Interview Questions

This page is here to help us all be prepared for the types of questions that are typically asked during an interview. We have tried to break them down into the categories listed below as best as possible. Personal Questions - Finance Questions - Accounting Questions - Other Questions

Personal Questions Q. Spend 5 minutes and walk me through your resume. A. The first question you will most likely be asked. On the surface it seems like an easy question, but you will need to be clear and concise with your response. This is something you will need to practice repeatedly so that you can SUCCINCTLY talk about yourself and relate your background to the job. Try to start after you finished undergrad. and talk about: Each position you have held, your role and responsibilities (try to highlight ones that match the job), and what you liked about that work. You want to work your way up to attending Emory. Q. Why do you want to work in Investment Banking/Sales & Trading / Research/ PCS? A. Probably the second question you will be asked. This is probably the most important question you will have to answer. You should be able to relate experiences in your job and interests that match the job you are interviewing for. This is a question that you need to have a rehearsed 2-minute response. Your answer should end along the line "and thats why I want to go into Investment Banking." How can you relate your background if you didnt used to work in the industry? Be creative! Interviewers dont care if you didnt work in this field before. Questions to ask yourself: Did your company ever get bought out or did your company ever buy another? Did you read an article about a merger in the Wall Street Journal? Work that into your answer. Here is what a second year student who came from different backgrounds said: DAVID RICHARDS- Manager at HBOC McKesson (Internship: SunTrust) I spent my time focusing on the things I had done that were related to Banking. P&L responsibilities I had & my motivation/track record of being profit focused The transactional work that I have done before and liking the work Leveraging grades/GMAT as a way to show my quant. orientation

Client centric management (more a corporate banking plus) I also spent some time talking about the two years of night school and preparation to come back to business school specifically for banking. Q. Why did you decide to go to Emory? No standard answer, but people usually mention: Small Class Size Need to be in a big city (if you want to work in NYC- don't say you like living where its warmer) The diversity of students (33% International). Do not say something like: "I didnt get into Harvard." You need to stay positive. Q. Why do you want to work for Company X? A. Try to tell them about your interests and how it relates to the strengths they provide. For example: I would like to work at Chase because I'm interested in working in leveraged finance and Chase is a leader in debt financing through syndicated loans and high yield offerings. I think SG Cowen would be a great place for me because I'm interested in doing healthcare banking, which is a particular strength of the firm. Q. What other companies are you considering? A. Don't just say that their company is the only one. You can be honest. They don't expect you to put all your eggs in one basket. I think the key to this question is to mention firms that may be similar to the reasons you gave for wanting to work at the company you are interviewing with. Using the Chase example from above, you might want to tailor your answer around other banks known for fixed income, such as B of A, Lehman, the Big Three(Merrill, Goldman, MSDW) or Bear. The thing not to say is someone like Robertson Stephens ( a fine institution, just not known for fixed-income). If you would want to work for a niche firm, don't say you are considering Merrill or some type of bulge bracket firm. The person interviewing you is trying to see if you are really interested in a certain type of work/environment or are you just bullshitting. Q. What specific area are you interested in? A. Obviously you want to display an interest in some area, but also need to be able to talk in detail about that subject area so they don't think you are trying to bullshit them. If you want to work in equity research covering telecommunications you should be able to talk now (as of 12/15/2000) about how telecomm. firms are struggling and what are some of the problems they face. Q. In 1 sentence, tell me why we should hire you? A. Don't just blurt out an answer. Take your time and use commas.

Q. Look outside my office. Down the right side of the building are offices of bankers that all went to Harvard Business School. Down the left side are all bankers that went to Wharton. I get hundreds of resumes every year - mostly from Harvard, Wharton, Chicago, and Columbia. There's a long track record of success here from those schools - if I take a chance on an HBS grad, and it doesn't work out, nobody will second-guess me. However, in your case, if I take a chance and you don't work out, I'll have some explaining to do about my judgment. How are you going to convince me to hire you over the hundreds of resumes I get every fall? Q. Is there anything else, that is not your resume that I should know about? A. Try to highlight personality traits. You could talk about work ethic, being a team player, and how you are an easy-going person who is great to work with.

Finance Questions Q. What are the three basic ways to value a company? A. The three most common ways to value a company are: Discounted Cash Flow (DCF)- The value of a firm is the present value of all future cash flows. A basic DCF involves forecasting free cash flow for the firm over a specific time horizon and discounting these cash flows back at the weighted average cost of capital (WACC). Free cash flow (FCF) is usually defined as: Operating Income (also known as EBIT) * (1-Tax Rate) Plus: Depreciation and Amortization (or other Non-Cash Charges) Less: Change in Net Working Capital and Capital Expenditures Generally, you would forecast a FCF number for each year over a certain time horizon (usually 5 or 10 years) and then attach a terminal value (TV) for the firm. The TV represents the firm as a growing perpetuity. You can estimate the TV one of two ways: TV= Final Year FCF (1+g)/(k-g) TV= Exit Multiple based on EBIT or EBITDA The FCFs and the TV are then discounted back at the WACC. This value is known as the Enterprise Value. By subtracting out net debt (debt outstanding-less cash), you are left with an equity value for the firm. The equity value divided by the number of diluted shares outstanding is the per share value. (Whew!!!) Trading Comparables (Comps)- This method involves finding comparable (this can be tricky) companies in the marketplace and determining at what multiple they trade to a variety of factors. For example, if comparable companies have firm values anywhere

