use LTM EBITDA.

1. Purchase EV. Equity Value and Enterprise Value are connected through the following formula:

Enterprise Value = $200 Equity Value + $300 Net Debt + $100 Minority Interest 

Enterprise Value = $600 

3.  Stated EV/EBITDA. Using the numbers from above, 

Stated EV/EBITDA = $600 EV / $100 Pro-Forma EBITDA 

Stated EV/EBITDA = 6.0x

Daily Finance Interview Question – 11.11.2022

Question: Assets (Pre-Deal) = $100, Liabilities (as Assessed) = $40, Assets (Market Value) = $110. Equity Purchase Price = $90. How much Goodwill is created?

  • $70
  • $60
  • $30
  • $20

Goodwill reflects the excess price paid for the Market/Purchase Value of Equity vs Book Equity on the Balance Sheet at the time of a Merger or Acquisition. 

In short, Goodwill = Market/Purchase Value of Equity – Book Value of Equity.

As part of the M&A process, Assets can often be written up to Fair Value which increases the value of Book Equity at the time of the Acquisition. 

In the question above, we start with Book Equity of $60 (Assets of $100 – Liabilities of $40), but the Assets are written up to $110 (i.e. Additional $10 to the Pre-Deal Value).

As a result, the Book Equity Value increases to $70 ($60 Book Value + $10 Write-Up). 

So, the answer is the following: $90 Equity Purchase Price – $70 Book Value = $20 of Goodwill Created.

Daily Finance Interview Question – 11.10.2022

Question: If a company with a PE of 13x buys a company with a PE of 10x in an all-stock deal, is the deal Accretive or Dilutive?

  • Accretive
  • Breakeven
  • Dilutive
  • Can’t tell with the information provided

Accretive means that the Earnings of a Company go up after an M&A Deal. Dilutive means that the Earnings of a Company go down after an M&A Deal.

There is a ‘shortcut’ to determine if a Deal is Accretive or Dilutive without calculating the new Earnings. If it is an All Stock Deal (i.e. Buyer pays for an acquisition by issuing new Shares, no Cash or Debt are involved), we can analyze PE (‘Price to Earnings’) multiples of Buyer (‘Acquirer’) and Seller (‘Target’).

Generally, if Acquirer’s PE Ratio is above Target’s Ratio, the Deal is Accretive. In other words, if the cost of issuing new shares for the Acquirer is lower than the Yield from the Target, the Deal is Accretive.

Using the numbers in the question above,

13x Buyer PE > 10x Target PE

Deal is Accretive

Below is a detailed explanation of the logic behind the above conclusion:

Accretive: Acquirer P/E Ratio > Target P/E Ratio

Buyer’s PE is 13x and Target’s PE is 10x.
The inverse of the Acquirer’s PE will reflect the Cost of issuing additional Shares for the M&A deal. In this case, it will be as follows:
Cost of issuing new Shares for Acquirer = 1 / 13x Acquirer PE
Cost of issuing new Shares for Acquirer = 7.7%

The inverse of the Target’s PE will reflect the Target’s Yield (i.e. how much value or Benefit it can bring to the Buyer). In this case, it will be as follows:
Target’s Yield = 1 / 10x Target PE
Target’s Yield = 10%

Therefore, we now know that the Cost of issuing new Shares for Acquirer is 7.7%, while Target’s Yield is 10%. It means that the Acquirer experiences a lower Cost than the Benefit that it received from the Target. If the Benefit is higher than the Cost, then it is an Accretive Deal.
7.7% Cost of issuing new Shares for Acquirer < 10% Target’s Yield

Overall, if Acquirer’s PE Ratio is above Target’s Ratio, the Deal is Accretive. In other words, if the cost of issuing new shares for the Acquirer is lower than the Yield from the Target, the Deal is Accretive.

On the other hand, if Acquirer’s PE Ratio is below Target’s Ratio, the Deal is Dilutive. In other words, if the cost of issuing new shares for the Acquirer is higher than the Yield from the Target, the Deal is Dilutive.

Daily Finance Interview Question – 11.09.2022

Question: Cost Synergies are generally given more credit than Revenue Synergies by Investors.

  • True
  • False

This is True. 

Synergies refers to benefits that a Company is able to experience after an M&A Transaction. The two main types of Synergies are: 

Cost Synergies – cost savings. For example, a Company can combine accounting departments, simplify processes, reduce headcount, and save money that way after the acquisition. Cost Synergies is the most achievable (i.e. realistic) and common form of Synergies. 

Revenue Synergies – opportunity to have higher revenue. For example, two Companies might have complimentary products – Company A sells bicycles, and Company B fixes bicycles. If Company A buys Company B, they can ‘package’ their offering together (ex. sell a bicycle and offer a one year repair warranty) and reach more customers. Revenue Synergies are less predictable and likely to happen than Cost Synergies. 

Overall, because Cost Synergies are more predictable and likely to occur than Revenue Synergies, Cost Synergies usually receive more credit. 

Daily Finance Interview Question – 11.08.2022

Question: Which of the following is NOT a typical reason Companies pursue M&A?

  • Reduced Scale
  • Hiring Competing Company Talent
  • Faster Growth
  • Increased Size

Companies are interested in pursuing M&A (‘Mergers and Acquisitions’) because they believe they will be better off after M&A than before. 

There are financial reasons to pursue M&A, such as Synergies (i.e. cost savings), Growth, increased Size, and etc. 

There are qualitative reasons to pursue M&A, such as bringing in new talent, building stronger brand image, gaining access to new channels (i.e. new customers or new suppliers), etc. 

Reduced Scale is when instead of growing, a Company is becoming smaller. Reduced Scale is not a Benefit and therefore is not a reason to pursue M&A.

Daily Finance Interview Question – 11.07.2022

Question: When would you use a Sum of the Parts Analysis?

  • Conglomerate with Different Businesses
  • Large Tech Company with Many Related Businesses
  • Company with One Line of Business
  • Small Cap Business

Sum of the Parts Analysis is a Valuation Method that allows to value each division or line of business separately. Individual values are then added. Sum of the Parts Analysis is the most helpful for Companies with different Businesses.

For example, a company might have a division that sells flowers and another division that operates as a restaurant franchise. These divisions are very different – it makes more sense to value them individually and then add up to determine Valuation of a full Company.

Therefore, Sum of the Parts Analysis is most applicable for Conglomerates with different Businesses. 

Daily Finance Interview Question – 11.04.2022

Question: Enterprise Value = $150, Debt = $75, Cash = $10. What’s Equity Value?

  • $65
  • $85
  • $140
  • $75

Equity Value (‘Market Cap’ or ‘Market Capitalization’) reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and collecting Extra Cash. 

Enterprise Value (‘EV’) is the total value of the Business. In other words, what you would need to pay to acquire the entire Business. 

The formula that connects Enterprise Value and Equity Value is: 

Enterprise Value = Equity Value + Debt – Cash

To solve for Equity Value, we would rearrange this formula to: 

Equity Value = Enterprise Value – Debt + Cash

Using the numbers from the question above, the calculation would be: 

Equity Value = $150 Enterprise Value – $75 Debt + $10 Cash 

Equity Value = $85

Daily Finance Interview Question – 11.03.2022

Question: 2 Year Treasury = 1%, 10 Year Treasury = 4%, Beta = 1.5, ERP = 5%. What’s the Cost of Equity?

  • 9.5%
  • 7.5%
  • 11.5%
  • 5%

Cost of Equity (‘CoE’) is the Expected Rate of Return Equity Investors are requiring. In other words, Cost of Equity is the reward Investors expect for taking on a risk of giving up their Cash to you. 

To calculate Cost of Equity, we use CAPM (or ‘Capital Asset Pricing Model’). The formula is as follows: 

Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium 

Below is an overview of each component: 

Risk Free Rate – Return investors expect to take on zero risk. In the US, we usually use the 10 Year Treasury as a Risk Free Rate because Treasury Bonds are issued by the US government. We assume that the government will not default and will always pay on its debt – it is Risk Free.

Beta – risk associated with investing in a particular Company. Beta reflects how a specific Company Stock moves versus the Market. 

Equity Risk Premium (‘ERP’) – reward for taking on risk by investing in the Stocks instead of Bonds (usually relative to Risk Free Bonds, such as 10 Year Treasury).  

Now using the numbers from the question above, 

Cost of Equity = 4% on 10 Year Treasury + 1.5 Beta * 5% ERP

Cost of Equity = 11.5%

Daily Finance Interview Question – 11.02.2022

Question: Cash received a year from now has the same value as cash received today.

  • True
  • False

The answer is False. 

Cash today has a higher value than Cash received a year from now. Would you rather have $10 in front of you or 10 miles away from you? You would prefer to have $10 in front of you. Similarly, it is better to have Cash today rather than a year from now because it is worth more today.  

Daily Finance Interview Question – 11.01.2022

Question: Initial Sponsor Equity = $100. Entry EV/EBITDA = 10.0x. EBITDA at Exit is $25. Net Debt at Close = $25. Assume Entry Multiple = Exit Multiple and a 5-year investment horizon. What’s the approximate IRR?

  • 15.0%
  • 22.5%
  • 17.5%
  • 20.0%

To calculate IRR (‘Internal Rate of Return’), we need to find a MOI (‘MOIC’ or ‘MoM’ or ‘Money on Invested Capital’) Multiple. Then, using a table that connects MOI and IRR, we can determine the IRR. 

MOI considers Initial Equity over Ending Equity. Initial Sponsor Equity is given at $100. Let’s find Ending Equity.

To find Ending Equity, we first need to find the total Exit Value (i.e. what the Business is sold for). Given that Entry, Multiple is the same as Exit Multiple on EBITDA of $25, 

Exit Value = 10x EV/EBITDA * $25 EBITDA 

Exit Value = $250 

At Close (‘at Exit’), $25 of that $250 will be used to pay off the remaining Debt. Therefore, Exit Equity is $225. To put it all together,

MOI = $225 Ending Equity / $100 Entry Equity 

MOI = 2.25x

Using the table, MOI of 2.0x over 5 years is 15% IRR

MOI of 2.5x over 5 years is 20% IRR

Therefore, MOI of 2.25x in 5 years is something between 15% and 20%. The best answer is 17.5%

Daily Finance Interview Question – 10.31.2022

Question: A company has $20 of EBITDA and raises $40 off First Lien Term Loan, $20 of 2nd Lien Term Loan, and $30 of Notes. What is total Bond Debt / EBITDA?

  • 2.5x
  • 1.5x
  • 3.0x
  • 1.0x

Loans (i.e. Bank Debt) include First and Second Lien. Bonds include Notes. 

Therefore, Total Bond Debt is represented by Notes in this question. Using the numbers from the question, 

Bond Debt / EBITDA = $30 Notes / $20 EBITDA 

Loan Debt / EBITDA = 1.5x

Daily Finance Interview Question – 10.28.2022

Question: How can you buy a company for $500M, then sell it for $500M 5 years later, but triple your investment?

  • Pay down debt
  • Increase EBITDA by 50%
  • Increase EBIT by 10%
  • Increase Revenue by 100%

This is a common interview question that tests your understanding of how value is created in an LBO. 

It seems tricky at first because you are buying and selling at the same price. 

But if you use the Cash Flow of the Business to pay down debt over the life of the LBO, you can still create a return on your investment. 

Daily Finance Interview Question – 10.27.2022

Question:  Debt / EBITDA is typically greater than EV / EBITDA in an LBO.

  • True
  • False

False. 

Daily Finance Interview Question – 10.26.2022

Question: All else equal, would you prefer to sell to a Financial Sponsor or a Strategic/Corporate buyer?

  • Strategic/Corporate; they can raise more debt due to their reputations
  • Sponsor; pay a higher price due to synergies
  • Sponsor; low cost of capital
  • Strategic/Corporate; pay a higher price due to synergies

Corporate (‘Strategic’) Buyers can typically eliminate duplicated Overhead Costs, which increases the profit of the acquired business following the acquisition.

As a result of the Higher Profitability from Cost Savings, Corporate Buyers can justify paying a higher price. 

Private Equity firms, in an LBO transaction, cannot generate those same savings unless they already own a competing asset. 

As a result, Corporate buyers can typically pay more than Private Equity buyers and are thus the preferred exit option in most cases. 

Daily Finance Interview Question – 10.25.2022

Question: A company pays off Debt of with a $100 Balance Sheet Value at a 50% Discount. What’s the 3 Statement Impact? (Assume a 20% Tax Rate)

  • NI ($40); Cash +($60); Debt ($100); RE ($40)
  • NI +$40; Cash +($60); Debt ($100); RE +$40
  • NI +$50; Cash +($50); Debt ($100); RE +$50
  • NI ($50); Cash +($50); Debt ($100); RE ($50)

To answer questions on the Three Statement Changes, start with Net Income, then Cash Flow Statement, then Balance Sheet. 

A Company pays off Debt for less than its Book Value. The full amount that the Company has to pay down with a 50% Discount is $50 ($100 Debt * (1 – 0.5 Discount)) which is less than the Book Value of $100 – a $50 Gain is recorded on the Income Statement. 

