Technical - General

Question 1

Whats the difference between IRR and WACC?

Answer 1

WACC:
(often used in DCF)
(is an input variable when calculating UFCFs)

IRR: The discount rate at which the Net Present Value of all cash flows from a project is equal to 0
(Often used by Private Equity Firms / Financial Sponsors in an LBO)
(is an output variable when PV or NPV is set)

Question 2

Walk me through each statement

Question 3

What does each statement measure

Question 4

Where does Net Income go beyond the I/S

Question 5

Which statement is most important

Question 6

What accounts for the change in PP&E?

Answer 6

Depreciation, CapEx, Proceeds from any sales

Question 7

What is the impact if Depreciation changes

Question 8

What are types of various analysis?

Answer 8

Valuation: 
(DCF)
(Public Comparables)
(Precedent Transactions)
(LBO Model)
(Football Field)
(WACC)

M&A:
(Accretion/Dilution)
(Merger/Model)

Question 9

What is the treasury stock method?

Answer 9

A way to calculate new shares created from options or warrants that are dilutive to the share price

Question 10

How do you compute the pro forma EPS?

Answer 10

Net incomeS + after-tax incremental adjustments / shares out + new shares issued

Question 11

Why would you use P/E Multiple? Whats the point / benefit? What does it tell us?

Question 12

How would you value an internet company?

Question 13

How would you value a traditional asset heavy company?

Question 14

Tell me about Enterprise value and Equity value. And why are they different? Can you give me a few examples?

Question 15

Tell me about a deal you’ve found interesting

Answer 15

GE Split off of Aviation, Healthcare

Question 16

What does it mean when treasury yields go up? Down?

Answer 16

They are not like stocks. A bonds yield and price are inversely related.
Lower yield means treasuries are in demand. They’re a safe asset. Higher means the opposite.

The cost of equity is cheaper when interest rates are low

Question 17

What is the relationship between the yield curve and inflation?

Answer 17

Well, the yield depends on whats going on in the markets

• credit risk of the issuer
• the outlook on markets and inflation rates
• and the interest rate set by central banks

Question 18

What happens when Tax rates rise?

Answer 18

The cost of debt is cheaper (interest exp is tax deductible)

Question 19

When happens to your WACC when Interest rates rise?

Answer 19

Cost of debt: Rises because you are paying for on interest

Cost of Equity: Rises

Question 20

What is free cash flow? How do we get there?

Question 21

Whats effecting the financial markets?

Answer 21

Inflation, Supply disruptions, new variants, climate change

Question 22

How does a merger model work? (the steps)

Answer 22

1) Determine Purchase Price
2) Determine Purchase Method
3) Project Financial Profiles & statements of buyer
4) Combine buyer & sellers income statements
5) Calculate Goodwill and allocate purchase price
6) Combine BS and adjust for acquisition effects
7) adjust IS and adjust for acquisition effects
8) Calculate Acre/Dil. & create sensitivity tables

Question 23

How would you combine the balance sheet of a merge?

Answer 23

Add all assets - the amount paid
+ all liabilities
+ Buyers SE only

adjust for Goodwill

Question 24

What are acquisition effects?

Answer 24

Foregone cash on interest (cash * interest rate)
New Interes expense if paying w/ debt (debt used * interest rate)
Shares outstanding (Old buyers shares + newly issued shares)
Synergies
D&A (Must reflect new expense via DTL or DTA)
Accretion/dilution

Question 25

Which is better to use when buying? Cash, Debt, or Equity.

Answer 25

Cash: Easiest & cheapest, you miss out on foregone cash from interest, but is generally the cheapest Debt: less cheap than cash, and you pay interest on it, but the interest expense is tax deductible Equity: more risky, as it is never promised, the share price may plummet after announcing, and creates a dilutive effect

Question 26

Whats the rule for using 100% stock in an acquisition

Answer 26

TL;DR - Sellers PE >>>>>> Buyers PE = DILUTIVE ! If P/E multiple of BUYER is MORE = accretive if P/E multiple of SELLER is MORE = dilutive Think of it as : P/E = Equity Value / Net Income ``` Buyer EV(Price) = $100 Buyer Net income (Earning) = $10 PE = 10x ``` If you FLIP the P/E = 10/100 = $0.10 If you bought it, you'd be getting $0.10 in earnings for each DOLLAR or 10% Sellers P/E: 80/10 = 8x Sellers E/P = $0.125 for every dollar OR 12.5% YOUD GET MORE FOR YOUR MONEY BECAUSE WITH THE SELLER BC ITS PE MULTIPLE IS LOWER.

