So you have an
interview scheduled,
now what?
1
Tips Before Going Into the Interview
 Network, Network, Network
 Talk to 2nd yrs that interned at target
company
 Talk to everyone
 Find out your interviewer
 Make the interviewer know who you are
before the interview
 Mock interviews
 Practice behavioral and technical questions
 Practice your story
 Vault, interview mastery, analyst reports,
company financials, webcast earnings reports
2
Typical Interview Structure
Section 1:
Me
Section 2:
Bank/Company
Section 3:
Behavioral Questions
Section 4:
Technical Questions
Section 5:
Market
Section 6:
Other
3
1. Let me tell you about myself:
Input your own story here
4
2. Why do I want to be an investment banker?
Input your own reasons here
5
3. Why should you hire me?
Input your own reasons here
6
4. Strengths and Weaknesses
Input your own list here
7
Uniquenesses
Input your own list here
8
Why did I choose to go to business school?
Input your own story here
9
Why did I choose CMU?
Input your own story here
10
What do I do for fun?
Input your own story here
11
What do I think Investment Bankers do?
1.
2.
3.
4.
Financial Activities –
1.
Building Financial Models
2.
Performing Valuation Work
3.
Pricing Offerings
4.
Formulating Financing and Capital Structure
Marketing –
1.
Assembling Marketing Material
2.
Presenting to Clients
3.
Selling the transaction to the market
4.
Developing target of likely investors
5.
Calling clients
Strategy –
1.
Strategic analysis
2.
Conducting due diligence
3.
Negotiating transaction terms and documentation
Managing –
1.
Analysts
2.
VPs, Directors
3.
Process
12
Stock Price of Previous Employers
Input your own story here
13
What activities do I participate in?
Input your own story here
14
Example of analytical or quantitative thinking
Input your own example here
15
Example of Leadership
Input your own example here
16
Why this firm?
Input your own reasons here
17
Behavioral Questions:
What 3 qualities would your friends use to describe you?
Input your own list here
18
Technical Questions: Income Statement
What is an income statement?
An income statement presents the results of operations of a
business over a specified period of time. (Revenues-Expenses).
This period is usually one fiscal year or one business cycle.
Net Sales – CGS = Gross Profit
Gross Profit – SG&A - Depreciation= EBIT
EBIT – Interest = EBT
EBT – Tax = Net Income
Net Income – Dividends = Transfer to Retained Earnings.
What is the link between the income statement and the balance
sheet?
The main link between the two statements is that profits
generated on the income statement get added to the
shareholder’s equity on the balance sheet as retained earnings.
Also, debt on the balance sheet is used to calculated interest
expense in the Income Statement.
19
Technical Questions: Balance Sheet
What is a balance sheet?
A balance sheet presents the financial position of a company at a
given point in time. It comprises Assets, Liabilites and Equity. A=
L&E.
What is the link between the balance sheet and the statement of
cash flows?
The statement of cash flows (CFS) starts with the beginning cash
balance, which comes from the cash line on the balance sheet.
Cash from operations is derived using the changes in the working
capital accounts (AR, AP).
The net increase in cash flow for the prior years goes back onto
the next year’s Balance sheet.
20
Technical Questions: Statement of Cash Flows
What is the statement of cash flows?
A CFS details al the cash inflows and outflows during a specified period of time.
It is divided into 3 parts:
cash from operating activities – presents how much cash was generated in the
operations of the firm.
investing activities – presents how much cash was generated in activities outside
the normal scope of business. (Sales of capital equipment. Items classified as assets
on the balance sheet.)
financing activities – presents how much cash was generated spent from/in
activities relating to capital.
Under operating activities it begins with Net Income and then Depreciation is added
back since it is a non-cash expense. Then the changes in working capital are added
or subtracted. Any CapEX is subtracted. Any cash in/outflows for financing are
included and then the closing cash balance is calculated.
NOTE: A company can be profitable, but can go bankrupt if it doesn’t have the cash
flow to meet interest payments.
How can net income go up but dwindling cash?
Operating – Working Capital Increases, CapEx Increases, Dividends and Stock
Repurchases.
21
Technical Questions: Statement of Cash Flows
How would you figure out a company’s cash flow from its net
income?
Net Income
+ Depreciation
-CapEX
-Increase in Working Capital
= FREE CASH FLOW
OR
EBIT(1-Tax Rate)
+ Depreciation
-CapEX
-Increase in Working Capital
= FREE CASH FLOW
22
Technical Questions: EBITDA
What is EBITDA?
A proxy for cash flow. EBITDA stands for earnings before
interest, taxes, depreciation and amortization.
23
Technical Questions: Valuation
How would you value a company?
1.