Income Statement: a Company records a Gain of $10 which then increases the Pre-Tax Income (‘Taxable Income’) by $50. Given a Tax Rate of 20%,

Net Income = $50 Pre-Tax Income * (1 – 0.2 Tax Rate) 

Net Income = $40

Cash Flow Statement: Net Income of $40 flows to the top line of the Operating Activities Section. Subtract the $50 Gain because it is a Non-Cash line item from the Income Statement – that results in Cash from Operations -$10. In the Financing Activities Section, record a $50 Cash Outflow from the Debt Paydown. In the Investing Activities Section, there are no changes. 

Net Change in Cash = -$10 Cash from Operations + (-$50) Cash from Financing 

Net Change in Cash = -$60

Balance Sheet: -$60 Net Change in Cash flows to the Cash Balance on the Asset side of the Balance Sheet – net Change in Assets is -$60. We reduce the Debt Account by $100 Book Value because it was paid down. Finally, $40 Net Income from the Income Statement flows to the Retained Earnings (‘RE’) balance on the Liabilities and Shareholders’ Equity side – net change on the Liabilities and Equity is -$60. Balance Sheet balances. 

Summary of the changes is below:

Net Income $40

Cash Flow -$60

Debt -$100

RE $40

Daily Finance Interview Question – 10.24.2022

Question: Deferred Tax Liabilities decrease by $5 and Deferred Tax Assets decrease by $20, what’s the net impact on Cash?

  • ($5)
  • ($15)
  • $15
  • $5

Deferred Tax Liabilities (‘DTL’) arise when a Company owes taxes to the IRS that will be paid in Cash in the future. A decrease of $5 in Deferred Tax Liabilities means that a Business finally paid in Cash for the Taxes owed – Use of Cash. 

Deferred Tax Assets (‘DTA’) arise when a Company paid more in Cash to the IRS than what it actually owes. A decrease of $20 in Deferred Tax Assets means a Business received a Tax Relief – Source of Cash.

To combine numbers, 

Impact to Cash = -$5 Decrease in Deferred Tax Liability + $20 Decrease in Deferred Tax Assets 

Impact to Cash = $15 Source of Cash 

Daily Finance Interview Question – 10.21.2022

Question: A Business sells a truck for $30, that’s a list on the Balance Sheet at $50. What is the Tax impact of the transaction? (Assume a 20% Tax Rate).

  • Income Tax Expense higher by $4
  • Income Tax Expense lower by $20
  • Income Tax Expense higher by $20
  • Income Tax Expense lower by $4

A Business sells a truck for less than what the truck is worth on the Balance Sheet. A $30 Selling Price is less than a $50 Book Value (what it is on the Balance Sheet) – it creates a Loss of $20.

A Business records a $20 Loss on the Income Statement which decreases a Company’s Pre-Tax Income by $20. Assuming a Tax Rate of 20%, 

Income Tax Expense = -$20 * 0.2 = -$4 

Income Tax Expense is lower by $4

Daily Finance Interview Question – 10.20.2022

Question: Revenue = $10, Cost of Goods Sold = $2, and SG&A Expense = $3. What is EBIT?

  • $5
  • $7
  • $12
  • $8

EBIT (or ‘Operating Profit’) represents Earnings for a Business after subtracting Selling General and Administrative Expenses (‘SG&A’), which include salaries, marketing and etc., and Costs of Goods Sold (‘COGS’), which include costs of materials to manufacture goods and etc., from Revenue. 

Using the numbers from the question above, 

EBIT = $10 Revenue – $2 Costs of Goods Sold – $3 SG&A Expense 

EBIT = $5

Daily Finance Interview Question – 10.14.2022

Question: A company’s Market Capitalization includes excess Cash.

  • True
  • False

This is True.
Market Capitalization (‘Market Cap’) is the term we use to describe Equity Value for a Public Company.
Equity Value reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and after collecting Extra Cash.

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Daily Finance Interview Question – 10.12.2022

Question: Enterprise Value = $100, Debt = $40, Cash = $10. The Company has 10 shares. What’s the value per share?

  • $6
  • $5
  • $4
  • $7

Value per Share is Price (i.e. the dollar amount you would pay on the Stock Market to buy one Share of a Public Company). Price per Share can be calculated as Market Capitalization (‘Equity Value’) divided by the number of Shares. 

Equity Value reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and collecting Extra Cash. 

Enterprise Value (‘EV’) is the total value of the Business. In other words, what you would need to pay to acquire the entire Business. 

The formula that connects Enterprise Value and Equity Value is: 

Enterprise Value = Equity Value + Debt – Cash

To solve for Equity Value, we would rearrange this formula to: 

Equity Value = Enterprise Value – Debt + Cash

Using the numbers from the questions above, 

Equity Value = $100 Enterprise Value – $40 Debt + $10 Cash 

Equity Value = $70

Value per Share = Price = $70 Equity Value / 10 Shares 

Value per Share = $7

Daily Finance Interview Question – 10.11.2022

Question: A startup business just became profitable in the most recent year reported. What is the right EV metric to use?

  • EV / EBITDA
  • Price / Earnings (P/E)
  • EV / Revenue
  • EV / EBITDA

You would probably still use EV / Revenue because the Business still wouldn’t reflect normal/mature profit margins.

Daily Finance Interview Question – 10.10.2022

Question: Asset Value is the root of most Business Valuations.

  • True
  • False

The answer is False.

Asset Value (‘Net Asset Value’ or ‘NAV’) is a Valuation Method in which we calculate how much we would pay for a Business today as Total Assets less Total Liabilities. 

It is not the main Valuation Method used. The three main methods are DCF (‘Discounted Cash Flow’), Precedent Transaction, and Comparable Companies Analysis.

Daily Finance Interview Question – 10.07.2022

Question: Initial Equity = $20. Entry EV/EBITDA = 8.0x. EBITDA at Exit is $10. Net Debt at Close = $20. Assume Entry Multiple = Exit Multiple and a 5-year investment horizon. What’s the approximate IRR?

  • 22.5%
  • 25%
  • 17.5%
  • 20%

To calculate IRR (‘Internal Rate of Return’), we need to find a MOI (‘MOIC’ or ‘MoM’ or ‘Money on Invested Capital’) Multiple. Then, using a table that connects MOI and IRR, we can determine the IRR. 

MOI considers Initial Equity over Ending Equity. Initial Sponsor Equity is given at $20. Let’s find Ending Equity.

To find Ending Equity, we first need to find the total Exit Value (i.e. what the Business is sold for). Given that Entry, Multiple is the same as the Exit Multiple on EBITDA of $10, 

Exit Value = 8x EV/EBITDA * $10 EBITDA 

Exit Value = $80

At Close (‘at Exit’), $20 of that $80 Exit Value will be used to pay off the remaining Debt. Therefore, Exit Equity is $60. To put it all together,

MOI = $60 Ending Equity / $20 Entry Equity 

MOI = 3x

Using the table, MOI of 3.0x over 5 years is 25% IRR

Daily Finance Interview Question – 10.06.2022

Question: We bought a company in an LBO for $500 million and sold it 5 years later for $750 million. What was the IRR?

  • 50%
  • 25%
  • 15%
  • No Way to Tell

The formula to calculate IRR is complex. Instead, let’s start by finding the MoM (‘Money on Money’ or ‘MOIC’ or ‘Money on Invested Capital’) which measures the initial payment versus what we get at the end. Put simply, 

MoM = Ending Equity / Initial Equity. Assuming the numbers given are for Equity, 

MoM = $750 Ending Equity / $500 Initial Equity 

MoM = 1.5x

IRR (‘Internal Rate of Return’) on a 1.5x Multiple over a 5-year Holding Period is about 10%.

There is a table that shows approximate IRR results depending on a specific IRR and a holding period that is easier to memorize for PE jobs and interviews than try to do a lot of mental math.

Daily Finance Interview Question – 10.05.2022

Question: Which of the following is not a typical exit strategy in an LBO?

  • IPO
  • Earnout
  • Sale to a Sponsor
  • Dividend Recapitalization

Earnout.

Daily Finance Interview Question – 10.04.2022

Question: The fee PE funds charge based on a percentage of capital managed is called…

  • Carried Interest
  • Management Fee
  • Base Fee
  • AUM Fee

Management Fee is the type of Fee the PE Firm (‘Private Equity’ or ‘Financial Sponsor’) gets paid for managing the Capital (‘Equity’) provided by outside Investors who want exposure to Private Companies.

Daily Finance Interview Question – 10.03.2022

Question: A company sells a piece of equipment with a Book Value of $50 to a Buyer for $100 in Cash. What’s the 3 Statement Impact? (Assume a 20% Tax Rate)

  • NI ($40); Cash +$90; PP&E ($50); RE ($40)
  • NI +$40; Cash +$90; PP&E ($50); RE +$40
  • NI +$100; Cash +$100; PP&E ($50); RE +$100
  • NI +$50; Cash +$50; PP&E ($50); RE +$50

To answer questions on the Three Statement Changes, start with Net Income, then Cash Flow Statement, then Balance Sheet. 

A Company sells a piece of equipment for more than its Book Value. The Selling Price of $100 is greater than the Book Value of $50 – a Gain of $50 is recorded on the Income Statement. 

Income Statement: a Company records a Gain of $50 which then increases the Pre-Tax Income (‘Taxable Income’) by $50. Given a Tax Rate of 20%,

Net Income = $50 Pre-Tax Income * (1 – 0.2 Tax Rate) 

Net Income = $40

Cash Flow Statement: Net Income of $40 flows to the top line of the Operating Activities Section. Subtract the $50 Gain because it is a Non-Cash line item from the Income Statement – that results in Cash from Operations -$10. In the Investing Activities Section, record a $100 Cash Inflow from the sale of the equipment. In the Financing Activities Section, there are no changes. 

Net Change in Cash = -$10 Cash from Operations + $100 Cash from Investing 

Net Change in Cash = $90

Balance Sheet: $90 Net Change in Cash flows to the Cash Balance on the Asset side of the Balance Sheet. We reduce the PP&E Account by $50 Book Value because the equipment is sold, so the net change on the Asset side is $40. Finally, $40 Net Income from the Income Statement flows to the Retained Earnings (‘RE’) balance on the Liabilities and Shareholders’ Equity side. Balance Sheet balances. 

A summary of the changes is below:

Net Income $40

Cash Flow $90

PP&E -$50

RE $40

Daily Finance Interview Question – 09.30.2022

Question: A business with Negative Net Working Capital grows and NWC remains proportional to sales. What’s the net impact on Cash?

  • Cash Outflow from NWC
  • No Cash Impact
  • Cash Inflow from NWC

Net Working Capital (‘NWC’ or ‘Working Capital’) is how much money a Business needs to put into its operations to keep running it day-to-day. Net Working Capital is a measurement of the day-to-day Capital Intensity of a Business.  

Negative Working Capital is usually when a Business has Current Liabilities that exceed Current Assets. Each year, the dollars required to fund increasing assets are lower than the dollar value from increased funding from money lent from Customers, Inventory Suppliers, and Operating Suppliers.

Assuming Negative NWC remains proportional to Revenue, this results in recurring excess cash inflows to the Business.

Daily Finance Interview Question – 09.29.2022

Question: Deferred Revenue increases by $10 and Prepaid Expenses decrease by $5, what’s the impact on Cash?

  • +$15 Source of Cash
  • +$10 Source of Cash
  • ($10) Use of Cash
  • ($15) Use of Cash

Deferred Revenue (or ‘Unearned Revenue’) – reflects a situation where a Business receives payment in advance for the future delivery of a product or service. A $10 increase in Deferred Revenue represents a source of Cash. 

Prepaid Expenses – reflects a situation where a Business paid for their expenses in advance. For example, a Business pays for full 12 months of rent on January 1. To continue the example, in February, a Business will do the following:

1. Put a portion of that rent Expense on the Income Statement, and

2. Decrease a Prepaid Expenses line item on the Balance Sheet 

A Business actually did not spend that cash in February (it was done in January). As a result, a $5 decrease in Prepaid Expenses is also a source of Cash. 

To combine the numbers together, 

Impact on Cash = +$10 Deferred Revenue + $5 Prepaid Expenses 

Impact on Cash = +$15

Daily Finance Interview Question – 09.28.2022

Question: What is expense Capitalization?

  • When we add capital to the Equity account
  • Recording Expenses based on the Debt or Equity used to fund them
  • When we record expenses to the Balance Sheet and expense them over their useful life

Expense capitalization is when we record expenses to the Balance Sheet and then expense them over their useful life.

Daily Finance Interview Question – 09.27.2022

Question: Accrual Accounting reflects Cash Revenue and Cash Costs for every transaction.

  • True
  • False

This is False.

Accrual Accounting reflects the underlying substance of transactions (i.e Revenue when earned and costs when Incurred) regardless of when cash exchanges hands.

Daily Finance Interview Question – 09.26.2022

Question: Net Income = $100, P/E Ratio = 10x, Debt = $500, Cash = $100. What’s Enterprise Value?

  • $1,500
  • $1,600
  • $1,000
  • $1,400

This is a ‘Puzzle’ question. 

