Finance Interview Questions


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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.

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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.  

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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%.

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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.

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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.

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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.  

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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%.

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

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

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.

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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). 

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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 – 02.15.2022

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. 

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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. 

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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. 

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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. 

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 – 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.

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 – 01.25.2022

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. 

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

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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.