FCF: Project the company’s cash flows for some forecastable
period, 5 or 10 years. To do this we need either forecasts of
Net Income or EBIT. Given that we simply take NI and add
back depreciation, subtract out CapEX, and Increases in
Working Capital Expenditures. This gives us FCF. Discount
the FCF back using the appropriate discount rate provided by
CAPM.
2.
Terminal Value: Add back terminal value. Take last year of
FCF and assume some constant growth rate. Multiply FCF last
year (1-g)/(r-g)
3.
Compute cost of capital using CAPM and WACC to find
discount rate. CAPM = reL = rf + BetaL(rm-rf) and WACC =
rwacc = (re) e/d+e + (1-t)(rd) d/d+e
4.
Discount FCF and Terminal value to present period.
24
Technical Questions: Comparable
How would you value a company?
Comparables
1.
2.
3.
4.
Select Comparable Firms
1.
Select based on business strategies, products, growth rate, size, etc.
2.
Compute relevant trading multiples
3.
Compute mean and median multiples for industry
Adjust Financial Data
1.
Remove the effects of one time , non-recurring events
2.
Compute EBIT, EBITDA
Select Multiples
1.
EV/EBITDA, EV/EBIT
2.
EV/SALES if negative EBIT
3.
Price/Earnings multiples used only when capital structure is similar
Compute Enterprise Value
1.
Apply peer multiples to the firm’s performance
2.
Arrive at a range of values using judgment and past experience.
25
Technical Questions: Precedent Transactions
How would you value a company?
Precedent Transactions
1.
2.
3.
4.
Identify Precedent Transactions
1.
Select comparable transactions within the industry
2.
Compute multiples at which the targets were valued
3.
Compute mean and median multiples for industry
Adjust Financial Data
1.
Remove the effects of one time , non-recurring events
2.
Compute EBIT, EBITDA
Select Multiples
1.
EV/EBITDA, EV/EBIT
2.
EV/SALES if negative EBIT
3.
Price/Earnings multiples used only when capital structure is similar
Compute Enterprise Value
1.
Apply peer multiples to the firm’s performance
2.
Arrive at a range of values using judgment and past experience.
3.
Reflects impact of synergies and control premium
26
Technical Questions: Football Field
DCF – Highest valuation since reflects optimism.
Precedent Transactions – Starting point for most M&A transactions. Reflects
synergies and control premium.
LBO Valuations – No synergies. Lowest valuations. LBO value comes from financial
engineering, operational improvement.
Public Comparables – Starting point for equity offerings.
27
Technical Questions: Beta
What is beta?
Beta is the value that represents the stock’s volatility with respect to the overall
market volatility.
How do you unlever beta?
Unlevering a company’s beta means calculating the Beta under the assumption that
it is an all-equity firm. The formula:
BL = BU[1+ (1-t)(D)/(E)]
For a valuation of a firm –
1.
Start with the industry levered beta
2.
Then calculate the unlevered average industry beta
3.
Utilizing the firm’s capital structure (target or industry average) get Beta or
Firm
28
Technical Questions: Depreciation
Scenario: Buy an asset – truck
1.
Take out loan $100, debit cash, credit liabilities
2.
Purchase truck $100, credit cash, debit pp&e
3.
After 1 year depreciate – need years of service, salvage value and depreciation
method
4.
Assuming 10 years straight line depreciation,$0 salvage value – debit
depreciation expense, credit accumulated depreciation
5.
Income Statement Effect – Depreciation expense reduces Net Income by $10
6.
Cash Flow Statement – Add back depreciation (In American financial
statements depreciation expense only appears in the Cash Flow Statement)
29
Technical Questions: Deferred Taxes
Deferred taxes are a result of temporary differences between the determination of
accounting income, but affects taxable income in a different period.
AI>TI Debit Income Tax Expense (I/S) Credit Deferred Tax Liability (B/S)
AI<TI Debit Deferred Tax Asset (B/S) Credit Income Tax Expense (I/S)
Scenario: Depreciation – Usually accelerated for TI
Bad debt expense – allowance method under AI, write off method in TI
30
Technical Questions: Accounting Ratios
How do you calculate Day Sales Outstanding? Accounts Receivable/sales*365
31
Technical Questions: Due Diligence Checklist
•
Management:
Company Organization
Ownership/Control
•
Financial
Audits
Verifications of A.R. , Inventory
•
Operations
Assets and Operations
Employee Benefits
•
Legal
Intellectual Property
Reports
Significant Contracts and Commitments
•
Environmental
•
Tax Matters
•
Customers
32
Technical Questions: Cash vs. Stock
Cash
Stock
Risk is solely on buyer
Risk is shared
Tax Penalty on Seller
Tax Penalty Incurred at Stock Sale
SVA = Synergies - Premium
Acquirer can revalues assets
increasing depreciation expense
Acquired company has vested
interest in attaining synergies
33
Technical Questions: LBO
A leveraged buyout occurs when a financial sponsor gains control
of a majority of a target company's equity through the use of
borrowed money or debt.