Question 27

What are the costs for using Cash, Debt, Stock?

Answer 27

Cash: Interest rate/RF * (1- Buyers tax rate) Debt: Rate on debt * (1- Buyers tax rate) Stock: Recipricol of buyers P/E multiple, i.e. Net Income / Equity Value Yield of Seller: Recipricol of seller P/E multiple (the P/E multiple at purchase price for the deal)

Question 28

How do you calculate the weighted 'cost' for the buyer?

Answer 28

WACOA or look at the yield of the seller and the costs for the buyer

Question 29

How do you handle a company that isnt synergistic after the merge?

Answer 29

Write down assets and create impairment charges Reduces: Pre-tax income, net income, and goodwill

Question 30

Why would a company want to purcchase another?

Answer 30

Better ROI / Higher EPS (appeals to shareholders) Undervalued Gain in market share

Question 31

Walk me through a merger model

Answer 31

Looks at: 1) Financial profile of the two using purchase price form of payment, and determines the possible effect on the pro-forma EPS Start by 1) Make assumptions about the acquisition & the form of payment 2) Determine valuations and shares outstanding of both buyer and seller, and project the income statements for each 3) Combine the IS: Revenue, Operating expenses, and adjust for foregone interest on cash, interest paid on debt, in COMBINED PRE-TAX income line; then apply the buyers tax rate to get combined NI, and then divide by the new share count to determine EPS Discuss Goodwill & combining sheets if asked

Question 32

Why would an acquisition be dilutive?

Answer 32

If the additional net income received by seller is not enough to offset the buyers Cost of Acquisition (foregone cash on interest, additional interest paid on debt, and effects of issuing more shares)

Question 32

Why would an acquisition be dilutive?

Answer 32

If the additional net income received by seller is not enough to offset the buyers Cost of Acquisition (foregone cash on interest, additional interest paid on debt, and effects of issuing more shares) * THIS WOULD ONLY WORK IF THEY HAVE THE SAME TAX RATE, no D&A effects, No transaction fees, no synergies, and if you use the current price rather than the purchase price, etc.

Question 33

Company A: higher P/E Company B: Lower P/E Is this accretive or dilutive?

Answer 33

Depends on if its an all-stock deal. If its ALL STOCK, then the deal with be accretive because the buyer gets more in earning for every $1 used to acquire 88

Question 34

How much a company is able to borrow/ take out in debt? How do you find out?

Answer 34

Look at precendent transations and public comps -> Debt/ EBITDA ratio

Question 35

Company A buy Company B using 100% debt A PE: 15x B P/E: 10x

Answer 35

Sellers Yield: 1/10 or 10% AFTER TAX COST OF DEBT MUST BE greater than 10% To get exact figure: 10%/ (1-.40) = 16.7% approx

Question 36

Comp A, PE: 10x < --- always higher than Comp B | Is debt or using equity more accretive?

Answer 36

Buyers cost of debt: .05 * (1-.40) = 3% Cost of equity: 10% 9%

Question 37

A: EntV 100, Market cap 80, EBITDA of 10, Net income of 4 B: EntV 40, Market cap of 40, EBITDA of 8, Net Income of 2

Answer 37

PE = 8/4 A: Ent: 100/10 = 10 , P/E = 80/4 = 20x B: 40/8 = 5 ; P/E = 20x

Question 38

Company A requires company B with 100% cash. What do you do? What are the combined PE and EBITDA multiples?

Answer 38

1) ADD the Market Caps =120, add 20 more -Adjust for Cash, Debt, and Stock used 2)

Question 39

How do P/E multiples change with different purchase methods (cash, stock, equity)

Answer 39

Enterprise Value is not affected because its cap structure agnostic Cost of equity increases paying with stock and Cost of debt increases when paying with debt

Question 40

What affects P/E ratio in general?

Answer 40

Exploring company growth: Reinvestment = INCREASES Paying dividends = INCREASES Increased debt / risk = FALLS

Question 41

How do you get to from EBITDA, EBIT, Net income to FCF?