Given the information above, we can determine Enterprise Value by finding the missing pieces of information in the following steps:

1. Find Equity Value 

We are given a PE Ratio of 10x. Another way to think about PE Ratio is ‘Price per Share over Earnings Per Share’ or ‘Equity Value / Net Income’. We are given Net Income of $100. To put the numbers together:

10x PE = Equity Value / $100 Net Income 

Equity Value = 10x * $100 Net Income 

Equity Value = $1,000

2. Find Enterprise Value 

Enterprise Value and Equity Value are connected through the following formula, 

Enterprise Value = Equity Value + Debt – Cash

We found Equity Value = $1,000. We are also given Cash = $100 and Debt = $500. To piece the numbers together:

Enterprise Value = $1,000 Equity Value + $500 Debt – $100 Cash 

Enterprise Value = $1,400

Daily Finance Interview Question – 09.23.2022

Question: A company must be in the same industry to be an appropriate Comparable for ‘Comps’ analysis.

  • True
  • False

This is False.

Most importantly, a Company should have similar operations to be an appropriate Comparable for ‘Comps’ Analysis. Similar operations do not guarantee that the Businesses are in the same industry.

Other characteristics that indicate a good Comparable – similar size, similar financial performance (i.e similar margins), similar geographic exposure and customers, etc.

Daily Finance Interview Question – 09.22.2022

Question: We typically use a Terminal Growth Rate (‘g’) of at least 5% or more for high-growth businesses.

  • True
  • False

This is False. 

We typically assume a Terminal Growth Rate that is at or below long-term GDP Growth Rate in the U.S. (typically 2-3%). If we assume anything higher than the GDP Growth Rate, we are implying that a Company will outpace and be larger than the whole U.S. economy at some point.

Daily Finance Interview Question – 09.19.2022

Question: A business has an EV of $100, a Debt of $40, and a Cash of $10. What is the company’s Equity Value?

  • $70
  • $50
  • $100
  • $60′

The value of the Company (‘Enterprise Value’) is $100, but lenders have a $40 Claim (‘Debt’) on the Business. 

On the flip side, there’s $10 of Cash in the Bank.

So Equity Value is $100 (EV) – $40 (Debt) + $10 (Cash) = $70

Daily Finance Interview Question – 09.16.2022

Question: Which of the following describes the process by which we account for the cost of receiving cash in the future (vs. today)?

  • Rollforward
  • Rollback
  • Discounting
  • Haircutting’

The answer is Discounting.

Discounting is the process of accounting for the cost of receiving Cash in the future instead of today. In other words, Discounting is the process of determining how much you would pay today to receive the Cash in the future.

Daily Finance Interview Question – 09.15.2022

Question: A company has $25 of EBITDA and raises 3.0x in Term Loans and 2.0x in Bonds. The Company has offered 10.0x EV / EBITDA and needs a 40% Minimum Equity Contribution. What is the max additional Debt that it can raise?

  • $75
  • $50
  • $0
  • $25

Let’s start by finding the total Purchase Price. From there, we can calculate the Equity and Debt contributions and finally find how much Debt could be raised in addition to existing levels. 

1. Purchase Price (‘EV’)

EV/EBITDA is 10x on $25 EBITDA, therefore EV (‘Enterprise Value’) is $250

2. Equity Contribution 

Using a $250 Purchase Price and given that a Minimum of 40% Equity must be put in, 

Equity Contribution = $250 Purchase Price * 40% Equity Contribution Minimum 

Equity Contribution = $100

3. Total Debt

Since $100 out of $250 Purchase Price come from Equity, the remainder needs to come from Debt. Therefore, total Debt is $150.

4. Existing Debt

Current Debt is 5x (3x from Term Loans and 2x from Bonds). Debt is usually expressed in terms of EBITDA in LBO Transactions, so given EBITDA of $25:

5x Current Debt = Current Debt / $25 EBITDA

Current Debt = $125

Overall, the Company can have $150 Debt in total. The Company has $125 currently. Therefore, the Company can raise additional $25

Daily Finance Interview Question – 09.14.2022

Question: A company has $25 of Senior Debt and $10 of Junior Debt. It sells for an EV of $30. What is the recovery on the Jr Debt?

  • 0%
  • 100%
  • 50%
  • 75%

If a company is valued at $30, then the Senior Debtholders would receive a full $25 recovery. 

Only $5 of value would remain for the Junior Debtholders.

So, $5 of value to $10 of Debt would result in a 50% Recovery. 

This is admittedly a bit of a simplification as Bankruptcy Court can dramatically shift recoveries in real life.

Daily Finance Interview Question – 09.12.2022

Question: LBO Debt is expressed typically in multiples (‘turns’) of EBIT or EBITDA – CapEx.

  • True
  • False

This is False. 

LBO Debt is typically expressed in multiples (‘turns’) of EBITDA. EBITDA is usually the closest proxy (i.e. approximation) for Cash Flows so multiples on EBITDA can give Lenders a good idea if a Business is capable of paying Interest Expense on its Debt.

Daily Finance Interview Question – 09.09.2022

Question: In a Roll-Up strategy, an LBO firm is typically looking for what?

  • A fragmented industry
  • Concentrated industry
  • Numerous Past LBOs
  • Competing companies are Publicly Traded

A fragmented industry offers the ability to buy (i.e. roll-up) numerous smaller players. 

Daily Finance Interview Question – 09.08.2022

Question: In an LBO, we typically assume the EV / EBITDA multiple will expand at the exit.

  • True
  • False

This is False.

Multiple Expansion (i.e. multiple at which you exit is higher than the multiple at which you enter) is difficult to be achieved. Usually, Multiple Expansion is not under the control of the Private Equity (‘PE’) Firm and is dependent on the Market.

Therefore, in an LBO, we typically assume that EV/EBITDA Multiple will stay the same at the exit.

Daily Finance Interview Question – 09.07.2022

Question: Deferred Tax Liabilities increase by $10 and Deferred Tax Assets decrease by $10, what’s the net impact on Cash?

  • $20
  • ($10)
  • $0
  • +$10

Deferred Tax Liabilities (‘DTL’) arise when a Company owes taxes to the IRS that are to be paid in Cash in the future. An increase of $10 in Deferred Tax Liabilities means that a Business did not spend Cash on Taxes in the current period – a Source of Cash. 

Deferred Tax Assets (‘DTA’) arise when a Company paid more in Cash to the IRS than what it actually owes. A decrease of $10 in Deferred Tax Assets means a Business received a Tax Relief – a Source of Cash. 

To combine the numbers, 

Impact to Cash = +$10 Increase in Deferred Tax Liability + $10 Decrease in Deferred Tax Asset

Impact to Cash = $20 Source of Cash

Daily Finance Interview Question – 09.01.2022

Question: CFO = $10, Capital Expenditures = ($1), Debt Repayment = ($1), Stock Buybacks = ($3) what is CFF?

  • $5
  • ($4)
  • ($1)
  • ($6)

CFF (‘Cash from Financing’) is a section of the Cash Flow Statement (‘CFS’) that reflects Cash Inflows and Outflows related to paying and raising Debt or Equity.

Using the numbers from the question above, 

CFF = -$1 Debt Repayment – $3 Stock Buybacks

CFF = -$4

Capital Expenditures are not included in the calculation because they appear in the Investing Section of the Cash Flow Statement 

Daily Finance Interview Question – 08.30.2022

Question: If Current Assets (Excl Cash) = $10 and Current Liabilities = $5, what is the value of Net Working Capital?

  • $10
  • $5
  • ($5)
  • ($15)

Net Working Capital (‘NWC’ or ‘Working Capital’) is how much money a Business needs to put into its operations to keep running it day-to-day. Net Working Capital is a measurement of the day-to-day Capital Intensity of a Business. 

Net Working Capital is calculated as a difference between Current Assets and Current Liabilities. Current Assets usually do not include Cash from Balance Sheet because Cash is the output from running a Business, and Net Working Capital attempts to measure how much Cash needs to be put in. 

Using the numbers from the question above, 

Net Working Capital = $10 Current Assets (Excluding Cash) – $5 Current Liabilities 

Net Working Capital = $5

Daily Finance Interview Question – 08.29.2022

Question: Which of the following reflects a Physical Asset with a useful life greater than 1 Year?

  • Goodwill
  • Long-Term Investments
  • Property, Plant, & Equipment
  • Intangible Assets

Physical Assets (‘Tangible Assets’) are objects that have economic value for business and business operations. The most common examples of Physical Assets are Property, Plant, and Equipment (‘PP&E’).

Property = Land etc.

Plant = Buildings etc.

Equipment = Machinery, Vehicles, etc.

Daily Finance Interview Question – 08.26.2022

Question: A company has $20 of Int Exp, $20 of Net Income,  $100 of Cash, $50 of EBITDA, a 5% cost of Debt, and a 25x P/E multiple. What is the company’s EV/EBITDA multiple?

  • 16x
  • 20x
  • 12x
  • 14x

This is a ‘Puzzle’ question.

To determine the EV/EBITDA multiple, we need to find EV (‘Enterprise Value’) and EBITDA. EBITDA is given in the problem, EBITDA = $50. To calculate Enterprise Value, we can find Equity Value from the information given and use the following equation to connect EV to Equity Value:

Enterprise Value = Equity Value + Debt – Cash 

To find Equity Value: 

We are given a PE multiple (or ‘Equity Value / Net Income’ or ‘Price per Share / Earnings per Share’) of 25x. We have Net Income of $20. To put the numbers together:

25x PE = Equity Value / $20 Net Income

Equity Value = 25x PE * $20 Net Income 

Equity Value = $500 

Looking at the equation 

Enterprise Value = Equity Value + Debt – Cash 

We now have Equity Value = $500 and Cash (given in the problem) = $100. We are missing Debt, but have Interest Expense and Cost of Debt (i.e. Interest Rate on Debt).

To find the Debt:

Debt * 5% Cost of Debt = $20 Interest Expense 

Debt = $20 Interest Expense / 5% Cost of Debt 

Debt = $400

Now, we have all numbers to calculate Enterprise Value:

Enterprise Value = $500 Equity Value + $400 Debt – $100 Cash

Enterprise Value = $800

Finally, we can calculate the multiple:

EV/EBITDA = $800 Enterprise Value / $50 EBITDA

EV/EBITDA = 16x

Daily Finance Interview Question – 08.24.2022

Question: Unlevered Beta = 2.0, 1 + D/E *(1 – Tax Rate) = 1.0. What is the Levered Beta?

  • 1.5
  • 1
  • 2.5
  • 2.0

Beta measures the connection between a Company’s Stock performance and a Market’s performance. 

Levered Beta is affected by Capital Structure (i.e. Debt levels of a company). Unlevered Beta is not affected by Capital Structure.

To ‘un-lever’ Beta means to go from Levered Beta to Unlevered Beta. The equation to do so is as follows, 

Unlevered Beta = Levered Beta / (1 + [Debt/Equity]) * (1-Tax Rate))

Using the numbers from the question above, 

Unlevered Beta = 2.0 Levered Beta / 1 from (1 + [D/E *(1 – Tax Rate)] )

Unlevered Beta = 2.0 / 1

Unlevered Beta = 2.0

The equation above is called the Hamada Equation. It attempts to separate risk associated with running a business (captured in Unlevered Beta) from the risk of taking on more Debt (captured in Levered Beta).

Daily Finance Interview Question – 08.23.2022

Question: Historical Beta can accurately predict how volatile a company’s shares will be in the future.

  • True
  • False

This is False. 

Historical Beta (usually a 5 Year Monthly Beta) is based on past performance of the Stock Market versus past performance of a Company’s Stock. While historical values are a good starting point and are usually the only available points of data, they are not perfect at predicting future volatility. 

For example, Company’s Capital Structure (i.e. Debt level) might change significantly in the future, increasing the Company’s risk profile (i.e. more Debt could mean a higher chance of Bankruptcy) and therefore becoming more volatile. Historical Beta would not have that change captured. 

Daily Finance Interview Question – 08.22.2022

Question: Levered Beta excludes the impact of the Capital Structure (i.e., the level of Debt).

  • True
  • False

This is False.

Levered means that a financial metric is impacted by Debt and its effects (i.e Interest Expense). Unlevered means that an item excludes the impact of the Capital Structure (i.e the level of Debt). 

Therefore, Levered Beta is impacted by Capital Structure, while Unlevered Beta is not (i.e ‘Capital Structure Neutral’).

Daily Finance Interview Question – 07.18.2022

Question: Which of the following describes the Valuation method in which we determine what a PE firm could pay based on typically targeted returns?

  • Trading Comparables
  • DCF
  • Transaction Comparables
  • LBO

There are multiple methods we can use to Value a Business (Discounted Flow Analysis, Trading Comparables, Transaction Comparables, and LBO).

In the question above, we are discussing the LBO Valuation approach.

In this approach, we are aiming to determine what a Private Equity (or ‘LBO’) Fund could pay based on target return thresholds, which are typically in the range of 15-25% Internal Rate of Return (‘IRR’). 

In the end, if an LBO firm pays more, the Private Equity (‘PE’) Firm will earn a lower return. And vice versa, if the PE firm pays more, all else equal, they will generate a lower return.