Targets: Steady cash flow firms whose stock may be trading at
an unrealistically low price or may be under leveraged.
Process: Financial Sponsors improve firms through financial
engineering, operational improvement and ultimately through
private vs. public market arbitrage.
Valuation: The financial sponsor typically pays a multiple of
EBITDA that included a premium for the company. They
acquisition currency is typically 20% cash and 80% debt. The
goal is to pay off the debt with the cash flows and then sell
the company at the same multiple ultimately earning a rate
of return of about 20-40% within a 2-7 year time frame.
Exit Strategy: Go public, sell to strategic buyer or recap.
34
Technical Questions: 10 Ways To Create Value
1.
Strategic Acquisition
2.
Partnership/Merger
3.
Sell/Divest of Business Unit
4.
Sell Assets
5.
IPO
6.
Borrow/Lever
7.
Operational Efficiencies
8.
Make it known that company is up for sale
9.
Go private
35
Market Questions:
Index/Currency
Last
Last Year
Other
DJIA
10962.36
Down .6%
3 days above
11K
S&P
1286
Up 3%
18 x P/E
NASDAQ
2316.7
1.4%
2 Year
4.37
10 Year
4.41
30 Year
4.59
Dollar/Yen
114.57
Dollar/Euro
1.203
Lehman
135.3
P/E 12.4
Corporate
Spread ~ 3.65%
Up 50% over
last year
CEO – Richard
Fuld
36
Typical Corporate Finance Interview Questions
 Tell me what you know about the company’s financial
performance.
 What are some recommendations you have for the
company to improve its financial performance?
 Tell me about the company’s dividend policy.
 What is the company’s biggest exposure?
 How would you go about evaluating a project?
 Why is capital structure important?
 What are my net cash flows from the following
transactions?
 How do you calculate cost of capital?
 Should you use the same cost of capital for all
projects? Why or why not?
37
S&T Interviews
38
Typical S&T Interview Structure
• Length – 30 to 60 minutes
• Number of Interviewers – 1 to 2
• Styles vary – relaxed/conversational to rapid fire no frills Q&A
1 – 5 minutes
Introduction
10 minutes
Behavioral Questions
10 minutes
Technical Questions
5 minutes
Your Time to Answer Questions
39
What to Expect: Introduction
•
Interviewer will retrieve you from the waiting area
•
Handshake
•
Friendly exchange – how are you doing? How was your trip? Etc.
•
Brief overview of interviewers background
•
History at company
Strategy:
•
Use this as time to relax and get comfortable
•
“Size up” the interviewer(s)
•
Introduction will set the stage for the remainder of the interview – try to
make it as conversational as possible
•
Pay close attention to what they say – question opportunity
40
What to Expect: Behavioral Questions
•
Tell me about yourself – your opportunity to pitch you
•
Resume specific questions
•
Why did you choose to go back to business school?
•
Why are you interested in sales and trading?
•
Why are you interested in working for this firm?
•
How do you work under pressure?
•
Have you ever failed?
•
Did you ever get a bad performance review? What did you do about it?
•
Tell me about a time when you had to make a decision when the answer
wasn’t clear
•
What are your favorite classes and why?
•
Pretend you work for your previous employer and I’m a potential client,
sell the firm to me
•
Have you ever been in a situation where you knew your boss was wrong?
What did you do about it?
•
Have you read any books about trading?
Strategy:
•
Practice, Practice, Practice
41
What to Expect: Technical Questions
•
What do you think makes a good trader?
•
Trading games
•
What do you think the Fed is going to do? Inflation/Interest Rates
•
Bond price/yield relationships and Duration/Convexity – also know how
prepayment option affects this relationship
•
Why is the yield on a 10 year corporate bond, greater than the yield on a
T-bill with 1 year until maturity?
•
Pitch a stock trade to me
•
Options – payoff diagrams, the “Greeks”, why price changes
•
I’m trying to hedge Microsoft with IBM, what are the problems with that?
•
Coin flip/Dice roll games – Be comfortable with expected value and
conditional probability calculations
•
What do you think happened to the price of gold after 9/11?
•
How does a trader make money?
•
Know what delta hedging is, and what it’s problems are
•
Market efficiency – What are your thoughts on it? Do you think markets
are efficient?
•
Shape of the yield cure – be able to explain, and how you would expect it
to change if X occurs.
42
Strategy for Technical Questions/Brainteasers
•
Practice
•
Show your thinking process, ask lots of questions, make sure you
completely understand the problem
•
Relax
•
Take your time, be systematic
•
If you really get stuck, ask for a hint
•
Use a pen and paper, don’t try to do it all in your head unless they insist
•
If you can’t get the answer, don’t sweat it.
43