Daily Finance Interview Question – 07.15.2022

Question: EBITDA is $15, D&A = $4, Interest = $1, Income Tax Rate = 20%, D&A = CapEx, change in NWC is 20% of EBITDA. What is Levered Free Cash Flow?

  • 10
  • $5
  • $7
  • $4

Levered Free Cash Flow (‘LFCF’) describes the Cash Flow generated by a Business after incorporating Cash Outflows related to Debt (Interest Expense + Principal Repayments).

We can calculate Levered Free Cash Flow with the following formula: [EBITDA – D&A – Interest Expense] * (1 – Tax Rate) + D&A – Capital Expenditures +/- Changes in Net Working Capital.

To begin with, we’ll calculate to Post-Tax Profit: [$15 EBITDA – $4 D&A – $1 Interest Expense] * (1 – 20%) = $8 Post-Tax Profit. 

Now, remember that increases/decreases in Net Working Capital result in a cash (Outflow)/Inflow.

$8 of Post-Tax Profit + $4 D&A – $4 Capital Expenditures – $3 NWC Outflow = $5 Levered Free Cash Flow.

Daily Finance Interview Question – 07.14.2022

Question: Which of the following transaction structures is likely to create a Deferred Tax Liability?

  • Stock Sale
  • Merger
  • Reverse Merger
  • Asset Sale

Deferred Tax Liabilities (‘DTL’) arise when a Company owes taxes to the IRS that are to be paid in Cash in the future.

The two main methods of structuring an M&A Deal are Stock Sale and Asset Sale.

Asset Sale is an M&A Deal in which the Buyer is able to decide which specific Assets to Buy and which specific Liabilities to assume from the Seller.

Stock Sale is an M&A Deal in which the Buyer buys everything that the Seller has (i.e. buys all Assets and assumes all Liabilities). With Stock Sales, the Buyer cannot Amortize Goodwill. Amortization of other Intangible Assets is also often not Tax Deductible for Tax Purposes (i.e. for IRS). 

Therefore, Stock Sale leads to DTLs for Buyer because of the differences in Amortization and Depreciation on Book versus Tax records.

Daily Finance Interview Question – 07.13.2022

Question: A company has $20 of EBITDA and can support 2.0x First Lien Debt and Total Debt of 5.0x. How much Debt can it raise?

  • $40
  • $100 
  • $60
  • $20

In this case, Total Debt is a Ratio that measures the level of Debt against EBITDA. Put simply, 

Total Debt = Debt / EBITDA 

5x Total Debt = Debt / $20 EBITDA

Debt = $100

The question is asking about Total Debt that the Firm can take on, not only First Lien so we are using 5x from Total Debt instead of 2x on First Lien.

Daily Finance Interview Question – 07.12.2022

Question: “When are Private Equity Funds and Corporate Buyers on equal footing?”

  • They aren’t
  • Acquihires
  • Roll-up strategy
  • When sponsors have cheap debt

If a Private Equity Fund (‘Financial Sponsor’) owns an existing company that can be merged with a newly acquired Business, they can typically generate Cost Savings (‘Synergies’).

A Roll-Up (or ‘Platform’) strategy is when a Private Equity fund acquires many of the same types of Businesses and combines them into a single company.

When they combine the Businesses they can often generate Cost Savings (‘Synergies’).

Similarly, Corporate Buyers can often eliminate duplicated Overhead Costs, which increases the profit of the acquired business following the acquisition.

So, in short, when a Private Equity Fund executes a Roll-Up Strategy, they are on more equal footing with a Corporate Buyer.

Daily Finance Interview Question – 07.11.2022

Question: Which of the following is NOT a reason for using Debt in an LBO?

  • Lower Equity Contribution
  • Potential for Higher Returns
  • Lower Risk

Debt is said to amplify Returns. In other words, keeping all else equal and assuming it goes well, more Debt in a Transaction will lead to higher Returns than less Debt. Similarly, keeping all else equal and assuming it goes poorly, more Debt in a Transaction will lead to lower Returns than less Debt. 

Finally, more Debt means less Equity is required. Let’s say we buy a Company for $100 and put $10 of Debt – we need to come up with $90 in Equity (i.e. our own money). On the other hand, if we buy a Company for the same $100 and put $90 of Debt – we need to come up with only $10 in Equity. 

More Debt means more Risk if the Company is not able to pay on the Interest Expense and Principal.

Daily Finance Interview Question – 07.08.2022

Question: A company pays off Debt with a $100 Balance Sheet Value at a 10% Premium. What’s the 3 Statement Impact? (Assume a 20% Tax Rate)

  • NI +$8; Cash +$108; Debt ($100); RE +$8
  • NI ($8); Cash +$108; Debt ($100); RE ($8)
  • NI ($8); Cash +($108); Debt ($100); RE ($8)
  • NI +$8; Cash ($108); Debt +$100; RE +$8

To answer questions on the Three Statement Changes, start with Net Income, then Cash Flow Statement, then Balance Sheet. 

A Company pays off Debt for more than its Book Value. The full amount that the Company has to pay down with a 10% Premium is $110 ($100 Debt * (1 + 0.1 Premium)) which is greater than the Book Value of $100 – a $10 Loss is recorded on the Income Statement. 

Income Statement: a Company records a Loss of $10 which then decreases the Pre-Tax Income (‘Taxable Income’) by $10. Given a Tax Rate of 20%,

Net Income = -$10 Pre-Tax Income * (1 – 0.2 Tax Rate) 

Net Income = -$8

Cash Flow Statement: Net Income of -$8 flows to the top line of the Operating Activities Section. Add back the $10 Loss because it is a Non-Cash line item from the Income Statement – that results in Cash from Operations $2. In the Financing Activities Section, record a $110 Cash Outflow from the Debt Paydown. In the Investing Activities Section, there are no changes. 

Net Change in Cash = $2 Cash from Operations + (-$110) Cash from Financing 

Net Change in Cash = -$108

Balance Sheet: -$108 Net Change in Cash flows to the Cash Balance on the Asset side of the Balance Sheet – net Change in Assets is -$108. We reduce the Debt Account by $100 Book Value because it was paid down. Finally, -$8 Net Income from the Income Statement flows to the Retained Earnings (‘RE’) balance on the Liabilities and Shareholders’ Equity side – net change on the Liabilities and Equity is -$108. Balance Sheet balances. 

Summary of the changes is below:

Net Income -$8

Cash Flow -$108

Debt -$100

RE -$8

Daily Finance Interview Question – 07.07.2022

Question: If we pay less tax to the IRS now (vs Income Tax Expense)…and have higher Taxes Paid in the future as a result, we record a….

  • No Way to Tell
  • Deferred Tax Asset
  • Deferred Tax Liability

Deferred Tax Liabilities (‘DTL’) arise when a Company owes taxes to the IRS that are to be paid in Cash in the future. It means a Company pays less Tax to IRS now and records a Deferred Tax Liability on the Balance Sheet. Therefore, the answer to the above question is Deferred Tax Liability. 

On the other hand, Deferred Tax Assets (‘DTA’) arise when a Company pays more in Cash to the IRS now than what it actually owes to IRS.

Daily Finance Interview Question – 07.06.2022

Question: One Business outsources manufacturing and another doesn’t, which has lower Capital Intensity? (Assume: EBITDA margin is the same for both Companies)

  • The Business that doesn’t outsource
  • No Way To Tell
  • The Business that outsources
  • They have the same Capital Intensity

A business that outsources manufacturing will not need to invest as much in manufacturing equipment and thus will have lower Capital Expenditures (or ‘CapEx’). 

Capital Intensity = Capital Expenditures + Working Capital 

As a result, the Business that outsources will have lower Capital Intensity, all else equal.

Daily Finance Interview Question – 07.05.2022

Question: Revenue = $10, Cost of Goods Sold = $2, and SG&A Expense = $3. What is Gross Profit?

  • $7
  • $12
  • $8
  • $5

Gross Profit (or ‘Gross Income’) represents earnings for a business after subtracting costs directly associated with creating products/services from Revenue. The direct costs are also called Costs of Goods Sold (‘COGS’). 

Using the numbers from the question above,

Gross Profit = $10 Revenue – $2 Costs of Goods Sold 

Gross Profit = $8

We do not subtract SG&A Expenses (‘Selling General and Administrative Expenses’) because they are not directly associated with creating products/services for a Business. SG&A Expenses include costs associated with paying salaries, paying for marketing, and etc.

Daily Finance Interview Question – 07.04.2022

Question: What is the Difference between COGS/COS Expenses and SG&A Expenses?

  • COGS/COS = Cost of the Product/Service Sold; SG&A = Selling and Overhead Expense
  • COGS/COS = Overhead; SG&A = Marketing Expense Only
  • COGS/COS = Selling and Overhead Expense; SG&A = Cost of the Product Sold

Cost of Good Sold reflects the cost of the product sold by a business. SG&A (also called ‘OpEx’) reflects the Selling, General, and Administrative costs of a Business, which is also referred to as ‘Overhead.’

Daily Finance Interview Question – 07.01.2022

Question: Enterprise Value = $500, Debt = $250, Preferred Stock = $50, Cash = $50, Basic Shares = 15, Fully Diluted Shares = 25. What’s the Value Per Share?

  • $15
  • $10
  • $25
  • $20

This is a ‘Puzzle’ question. 

Value per Share is the same thing as Price per Share (i.e what you would pay on the Stock Market to buy one Share of a Public Company). Market Capitalization (‘Equity Value’) is the total value of all Shares that the company has. Therefore, to determine Value per Share, we first need to find the total Equity Value.

Given the numbers above, we can follow these steps to find Value per Share:

 1. Find Equity Value 

We are given Enterprise Value in the problem. Enterprise Value and Equity Value are connected through the following equation:

Enterprise Value = Equity Value + Debt + Preferred Stock – Cash

Using the numbers from the question above,

$500 Enterprise Value = Equity Value + $250 Debt + $50 Preferred Stock – $50 Cash 

Equity Value = $250

2. Find Value per Share

We are given Basic Shares and Fully Diluted Shares. The correct way to calculate Value per Share is by using the Fully Diluted Shares because they include Options, Restricted Stock Units (‘RSU’) that can dilute ownership if they are used (or ‘Exercised’). To put the numbers together:

Value per Share = $250 Equity Value / 25 Fully Diluted Shares 

Value per Share = $10

Daily Finance Interview Question – 06.30.2022

Question: Levered Beta = 2.0, 1 + [D/E *(1 – Tax Rate)] = 1.0. What is the Unlevered Beta?

  • 0.5
  • 2.0
  • 1.5
  • 1.0

Beta measures the connection between a Company’s Stock performance and a Market’s performance. 

Levered Beta is affected by Capital Structure (i.e. Debt levels of a company). Unlevered Beta is not affected by Capital Structure.

To ‘un-lever’ Beta means to go from Levered Beta to Unlevered Beta. The equation to do so is as follows, 

Unlevered Beta = Levered Beta / (1 + [Debt/Equity]) * (1-Tax Rate))

Using the numbers from the question above, 

Unlevered Beta = 2.0 Levered Beta / (1 + [1.0 D/E *(1 – Tax Rate)] )

Unlevered Beta = 1.0

The equation above is called the Hamada Equation. It attempts to separate risk associated with running a business (captured in Unlevered Beta) from the risk of taking on more Debt (captured in Levered Beta).

Daily Finance Interview Question – 06.29.2022

Question: Market Cap = $100, Debt = $30, Cash = $20. What’s Enterprise Value?

  • $80
  • $100
  • $110
  • $150

Market Capitalization (‘Market Cap’) is the term we use to describe Equity Value for a Public Company.

Equity Value reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and collecting Extra Cash. 

Enterprise Value (‘EV’) is the total value of the Business. In other words, what you would need to pay to acquire the entire Business. 

The formula that connects Enterprise Value and Equity Value is: 

Enterprise Value = Equity Value + Debt – Cash

Using numbers from the question above, 

Enterprise Value = $100 Equity Value + $30 Debt – $20 Cash 

Enterprise Value = $110

Daily Finance Interview Question – 06.28.2022

Question: For how many years do you project into the future for the Stage 1 of a DCF?

  • 5-10 years; until steady-state
  • 2-3 years
  • At least 10 years

You typically project out at least 5-10 years. However, you shouldn’t stop until the business reaches a steady-state that is near GDP-level growth.

Daily Finance Interview Question – 06.27.2022

Question: What is the risk-free rate we use for CAPM? Why do we use US Securities?

  • 5  Yr; US will repay 
  • 10 Yr; US usually repays 
  • 10 Yr; US will repay
  • 2 Yr; US usually repays

We typically use the 10 Yr Treasury because it reflects a longer cash flow duration, similar to that of a business. We use the US Treasury because it’s assumed that the US will always repay its debts.

Daily Finance Interview Question – 06.23.2022

Question: If IRR is time-weighted, why do we use MOI metrics?

  • MOI can be distorted; PE funds are paid on underlying return percentages
  • IRR can be distorted; PE funds are paid on absolute dollars returned
  • We can combine the formulas to come up with a single, far superior metric
  • Trick question. We don’t.

The Internal Rate of Return (IRR) can be easily distorted by an early exit. 

And it’s hard to pair with the dollars invested in the transaction to assess the potential dollars returned to investors. 

In contrast, Multiple of Investment (MOI) reflects dollars returned vs dollars invested. 

As a result, an investor can quickly see the potential dollars returned with MOI.

At the end of the day, Private Equity funds are paid based on aggregated dollars returned to investors. 

So, while the IRR is important, it’s often paired with an MOI metric to ensure that an adequate amount of dollars will be returned to Investors.

Daily Finance Interview Question – 06.22.2022

Question: An investment generates a 20% annual return on investment? Approximately how long will it take for the investment to double?

  • About 5 years
  • About 4.5 years
  • About 3.5 years
  • About 3 years

The phrase “investment to double” refers to a MoM (‘Money on Money’ or ‘Money on Invested Capita;’ or “MOIC’ which measures initial investment against the money we get at the end) Multiple being 2x.

Given the Annual Return on Investment (i.e. ‘IRR’ or ‘Internal Rate of Return’) of 20% and using the MoM versus IRR table, we can approximate that it will take about 3.5 years. 

Note: IRR on 2x MoM on 3 years is 26% and IRR on 2x MoM on 4 years is 18%, which means that a 20% IRR with a 2x MoM would fall sometime between year 3 and year 4.

Daily Finance Interview Question – 06.21.2022

Question: What metrics are typically used to measure returns in an LBO?

  • IRR / NPV
  • NPV / PV
  • IRR / PV
  • IRR / MOIC

The most commonly used metrics to assess returns in an LBO transaction are: 

1) Internal Rate of Return (IRR) – measures effective annualized, percentage-based return.

2) Multiple of Invested Capital (MOIC) – reflects dollars returned at exit vs the original dollars invested. 

Note that MOIC is also called Multiple of Money (MOM), Multiple of Investment (MOIC), and Cash on Cash Return (COC).

Daily Finance Interview Question – 06.20.2022

Question: The LBO business has historically been highly cyclical.

  • True
  • False

This is True. 

Looking at the history of LBO (‘Leveraged Buyout’) business (i.e. the practice of buying other Companies by using a lot of Debt), we can see that it has been cyclical. 

The first wave of LBOs started in the 1980s when High Yield Bonds (also called ‘Junk Bonds’) were used as a major source of funding when buying Companies. Excess speculation leads to LBOs being seen as a risky investment strategy which lead to LBO Deals decline. 

The second wave of LBOs came in the 2000s when many Institutional Investors (ex. hedge funds) started to engage in LBO Deals. Financial crisis of 2008 stopped the wave. 

Currently, we are seeing a lot of LBO transactions happening again.

Daily Finance Interview Question – 06.17.2022

Question: A company sells a piece of equipment with a Book Value of $100 to a Buyer for $50 in Cash. What’s the Net Change in Assets? (Assume a 20% Tax Rate)

  • ($40)
  • +$40
  • +50
  • ($50)

To answer questions on the Three Statement Changes, start with Net Income, then Cash Flow Statement, then Balance Sheet. 

A Company sells a piece of equipment for less than its Book Value. The Selling Price of $50 is less than the Book Value of $100 – a Loss of $50 is recorded on the Income Statement. 

Income Statement: a Company records a Loss of $50 which then lowers the Pre-Tax Income by $50. Given a Tax Rate of 20%,

Net Income = -$50 Pre-Tax Income * (1 – 0.2 Tax Rate) 

Net Income = -$40

Cash Flow Statement: Net Income of -$40 flows to the top line of the Operating Activities Section. Add back the $50 Loss because it is a Non-Cash line item from the Income Statement – that results in Cash from Operations $10. In the Investing Activities Section, record a $50 Cash Inflow from the sale of the equipment. In the Financing Activities Section, there are no changes. 

Net Change in Cash = $10 Cash from Operations + $50 Cash from Investing 

Net Change in Cash = $60

Balance Sheet: $60 Net Change in Cash flows to the Cash Balance on the Asset side of the Balance Sheet. We reduce the PP&E Account by $100 Book Value because the equipment is sold, so the net change on the Asset side is -$40. Finally, -$40 Net Income from the Income Statement flows to the Retained Earnings (‘RE’) balance on the Liabilities and Shareholders’ Equity side. Balance Sheet balances. 

A summary of the changes is below:

Net Income -$40

Cash Flow $60

PP&E -$100

RE -$40

So the net change in Assets is ($40).

Daily Finance Interview Question – 06.16.2022

Question: A Business with Negative Working Capital has Current Liabilities that exceed Current Assets (Excl Cash).

  • True
  • False

The answer is True. 

Net Working Capital (‘NWC’ or ‘Working Capital’) is how much money a business needs to put into its operations to keep running it day-to-day. Net Working Capital is a measurement of the day-to-day Capital Intensity of a Business.

Net Working Capital is calculated as a difference between Current Assets (‘CA’) and Current Liabilities (‘CL’):

Net Working Capital = Current Assets – Current Liabilities

Therefore, it is possible to have Negative Working Capital if Current Liabilities exceed Current Assets.

For example, let’s assume the following: 

Current Assets = $10

Current Liabilities = $20

Net Working Capital = $10 Current Assets – $20 Current Liabilities 

Net Working Capital = -$10

Daily Finance Interview Question – 06.15.2022

Question: Net Income = $10, D&A = $3, NWC increased by $5, Capital Expenditures = $1, what is CFI?

  • $9
  • ($19)
  • $8
  • ($1)

Cash Flows from Investing (‘CFI’) is a section of the Cash Flow Statement that describes Cash Inflows/(Outflows) from the Purchase or Sale of Physical/Intangible Investments (e.g. Factories, Patents, etc.) or the Purchase or sale of Financial Investment (e.g. Buying Stocks/Bonds) as an investment for the Company.

In the question above, the only relevant item to consider is Capital Expenditures (or ‘CapEx’).

So the answer to the question is that CFI is ($1).

Daily Finance Interview Question – 06.14.2022

Question: Which of the following excludes the impact of Non-cash Expenses and Capital Expenditures?

  • EBITDA
  • Unlevered Free Cash Flow
  • Net Income
  • EBIT

Non-cash Expenses are expenses that appear on the Income Statement but actually don’t require Cash payments. The most common example of Non-cash Expenses is D&A (‘Depreciation and Amortization’). 

Capital Expenditures (‘CapEx’) represent money spent to obtain, maintain, and expand Physical Assets for a Business. Physical Assets include Property (i.e. land), Plant (i.e. buildings), and Equipment (i.e. machines).

Capital Expenditures are connected to D&A because Plant and Equipment are Depreciated over time to reflect their usage by a Business. Property is not Depreciated because it has an infinite lifetime. 

Below is the overview of answer choices:

Unlevered Free Cash Flow (‘UFCF’) includes the impact of both D&A and Capital Expenditures.

EBIT (or ‘Operating Profit’) and Net Income (‘NI’) include the impact of D&A.

EBITDA doesn’t include the impact from both D&A and Capital Expenditures as those are not subtracted from Revenue to arrive at EBITDA.

Daily Finance Interview Question – 06.13.2022

Question: Which of the following best describes ‘Current’ vs ‘Non-Current’ items on the Balance Sheet?

  • C: <6 months NC: >6 Months
  • C: <30 Days NC: >30 Days
  • C: <12 months NC: >12 Months

‘Current’ refers to Assets that will convert into Cash within 12 months or Liabilities that need to be paid within 12 months. 

‘Non-Current’ refers to Assets that will convert into Cash after 12 months or Liabilities that need to be paid after 12 months.

Daily Finance Interview Question – 06.10.2022

Question: Enterprise Value = $400, Debt = $200, Cash = $50, Basic Shares = 15, Dilution from Options/RSUs = 10 Shares. What’s the Value Per Share?

  • $10
  • $16.67
  • $15
  • $20

$400 Enterprise Value = Equity Value + $200 Debt – $50 Cash 

Equity Value = $250

2. Find Value per Share

We are given Basic Shares and Dilution from Options and Restricted Stock Units (‘RSU’). The correct way to calculate Value per Share is by using the Fully Diluted Shares because Options and Restricted Stock Units (‘RSU’) that can dilute ownership if they are used (or ‘Exercised’).

Therefore, Fully Diluted Shares = 15 Basic Shares + 10 Dilution

Fully Diluted Shares = 25

To put the numbers together:

Value per Share = $250 Equity Value / 25 Fully Diluted Shares 

Value per Share = $10

Daily Finance Interview Question – 06.09.2022

Question: EV = $100, Debt = $30, Cash = $20, Preferred Stock = $10, Minority Interest = $5. What’s the Market Cap?

  • $75
  • $135
  • $55
  • $85

Market Capitalization (‘Market Cap’) is the term we use to describe Equity Value for a Public Company. 

Equity Value reflects what you (as the Owner or ‘Shareholder’) own in the Business. In other words, the value attributable to the Owner(s) after paying the Company’s Debt and other obligations, such as Preferred Stock and Minority Interest, and collecting Extra Cash. 

Enterprise Value (‘EV’) is the total value of the Business. In other words, what you would need to pay to acquire the entire Business. 

The formula that connects Enterprise Value and Equity Value is: 

Enterprise Value = Equity Value + Debt + Preferred Stock + Minority Interest – Cash

To solve for Equity Value, we would rearrange this formula to: 

Equity Value = Enterprise Value – Debt – Preferred Stock – Minority Interest + Cash

Using the numbers from the question above, the calculation would be: 

$100 Enterprise Value – $30 Debt – $10 Preferred Stock – $5 Minority Interest + $20 Cash = $75 Equity Value

Daily Finance Interview Question – 06.08.2022

Question: What is the Depreciation (D&A) tax shield in the UFCF calculation?

  • Lower tax from adding back D&A
  • Lower tax from deducting D&A
  • Higher tax from adding back D&A
  • Higher tax from deducting D&A

The ‘Depreciation Tax Shield’ reflects the reduction in Income Tax paid due to the Depreciation deduction.

Daily Finance Interview Question – 06.07.2022

Question: How do you value a business that is losing money?

  • EV / Revenue Multiples
  • EV / EBIT Multiples
  • Price / Earnings Ratio
  • EV / EBITDA Multiples

You would need to use an EV / Revenue Multiple because a money-losing business would likely not have any EBIT, EBITDA, or Net Earnings.

Daily Finance Interview Question – 06.06.2022

Question: What does “above the line” / “below the line” mean? Note: Ops = Operations.

  • Above/Below reflect Tax + Debt
  • Above = Ops (Excl Tax + Debt)
  • Below = Ops (Excl Tax + Debt)

Above the line reflects just operations; below reflects Operations, Taxes, and Debt.

Daily Finance Interview Question – 06.03.2022

Question: The Balance Sheet Equation is…

  • L = A + OE
  • A + L = OE
  • A = L + OE

The Balance Sheet equation is Assets = Liabilities + Owners Equity

Daily Finance Interview Question – 06.02.2022

Question: What is Negative Net Working Capital? Note: CA = Current Assets (Excl Cash) & CL = Current Liabilities

  • CA > CL
  • CA = CL
  • CL > CA
  • Not possible. I can’t owe more than I own.

Negative Net Working Capital arises when a Company’s Current Liabilities exceed Current Assets.

Daily Finance Interview Question – 06.01.2022

Question: Describe Cash Flows from Investing (CFI) in Plain English.

  • Reinvestments in Business
  • Cash generated by Business 
  • Cash to/from Lenders/Investors

CFI reflects Cash Reinvestments in the Business as well as the purchase/sale of Investments.

Daily Finance Interview Question – 05.31.2022

Question:EBITDA is $10, D&A = $3, Debt = $50, Interest Rate = 4%, Income Tax Rate = 20%, CapEx = ($5), NWC increases by $2. What is Levered Free Cash Flow?

  • $0
  • ($1)
  • $1
  • $3

Levered Free Cash Flow (‘LFCF’) describes the Cash Flow generated by a Business after incorporating Cash Outflows related to Debt (Interest Expense + Principal Repayments).

We can calculate Levered Free Cash Flow with the following formula: [EBITDA – D&A – Interest Expense] * (1 – Tax Rate) + D&A – Capital Expenditures +/- Changes in Net Working Capital.

To begin with, we’ll calculate to Post-Tax Profit: [$10 EBITDA – $3 D&A – $2 Interest Expense] * (1 – 20%) = $4 Post-Tax Profit. 

Now, remember that increases/decreases in Net Working Capital result in a cash (Outflow)/Inflow.

$4 of Post-Tax Profit + $3 D&A – $5 Capital Expenditures – $2 NWC Outflow = $0 Levered Free Cash Flow

Daily Finance Interview Question – 05.30.2022

Question: A company has $25 of Senior Debt and $20 of Junior Debt and is estimated to have an EV of $45 in Bankruptcy. What is the Equity Value?

  • $0
  • $45 or More
  • $10
  • $5

Equity Value represents what you own in a Business after all obligations, such as Debt, were paid off. EV (‘Enterprise Value’) represents how much you would have to pay to buy the whole Business. Put simply, 

EV = Equity Value + Debt 

$45 EV = Equity Value + $25 Senior Debt + $20 Junior Debt 

Equity Value = $0

Equity Value is $0 which can be explained by the fact that the Company is in Bankruptcy.

Daily Finance Interview Question – 05.27.2022

Question: What is the difference between Bank Debt and Bond Debt? 

  • No difference
  • Bond Debt easier to Raise
  • Bank Debt is generally more Sr
  • Bond Debt is generally more Sr

Bond Debt (‘High Yield Bonds’) usually do not have Maintenance Covenants (i.e. requirements). Maintenance Covenants require a Business to maintain certain metrics at certain levels. For example, Maintenance Covenant might require that a Business maintains an Interest Coverage at least 2x for the holding period.

Companies tend to choose Bond Debt even though they have to pay a higher Interest Rate than on Bank Debt exactly because Bonds are ‘Covenant lite’ (i.e. usually have low to no maintenance requirements). 

Bank Debt doesn’t usually come with Incurrence Covenants. Incurrence Covenants usually restrict a Business from doing certain things. For example, an Incurrence Covenant might require that a Business does not do acquisitions. 

Call Provision would allow the Company to repay the Debt earlier. A No-Call Provision prevents that and can be installed in Bond Debt. 

Make Whole Provision is a function of a Call Provision that determines how much the Company needs to repay if it chooses to repay Debt early. Since Call Provisions can be on Bonds (yet unlikely), Make Whole Provision is still a likely term on Bonds.

Daily Finance Interview Question – 05.26.2022

Question: What is a Dividend Recap? Note: CF = Cash Flow

  • Take on Equity to Pay Dividend
  • Pay Dividend from Recurring CF
  • Take on Debt to Pay Dividend

After a period of strong operating performance (or better Debt market conditions), a Portfolio Company may have the ability to raise additional Debt (often expressed as additional Debt or Leverage Capacity).

In that case, the Private Equity fund may pursue a Dividend Recapitalization (or ‘Dividend Recap’) in which the Portfolio Company raises additional Debt and uses the Cash from the Debt Raise to pay a Dividend to the Private Equity Fund.

This allows the Private Equity Fund to ‘take some money off the table,’ while reserving the ability to benefit from future upside in the Investment.

Daily Finance Interview Question – 05.25.2022

Question: Initial Sponsor Equity = $100. Entry EV/EBITDA = 10.0x. EBITDA at Exit is $25. Net Debt at Close = $25. Assume Entry Multiple = Exit Multiple and a 5-year investment horizon. What’s the approximate IRR?

  • 15.0% 
  • 17.5% 
  • 25.0% 
  • 20.0%

Assuming a 10x EV/EBITDA multiple and $25 of EBITDA at Exit, the sale value of the company would be $250. We would then subtract Net Debt of $25 to arrive at Sponsor Equity of $225. This would result in a 2.25x Return (or a ~17.5% IRR) versus the original $100 investment.  

If you’d like to learn how to quickly calculate the IRR above, check out our LBO content below.  

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 04.04.2022

Question: 5 Year Treasury = 2%, 10 Year Treasury = 3%, Beta = 1.0, ERP = 6%. What’s the Cost of Equity?

  • 7% 
  • 9% 
  • 6% 
  • 3%

The Cost of Equity Formula is Risk-Free Rate (3%) + Beta (1.0) * Equity Risk Premium (6%). So the Cost of Equity is 9%.

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 04.01.2022

Question: Net Income = $15, D&A = $2, NWC increased by $2, Capital Expenditures = $3, what is CFO-CFI?

  • ($8) 
  • $12 
  • $8 
  • $11

$15 of Net Income + $2 D&A – $2 NWC impact = $15 of CFO

CapEx is the only CFI item, so CFI = ($3)

So, $15 of CFO – $3 of CFI = $12.

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 03.31.2022

Question: Which of the following is a Leverage Ratio? 

  • [EBITDA – CapEx] / Interest 
  • EBITDA / Interest 
  • Days Sales Outstanding
  • Net Debt / EBITDA

Net Debt / EBITDA is the only Leverage Ratio in the list above. It shows the number of Debt dollars (or ‘Leverage) per dollar of Debt for a company.

Want to master LBO Concepts for your Interviews (or the Job)? Check out our LBO Fundamentals Modeling Mastery course.

Daily Finance Interview Question – 03.30.2022

Question: Revenue = $10, Cost of Goods Sold = $2, SG&A Expense (Incl D&A) = $3, and D&A = $2. What is EBITDA? 

  • $7 
  • $12 
  • $5 
  • $8

$10 Revenue – $ 2 COGS – $3 SG&A (Incl D&A) + $2 of D&A = $7 of EBITDA.

Want to test your skills with similarly challenging questions? Check out our free GearUp platform. 

Daily Finance Interview Question – 03.29.2022

Question: What does Beta (in the Cost of Equity Formula) capture? 

Note: Cov = Covariance; Var = Variance, S = Stock, M = Market.

  • Cov (S,M) / Var (M) 
  • Slope of a Regression 
  • Riskiness of a Single Stock 
  • All of the Above

The technical definition of Beta is the Covariance of a single stock (vs the market) divided by the Variance of the market. That same calculation represents the slope of the line of the Regression of the movements of a Single Stock and the Market as a whole. In the cost of Equity Formula, Beta reflects the riskiness of a single company. So the answer is All of the Above.

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 03.28.2022

Question: A business with Positive Net Working Capital grows and NWC remains proportional to sales. What’s the net impact on Cash?

  • Cash Inflow from NWC 
  • Cash Outflow from NWC 
  • No Cash Impact

All else equal, this situation would result in a net outflow (or ‘Use’) of cash.  

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 03.25.2022

Question: Which of the following describes a transaction in which a PE Portfolio Company raises additional debt and uses the funds to pay the PE fund investors/owners?

  • Secondary Buyout 
  • Dividend Recap 
  • Strategic Takeout

In a Dividend recapitalization, a Private Equity firm takes out additional debt and pays itself a dividend. 

This usually occurs when a company has performed well and has extra debt capacity, but the Private Equity firm isn’t yet ready to sell the business.

To learn more about LBOs, check out our LBO Modeling Fundamentals Mastery Course.

Daily Finance Interview Question – 03.24.2022

Question: Initial Sponsor Equity = $100. Entry EV/EBITDA = 10.0x. EBITDA at Exit is $25. Net Debt at Close = $25. Assume Entry Multiple = Exit Multiple and a 5-year investment horizon. What’s the approximate IRR?

  • 15.0% 
  • 17.5% 
  • 25.0% 
  • 20.0%

Assuming a 10x EV/EBITDA multiple and $25 of EBITDA at Exit, the sale value of the company would be $250. We would then subtract Net Debt of $25 to arrive at Sponsor Equity of $225. This would result in a 2.25x Return (or a ~17.5% IRR) versus the original $100 investment.  

If you’d like to learn how to quickly calculate the IRR above, check out our LBO content below. 

Want to master the concepts behind this question? Check out these resources: 

Daily Finance Interview Question – 03.23.2022

Question: Which of the following is a Levered Valuation multiple? 

  • EV/Revenue 
  • TEV / EBIT 
  • EV/EBITDA 
  • P/E Ratio

The Price to Earnings Ratio (‘P/E Ratio’) is calculated with Market Capitalization / Net Income, both of which are Levered. So P/E Ratio is the only Levered metric in the list. 

Want to master Valuation Concepts for your Interviews? Check out our Valuation Fundamentals Mastery course.

Daily Finance Interview Question – 03.22.2022

Question: A company has $50 of EBITDA and raises 3.0x in Term Loans, 2.0x in Bonds. If the PE firm pays 10x EV / EBITDA. Management wants to roll into 25% of the Pro Forma Equity. What is the Sponsor Contribution %?

  • 40%
  • 30.5%
  • 75%
  • 37.5%

With 5x Total Debt / EBITDA and a 10x EV / EBITDA Purchase Price, the Sponsor would normally contribute 50% of the total Purchase Price. However, management wants to own 25% of the Pro Forma Equity. So, the Sponsor’s required Equity Contribution would be 75% of 50%, for a Sponsor Equity Contribution of 37.5%.

Want to master the concepts behind this question? Check out these resources:

Daily Finance Interview Question – 03.21.2022

Question: Which multiple is most commonly used to value a business that has negative EBITDA?

  • EV/EBITDA
  • P/E Ratio
  • EV/Revenue
  • All of the Above

You would need to use an EV/Revenue multiple for a Business with Negative EBITDA because the denominator in EV/EBITDA and Price / Earnings (P/E) ratios require positive earnings. 

In other words, if you applied a valuation multiple to negative EBITDA or Net Income, you’d get a negative number which wouldn’t be useful. 

Want to master Valuation Concepts for your Interviews? Check out our Valuation Fundamentals Mastery course.

Daily Finance Interview Question – 03.18.2022

Question: What is the formula used to Re-Lever Beta? Note: Lev = Levered; Unlev = Unlevered.

  • Unlev Beta * [1 + D/E + (1-t)]
  • Lev Beta / [1 + D/E * (1-t)]
  • Unlev Beta * [1 + D/E * (1-t)]
  • Lev Beta / [1 + D/E + (1-t)]

The correct formula is Unlevered Beta * [1 + D/E * (1-t)]. This formula converts an Unlevered (‘Asset’) Beta into a Levered (or ‘Equity’) Beta. Beta is a core component of the Cost of Equity formula. 
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Daily Finance Interview Question – 03.17.2022

A company has $25 of Senior Debt and $10 of Junior Debt and it sells for an EV of $30. What is the recovery on the Jr Debt?

  • 0%
  • 50%
  • 75%
  • 100%

At an EV of $30, the Senior Debt would receive a full recovery of $25. The remaining $5 of Enterprise Value versus the $10 Face Value of the Junior Debt, would result in a 50% recovery. 

Note this is a common interview question to test your understanding of the Debt Stack. However, in real life recoveries become much more complicated as companies go through the bankruptcy process.

Learn more about the Debt Stack in our LBO Course
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Daily Finance Interview Question – 03.16.2022

Question: What are the two most common approaches to calculate Terminal Value?

  • DCF / LBO
  • APV / Exit Multiple
  • LBO / APV
  • Exit Multiple / Perpetuity Growth

The two most common approaches are the Perpetuity Growth Method and the Exit Multiple Method.
Want to master Valuation concepts for an interview? Check out our Valuation Fundamentals Mastery Course

Daily Finance Interview Question – 03.14.2022

Question: Bonus Depreciation allows you to take much larger depreciation for tax purposes in Year 1 (vs straight-line depreciation). Does this create a Deferred Tax Asset or Liability?

  • Def Tax Asset
  • Def Tax Liability
  • Both
  • No Way To Tell

Bonus Depreciation creates a significant deduction today which lowers our tax bill now, but we have no future deductions so we pay more tax later.

Lower tax paid now, more tax paid later results in a Deferred Tax Liability.
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Daily Finance Interview Question – 03.11.2022

Question: What does Enterprise Value represent?

  • The value attributable to Equity holders
  • Equity Value plus Asset Value
  • The price to buy the entire Business
  • The value of the assets of a Business

Enterprise Value reflects the price you would need to pay to acquire the Entire Business, irrespective of Debt and Equity previously used to Finance the Business.

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Daily Finance Interview Question – 03.10.2022

Question: Deferred Tax Liabilities decrease by $5 and Deferred Tax Assets decrease by $20, what’s the net impact to Cash?

  • $5 Source of Cash
  • $15 Source of Cash
  • ($5) Use of Cash
  • ($15) Use of Cash

An increase in Deferred Tax Liabilities reflects a ($5) Use of Cash and the Decrease in Deferred Tax Assets reflects a +$20 Source of Cash. So the net impact to Cash is a $15 Source of Cash. 
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Daily Finance Interview Question – 03.09.2022

Question: Inventory increases by $10 and Accrued Expenses increase by $5, what’s the impact on Cash?

  • ($5) Use of Cash
  • $5 Source of Cash
  • $15 Source of Cash
  • ($15) Use of Cash

An Increase in Inventory is a ($10) Use of Cash and an Increase in Accrued Expenses is a +$5 Source of Cash. So the net impact is a ($5) Use of Cash.

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Daily Finance Interview Question – 03.08.2022

Question: Net Income = $10, D&A = $3, NWC increased by $5, Capital Expenditures = $1, what is Cash Flows from Operations?

  • ($1)
  • ($19)
  • $8
  • $9

To get to Cash Flows from Operations, we would start with a Net Income of $10, add $3 of D&A and then Subtract the $5 increase in Net Working Capital. This results in a CFO of $8.

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Daily Finance Interview Question – 03.01.2022

Question: What is typically the least preferred exit method in PE?

  • Dividend Recap
  • Secondary Buyout
  • IPO

The least preferred Exit Method is an Initial Public Offering or IPO (see Report) because of the time commitment required to go public as well as post-IPO lock-ups. 
Want to master LBOs? check out our LBO Modeling course.

Daily Finance Interview Question – 02.28.2022

Question: What is PIK interest?

  • Non-Cash Interest
  • Cash Interest
  • Both
  • None of the Above

PIK Interest stands for ‘Paid-In-Kind’ interest and it reflects a form of non-cash interest. With PIK interest, the non-cash interest is added to the principal balance of the Debt each year and is repaid at maturity. 

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Daily Finance Interview Question – 02.24.2022

Question: Which of the following takes into account some element of Capital Intensity?

  • EBIT
  • EBITDA
  • Free Cash Flow
  • Both A and B

The answer is that both EBIT and Free Cash Flow take into account Capital Intensity. Admittedly, EBIT does not capture the impact of Cash Flow, but it does capture the impact of Depreciation. 

EBITDA does not capture Capital Expenditures/Depreciation or Working Capital. 

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Daily Finance Interview Question – 02.23.2022

Question: Which of the following is a common ‘Leverage Ratio’ for an LBO transaction?

  • EBITDA / Interest Expense
  • Fixed Charge Coverage Ratio
  • Net Debt / EBITDA

A Leverage ratio measures Debt vs the Profitability or Cash Flow of a Business. The only Leverage Ratio in the list above is Net Debt / EBITDA.
Want to master LBOs? Check out our LBO Modeling course.

Daily Finance Interview Question – 02.22.2022

Question: Which of the following is typically the ‘Floor Valuation?’

  • DCF
  • Trading Comps
  • LBO

The LBO valuation is typically referred to as the ‘floor valuation’ because Private Equity funds cannot extract ‘Synergies’ and thus typically pay less than a Corporate Buyer.

With that said, the valuation of a company should not fall below the LBO valuation range. 

If it does, a PE fund will likely acquire the Business, hence the term ‘floor’ valuation. 
Want to master LBOs? Check out our LBO Modeling course.

Daily Finance Interview Question – 02.21.2022

Question: What is the risk-free rate we use for CAPM?

  • 2 Yr US Treasury
  • 5 Yr Bund
  • 10 Yr US Treasury
  • 30 Yr Eurobond

We typically use the 10 Year US treasury. We use the US instrument because US Debt is viewed as ‘risk-free.’ 

We use the 10 Year instrument, in particular, to roughly match the ‘duration’ of the company we are attempting to value. 

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Daily Finance Interview Question – 02.18.2022

Question: For which of the following companies would a DCF not typically be utilized?

  • Brand New Start-Up
  • Publicly Traded Retailer
  • Privately Held Mining Company

You would not typically use a DCF to value a new start-up because the Company’s future Cash Flow would be very difficult to predict with any degree of certainty. 

Instead, you would more likely use an EV/Revenue multiple.

Want to master the concepts behind this question? Check out these resources:

Daily Finance Interview Question – 02.17.2022

Question: What is a reasonable terminal growth rate?

  • GDP Growth
  • <2% Growth
  • >5% Growth
  • 0% Growth (i.e. flat)

A reasonable GDP growth rate is around GDP growth. If you grow any faster, you’ll mathematically outgrow the economy over time. 

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Daily Finance Interview Question – 02.16.2022

Question: For how many years do you project into the future for Stage 1 of a typical DCF?

  • A couple of years
  • 5-10 years
  • At least 10 years
  • None of the Above

In a traditional DCF, you will make 5-10 years of projections, stopping when the business hits ‘maturity’ (typically in line with GDP growth). 

Want to master the concepts behind this question? Check out these resources:

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Daily Finance Interview Question – 02.15.2022

Question: A Public company can have Negative (Market) Equity Value?

  • True
  • False

While it is possible for a Business to have a Negative Enterprise Value, it’s not possible for a Business to have Negative Equity Value. 

A Shareholder’s liability in the event of a Public Company’s collapse is limited to their investment.

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 02.14.2022

Question: A company can have Negative Enterprise Value?

  • True
  • False

It is possible for a Business to have a Negative Enterprise Value. This typically occurs in one of two scenarios:

  1. Significant Cash balance
  2. A Business that will generate negative Cash Flow well into the future with little hope for positive cash flow

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 02.11.2022

Question: Which of the following need to be included to get from Basic to Diluted Shares?

  • Employee Options
  • Restricted Stock
  • Only A
  • Both A and B

Fully Diluted shares must reflect the full share count of a business including any impact of Employee Options, Restricted Stock, Convertible Securities, or any other instrument that could increase the Basic Share Count.

Want to master the concepts behind this question? Check out this Article: Treasury Stock Method

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 02.10.2022

Question: How can a company generate Operating Profit but still go bankrupt?

  • Significant Debt
  • Low Expenses
  • Recurring Revenue
  • None of the Above

The answer is significant Debt. A company can generate Operating Profit but have too large of an interest expense payment due to its Debt, which can cause the company to file for bankruptcy.

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 02.09.2022

Question: How could a Company make significant operating cash flow and show zero net income?

  • High Accounts Receivable
  • Low Inventory
  • High Deferred Revenue

If a company received significant prepayments from customers for future services, it would record meaningful Cash Flow. However, the company would not record the Revenue until it had been earned, thus showing no Net Income. 

Want to master the concepts behind this question? Check out these resources:

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 02.08.2022

Question: Which of the following typically does not have a negative impact on Book Equity Value?

  • Common Stock
  • Dividends
  • Share Buybacks
  • None of the Above

Both Dividends and Share Buybacks reduce Book Equity Value. Common Stock is the only item of the three that does not reduce Book Equity Value. 

Want to master the concepts behind this question? Check out these resources:

Daily Finance Interview Question – 02.07.2022

Question: What is EBITDA?

  • A ‘proxy’ for Free Cash Flow
  • An unlevered profit metric
  • Both #1 and #2
  • #1 Only

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. 

EBITDA (by definition) excludes the impact of Interest from Debt and is thus an Unlevered (i.e. excluding Debt) metric. 

In addition, EBITDA is often called a ‘Cash Flow Proxy’ because it excludes all non-cash charges. That said, it’s not actual Cash Flow which we dive into in the video below.

Want to master the concepts behind this question? Check out this resource:

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Daily Finance Interview Question – 02.04.2022

Question: Which of the following is not a component of Equity on the Balance Sheet?

  • Common Stock
  • Retained Earnings
  • Treasury Stock
  • Accounts Payable

Accounts Payable is a Liability and as a result, is not included in the Equity section of the Balance Sheet.

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Daily Finance Interview Question – 02.02.2022

Question: How could we make significant net income but have zero cash flow?

  • High Deferred Revenue
  • Multi-Year Contracts
  • Not Possible

If a company works on a project with multi-year contracts with payment at the end of the contract, the Company would likely record Revenue proportionate to the work completed. 

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Daily Finance Interview Question – 02.01.2022

Question: In which of the following situations would a company collect cash but not record Revenue?

  • Sale of Shake Shack Burger
  • Annual Hulu Subscription
  • Purchase of 10 Nike’s

The Annual Hulu Subscription would be recorded as Deferred Revenue if the payment for the service is received at the beginning of the twelve-month period. 

Want to master the concepts behind this question? Check out these resources:

Daily Finance Interview Question – 01.31.2022

Question: Depreciation is a non-cash expense. So, how does it impact Cash Flow?

  • Capital Expenditures
  • Working Capital 
  • Stock-Based Compensation
  • Depreciation Tax Shield

Depreciation lowers taxable income and thus lowers the taxes a company owes. This effect is often referred to as the ‘Depreciation Tax Shield’ because Depreciation shields a company from taxes, thus increasing Cash Flow. 

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Daily Finance Interview Question – 01.28.2022

Question: One business outsources manufacturing and another doesn’t, which business has lower Capital Intensity?

  • Biz with Outsourcing
  • Biz without Outsourcing
  • No Way to Tell

The business that outsources has lower Capital Intensity. 

A business that outsources has lower Capital Expenditures and thus lower Capital Intensity.

This question tests whether you understand the underlying drivers of cash flow…in particular the concept of Capital Intensity, which is a function of Capital Expenditures and Net Working Capital. 

Want to master the concepts behind this question? Check out this video: Capital Intensity Impact on Valuation

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 01.27.2022

Question: Is an increase in a Deferred Tax Asset a Source or Use of Cash?

  • Source of Cash
  • Use of Cash
  • Neither

This seems like a trick question because we’re now dealing with Taxes instead of the usual Inventory, Accounts Payable, etc, but the same rules apply. 

The rule of thumb to remember here is that Increases / (Decreases) in Assets result in a Use / (Source) of cash…and vice versa for liabilities. 
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Daily Finance Interview Question – 01.26.2022

Question: Which valuation method typically results in the highest valuation?

  • DCF
  • Trading Comps
  • Transaction Comps
  • LBO

Precedent Transactions (‘Transaction Comps’) typically result in a higher valuation because you have to pay a ‘Control Premium’ to acquire an entire business vs buying a smaller, non-controlling stake.

Want to master the concepts behind this question? Check out our Valuation Fundamentals Course.

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Daily Finance Interview Question – 01.25.2022

Question: Why isn’t Cash part of Working Capital?

  • Cash is Non-Op. Asset
  • A/R Reflects Cash
  • Trick Question. It’s Included

In technical terms, Cash is a ‘Non-Operating Asset’ as opposed to items like Inventory, Accounts Receivable, etc. which are ‘Operating Assets’. 

In plain English terms, Cash is an output of the business and is not employed in the business’ operations. 

In contrast, an item like Accounts Receivable is directly employed in the business. 

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Daily Finance Interview Question – 01.24.2022

Which of the following is a common ‘Coverage Ratio’ for an LBO transaction?

  • EBITDA / Interest Expense
  • Debt / EBITDAR
  • Net Debt / EBITDA

A ‘Coverage Ratio’ measures the Profitability or Cash Flow of a Business relative to Fixed Expenses (most commonly Interest Expense). The only Coverage Ratio in the list above is EBITDA/Interest Expense.
Want to master LBOs? Check out our LBO Modeling course.

Daily Finance Interview Question – 01.11.2022

Question: How would we account for a purchase of Inventory if we pay for it today? What is the I/S impact if we haven’t sold it yet?

  • (+) Cash / (-) Inv; Record Exp
  • (-) Cash / (+) Inv; None
  • (+) Cash / (-) Inv; None
  • (-) Cash / (+) Inv; Record Exp

We would reduce Cash at the time of purchase and increase Inventory. However, we don’t record an Income Statement impact until the Inventory is sold to a Customer.

Dive Deeper With The Following Resources:

Daily Finance Interview Question – 01.10.2022

How would we account for a purchase of Inventory if we pay for it today? What is the I/S impact if we haven’t sold it yet?

  • (+) Cash / (-) Inv; Record Exp
  • (-) Cash / (+) Inv; None
  • (+) Cash / (-) Inv; None
  • (-) Cash / (+) Inv; Record Exp

If a business is paid before a sale is earned or completed, then we create a Liability called Deferred Revenue. If a business is paid after the sale is earned or completed, then we create an Asset called Accounts Receivable.

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Daily Finance Interview Question – 01.03.2022

Question: What is the CAPM Formula? Note: RF = Risk Free Rate & ERP = Equity Risk Premium)

  • Beta * RF+ ERP
  • RF + Beta * ERP
  • RF + Beta + ERP
  • None of the Above

The formula for CAPM is RF + Beta * ERP.  The formula begins with the Risk-Free Rate (usually the 10 Yr US Treasury). This gives us a baseline for the Minimum Return we should expect if we’re taking zero risk. We then add a reward for taking incremental Risk in the form of Beta (which characterizes the volatility/riskiness of an individual stock) and multiply Beta by the Equity Risk Premium (which reflects the historical Reward for investing in Stocks vs Bonds over time). 

Want to master the core Valuation Concepts for you need to nail your interview? Check out our Valuation Fundamentals Mastery course:

https://courses.finance-able.com/courses/valuation-fundamentals-mastery

Daily Finance Interview Question – 12.21.2021

Question: Which of the following describes when a seller retains ownership after the sale of their company?

  • Sponsor Equity
  • Preferred Stock
  • Rollover Equity

When the seller or management of a company sold in an M&A transaction retains ownership in a company following an LBO transaction.

To learn more about LBOs, check out our LBO Fundamentals Mastery Course: https://courses.finance-able.com/courses/lbo-modeling

Daily Finance Interview Question – 12.20.2021

Question: What is ‘Capital Intensity’ in the context of the Free Cash Flow formula….in Plain English?

  • NWC Only
  • CapEx + NWC
  • D&A
  • All of the Above

Capital Intensity is the combination of Capital Expenditures and Net Working Capital, but in Plain English, these two items simply represent the reinvestments we have to make to maintain (and grow) the business.  

For a deeper dive, check out our Impact of Capital Intensity on Valuation video: https://youtu.be/ZkGMSG2umCk

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Diver Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 12.17.2021

Question: Which of the following describes a transaction in which a PE Portfolio Company raises additional debt and uses the funds to pay the PE fund investors/owners?

  • Secondary Buyout
  • Dividend Recap
  • Strategic Takeout

In a Dividend recapitalization, a Private Equity firm takes out additional debt and pays itself a dividend.

This usually occurs when a company has performed well and has extra debt capacity, but the Private Equity firm isn’t yet ready to sell the business.
To learn more about LBOs, check out our LBO Fundamentals Mastery Course: https://courses.finance-able.com/courses/lbo-modeling

Daily Finance Interview Question – 12.16.2021

Question: What is Unlevered Free Cash Flow in Plain English?

  • Pre-Tax Cash Flow incl debt
  • Pre-Tax Cash Flow excl debt
  • After-tax Cash Flow incl debt
  • After-tax Cash Flow excl debt

Unlevered Free Cash Flow reflects after-tax Cash Flow (including reinvestments) without the impact of Debt.

For a deeper dive, check out our Walk Me Through a DCF article: https://finance-able.com/walk-me-through-a-dcf/

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Diver Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 12.15.2021

Question: If an acquirer’s Cost of Debt is 5% and the acquirer has a 20% tax rate? What’s the implied P/E of Cash?

  • 20.0x
  • 25.0x
  • 22.5x

The P/E of Cash and Debt reflects the inverted after-tax cost of Cash and Debt in an M&A deal.

So the P/E of Debt, in this case, would be 25.0x or 1 / (5% Cost of Debt * [1 – 20% Tax Rate])

Daily Finance Interview Question – 12.14.2021

Question: What gives rise to Deferred Tax Assets/Liabilities?

  • Permanent Differences
  • Temporary Differences
  • An IRS Audit
  • None of the Above

Temporary differences between book and GAAP accounting create Deferred Tax Assets/Liabilities. 

GAAP and IRS Tax accounting rules are often quite different from each other. When there are disconnects between the two that will revert over time, those disconnects result in temporary differences which create deferred tax Assets and Liabilities. 

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Diver Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 12.13.2021

Question: Which of the following describes a payment contingent on future operational performance milestones of an acquisition target?

  • Preferred Stock
  • Earnout
  • Warrants

When a seller agrees to receive a portion of the purchase price in an acquisition based on the operating performance of the business following an acquisition.

Payment is typically based on achieving Revenue and/or EBITDA growth milestones over time.

Daily Finance Interview Question – 12.10.2021

Question: A Company has negative Net Working Capital (NWC), NWC is proportional to Sales. If the business doubles, what’s the impact to Cash from NWC?

  • Negative Cash Impact
  • Positive Cash Impact
  • Both
  • None of the Above

There will be a positive impact to Cash. If a company has negative NWC, that means that Current Liabilities are greater than Current Assets. If both grow proportional to sales, the absolute dollar growth in Current Liabilities will exceed the growth in Current Assets, resulting in an increase in Liability on a net basis, which is a Source of Cash. 

The rule of thumb is that if a company has negative NWC (and all the underlying components) are proportional to revenue…and revenue grows…it will result in a cash inflow from NWC…and if the revenue declines, there will be a cash outflow from NWC. Negative NWC is a tricky concept, but if you can remember this rule of thumb, then you’re in good shape. 

For a deeper dive, check out our Negative Net Working Capital video: https://youtu.be/Mm-NHsy3Brc

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Diver Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 12.09.2021

Question: Describe Cash Flows From Financing in Plain English. Note: CF is Cash Flow in answers below.

  • CF after investment in CapEx
  • CF generated by Business 
  • CF from Debt & Equity
  • All of the above

Cash Flows from Financing reflects cash in and out from lenders and investors. 

By contrast, Cash Flows From Operations reflects the Cash generated by the Business during the period. Cash Flows from Investing reflects reinvestments in the business as well as the purchase/sale of investments. 

Want to master Accounting for Interviews? Check out our Accounting Fundamentals Mastery course: https://courses.finance-able.com/courses/accounting-concepts-series

Daily Finance Interview Question – 12.08.2021

Question: If I buy Inventory at the beginning of the month for $100 and at the end of the month the Inventory remains unsold. What is the Income Statement (I/S) impact?

  • ($100) Expense on I/S
  • ($100) Cash on the I/S
  • No impact on the I/S
  • All of the Above

There is no Income Statement impact because the Inventory won’t hit the Income Statement until it is sold to a customer. 

For a deeper dive, check out our 3 Statement Impact (Inventory + PP&E) video: https://youtu.be/k0H2ryvcaHY

Aiming for IB/PE/IM? Check out our (free) Analyst Starter Kit (Deep Dive Articles + Animated Explainer Videos): https://finance-able.com/analyst-starter-kit/

Daily Finance Interview Question – 12.07.2021

Question: Which of the following is an Unlevered Valuation multiple?

  • Price/Book
  • EV/EBITDA
  • PE Ratio

EV/EBITDA is the only unlevered multiple of the three. Enterprise Value (EV) is an unlevered valuation metric that measures a Company’s total value. And EBITDA is an unlevered profit metric. 

Want to master the Valuation Concepts for your interviews? Check out our Valuation Fundamentals Mastery course: https://courses.finance-able.com/courses/valuation-fundamentals-mastery

Daily Finance Interview Question – 12.06.2021

Question:  A start-up just became profitable in the current year and has a 5% profit margin. More mature peer companies in the same industry have 20% profit margins. What’s the more appropriate multiple to use here?

  • EV/Revenue
  • EV/EBITDA
  • Price/Book Value
  • None of the Above

Because this company is still in the early stages of its development, an EV/Revenue multiple would likely be more appropriate until the company achieves a normalized (or ‘mature’) level of profitability. 

Want to master the core Valuation Concepts for you need to nail your interview? Check out our Valuation Fundamentals Mastery course: https://courses.finance-able.com/courses/valuation-fundamentals-mastery

Daily Finance Interview Question – 12.03.2021

Question: What is another name for the Cost of Equity Formula?

  • CAPM Formula
  • Beta
  • APV Formula
  • All of the Above

The Capital Asset Pricing Model is the basis for the Cost of Equity formula and so the ‘CAPM formula’ and ‘Cost of Equity Formula’ are interchangeable terms for the purpose of interviews. 

Want to master all of the critical Valuation Concepts for your Interviews? Check out our Valuation Fundamentals Mastery Course.

Daily Finance Interview Question – 12.02.2021

Question: Describe Cash Flows From Operations in Plain English. Note: CF is Cash Flow in answers below.

  • CF after investment in CapEx
  • CF generated by Business
  • CF Including Debt & Equity
  • All of the above

Cash Flows From Operations reflects the Cash generated by the Business during the period. 

By contrast, Cash Flows from Investing reflect reinvestments in the business as well as the purchase/sale of investments. Cash Flows from Financing reflect cash in and out from lenders and investors. 

Want to master Accounting for Interviews? check out our Accounting Fundamentals Mastery course: https://courses.finance-able.com/courses/accounting-concepts-series

Daily Finance Interview Question – 12.01.2021

Question: Which of the following describes an acquisition that aims to bring in a company’s team to the acquiring company…as opposed to the product, cash flow, etc.?

  • Reverse Merger
  • Leveraged Buyout
  • Acquihire

An Acquihire is an acquisition of a target company with the primary goal of bringing in the target company’s team to work at the acquiring company.

Daily Finance Interview Question – 11.30.2021

Question: Which multiple is most commonly used to value a business that has negative EBITDA?

  • EV/EBITDA
  • P/E Ratio
  • EV/Revenue
  • All of the Above

You would need to use an EV/Revenue multiple for a Business with Negative EBITDA because the denominator in EV/EBITDA and Price / Earnings (P/E) ratios require positive earnings. 

In other words, if you applied a valuation multiple to negative EBITDA or Net Income, you’d get a negative number which wouldn’t be useful. 

Want to master Valuation Concepts for your Interviews? Check out our Valuation Fundamentals Mastery course: https://courses.finance-able.com/courses/valuation-fundamentals-mastery

Daily Finance Interview Question – 11.18.2021

Question: Does a Stock Deal in M&A typically create a Deferred Tax Asset or Liability?

  • Deferred Tax Asset
  • Deferred Tax Liability

A Stock Deal typically creates a Deferred Tax Liability because in a Stock Deal there isn’t a step-up in basis for tax purposes, which creates a disconnect between GAAP and IRS Tax Expenses.

Daily Finance Interview Question – 11.16.2021

Question: What are the two most common approaches to calculate Terminal Value?

  • DCF / LBO
  • APV / Exit Multiple
  • LBO / APV
  • Exit Multiple / Perpetuity Growth

The two most common approaches are the Perpetuity Growth Method and the Exit Multiple Method.

Want to master Valuation concepts for an interview? Check out our Valuation Fundamentals Mastery Course here: https://courses.finance-able.com/

Daily Finance Interview Question – 11.12.2021

Question: Bonus Depreciation allows you to take much larger depreciation for tax purposes in Year 1 (vs straight-line depreciation). Does this create a Deferred Tax Asset or Liability?

  • Def Tax Asset
  • Def Tax Liability
  • Both
  • No Way To Tell

Bonus Depreciation creates a significant deduction today which lowers our tax bill now, but we have no future deductions so we pay more tax later.

Lower tax paid now, more tax paid later results in a Deferred Tax Liability.

Daily Finance Interview Question – 11.11.2021

Question: Which of the following valuation methods is typically the lowest (i.e. the ‘floor’)?

  • Discounted Cash Flow Analysis
  • Trading Comparables
  • Transaction Comparables
  • LBO

An LBO firm typically doesn’t own a competing asset to a target company it acquires and thus can’t generate Synergies. So, LBO valuations typically result in the lowest purchase price versus other methods.

To learn more about how Private Equity Funds operate, check out the deep-dive Private Equity vs Venture Capital article: https://finance-able.com/private-equity-vs-venture-capital/

Daily Finance Interview Question –
11.10.2021

Question: When are Financial Sponsors and Strategic Buyers on more equal footing when making a bid?

  • Roll Up Strategy
  • Acquihire
  • Stock Deal
  • Asset Deal

When a Private Equity Fund (or ‘Financial Sponsor’) already owns a competing asset, it can generate synergies (which justifies a higher price), and thus they are on more equal footing with Strategic buyers.

A common example of this is a ‘roll-up’ strategy where a PE firm buys a series of businesses, and each additional acquisition creates cost savings (i.e. synergies).

To learn more about how Private Equity Funds operate, check out our animated explainer video: https://youtu.be/7ZN2XJPwN-Q

Daily Finance Interview Question –
11.09.2021

Question: What account is created when a customer pays in advance for future delivery of a product/service?

  • Accounts Receivable
  • Deferred Revenue
  • Accounts Payable
  • None of the Above

When a customer pays in advance and the Revenue from the sale has not been earned, we created a Liability called Deferred Revenue. 

For a deeper dive on check out this video: https://youtu.be/Sx2R6qS8ZJw

Daily Finance Interview Question –
11.08.2021

Question: What is ‘OpEx’?

  • SG&A Expense
  • Operating Expenses
  • Only B
  • Both A & B

Operating Expense (or ‘OpEx’) is simply another name for Selling, General, and Administrative (‘SG&A’) expense. OpEx includes all of the indirect expenses needed to run a business that isn’t directly tied to the products or services a business sells. OpEx typically includes overhead costs as well as marketing and selling expenses.

For a deeper dive on check out this video: https://youtu.be/vBdPq64Z6w8

Daily Finance Interview Question –
11.05.2021

Question: If I buy a $100 piece of Equipment with cash, what’s the net impact to Assets? Assume a 20% Tax Rate.

  • Assets: ($100) Impact
  • Assets: +$0
  • Assets: +$100
  • No Way To Tell

Zero impact to the Income Statement. ($100) Capital Expenditures in Cash Flows from Investing which results in a ($100) Change in Cash. The ($100) decrease in Cash lowers the cash account by ($100). The offsetting entry to balance the Balance Sheet is to increase PP&E by +$100. So the net change to Assets is $0.

Want to better understand this? check out our video on how to answer this question: https://youtu.be/k0H2ryvcaHY

Daily Finance Interview Question –
11.04.2021

Question: What is the formula to calculate Equity Value? Note: EQ = Equity Value, EV = Enterprise Value.

  • EQ = EV – Debt + Cash
  • EQ = EV – Debt – Cash
  • EQ = EV + Debt – Cash

Equity Value reflects all value attributable to the owners of a Business. So, the formula is Equity Value = Enterprise Value – Debt + Cash.

For a deeper dive on Enterprise Value vs Equity Value, check out this article: https://finance-able.com/enterprise-value-vs-equity-value/

Daily Finance Interview Question –
11.02.2021

Question: How would you characterize a company with ‘High Operating Leverage?’

  • High Incremental Margins
  • Low Incremental Margins
  • Constant Margins

Operating Leverage is a function of the degree to which costs are Fixed. A company with High Operating Leverage would have High Fixed Costs, and thus High Incremental Margins. 

For a deeper dive on Operating Leverage, check out this video: https://youtu.be/ZEntrZnFEz4

Daily Finance Interview Question -11.01.2021

Question: If Accounts Receivable increases by $20 and Deferred Revenue increases by $40, what’s the net impact to cash?

  • +$20 Source of Cash
  • ($20) Use of Cash
  • Breakeven
  • $60 Source of Cash

The rule of thumb to remember here is that Increases / (Decreases) in Assets result in a (Use) / Source of cash…and vice versa for liabilities. 

So if Accounts Receivable increases by $20, it’s a ($20) Use of Cash. And if Deferred Revenue increases by $40, it’s a +$40 Source of Cash. So, the net impact is a +$20 Source of Cash.

For a deeper dive check out our video on Net Working Capital.