from 5x-10x EBIT, and the company I am valuing has $100 million in EBIT, then the company could be worth anywhere from $500 million to $1 billion dollars. If you are asked about this, the best way is to give a quick example like the one described above. Acquisition Comparables- Similar to Trading Comps. If comparable companies have been sold for 5x-10x revenues, and my company has $100 million in revenues, then my company may be worth anywhere from $500 million to $1 billion dollars. They key to comparable valuation is picking the right set of comps. Obviously picking companies in the same industry is necessary, but also think about other factors such as: capital structure (companies who use more leverage may trade differently than companies with all equity financing), size, seasonality, and operating margins. Other valuation methods include liquidation value and Leveraged Buy-Out, however, interviewers generally stick to the first three. Q. What has a cheaper cost of capital, Equity or Debt? A. Debt has the cheapest cost of capital. There are two reasons. First, using debt allows corporations to deduct interest payments which lowers the cost. Second, debt holders would be paid off before equity holders in the event of a liquidation, so the risk of not being paid back is less for debt holders than equity holders. My general rule of thumb is that the more senior the claim, the lower the cost of capital. Here is a breakdown of costs of capitals form lowest to highest. 1. Debt 2. Subordinated Debt (Mezzanine Debt) 3. Preferred Stock 4. Equity Q. How do I determine the Cost of Debt and Equity? A. Debt- Does the company have any debt outstanding? If so, use the Yield to Maturity (YTM) on the bonds as the cost of debt. If there are no bonds outstanding, look at comparable companies' YTMs. Preferred stock can be found the same way. Equity - use the Capital Asset Pricing Model (CAPM). If you don't know the Beta, use a comparable company beta. Q. How do I determine the Weighted Average Cost of Capital (WACC)? A. To determine the WACC, find the what percentage debt and equity are of the total capital structure and multiply these numbers by your cost of debt (1-t) and your cost of equity. For example: Capital structure= 100, Debt= 50, Equity=50, Cost of Debt= 8%, Cost of Equity=12%. The WACC is= .5*8%(1-T)+ .5*12

Q. If my capital structure is optimized, what also should be optimized? A. Return on Equity. Basically you have the optimal amount of equity to produce your net income. Q. Define cash earnings per share. A. Cash Earnings=NI+Depreciation and Amortization+Deferred Taxes. Q. A company is listed as an ADR on an American exchange. The ration of shares on the home exchange to ADR shares is 6 for 1. If the ADR earnings per share is $6 what is the EPS for a share listed on the home exchange? A. $1, treat as if a 6 for 1 stock split occurred. Q. Suppose you have a company where EBITDA has been rising for the past several years and that company suddenly declares bankruptcy, name some reasons for why that could have happened? A. Companies declare bankruptcy because they have no cash (liquidity crunch); the best answer would be to walk down the cash flow statement and describe how each of the sections could contribute to a bankruptcy filing: - Working capital crunch (receivables could be rising; could be getting pushed on payables; might be required to build significant inventory) - Capex requirements could be large (ie telecom) - Might not be able to refinance a maturing issue - Litigation (ie Philip Morris posting tobacco bond) Q. You are looking at acquiring a company, but that company has a negative book value of equity. Is this a big deal? A. You would want to see why the BV of equity is negative, and there could be several reasons: - Could be from negative net income over the past several years - this might a problem from an operational perspective - Might be due to a write-down of assets - would want to understand this but might not be as bad a recurring negative net income - Firm might have levered up to issue a large dividend - will leverage be an issue going forward? Q. Which will place a higher value on the company, equity comparables or M&A comparables and why? A. M&A comparables will be higher due to a control premium that must be paid and synergies expected to be derived from the deal

Q. Briefly walk through a discounted cash flow analysis. (including WACC) A. First, you want to calculate free cash flow for a certain period of time (generally five or ten years). To calculate free cash flow, start with after-tax EBIT and then add back D&A, subtract Capex and add/subtract and decrease/increase in working capital. Next, you want to determine the appropriate discount rate for the cashflows, the WACC. The cost of debt is determined using the current yields on the company's existing debt issues (where bonds are trading) and tax affecting them. The cost of equity is generally determined by CAPM (ie risk-free rate plus company's beta multiplied by the equity risk premium). WACC=D/(D+E)*(1-T)*Kd + E/(D+E)*Ke Next, you would calculate a terminal value for the firm either using a multiple of EBITDA or a perpetuity growth rate on the firm's free cash flow. - Multiple Method - Multiply the final year's EBITDA by an appropriate EBITDA multiple for the firm (based on comparables) - Perpetuity Growth Method - multiply the final year's free cash flow by (1+growth rate) and divide that by (r-g) You would next calculate the PV of the terminal value Next, you would determine the PV of the free cash flows for the given period (dividing the cashflows by WACC) Finally, you would add the PV of the terminal value to the PV of the free cash flow to determine the value of the firm Q. If a company is considering an all-stock acquisition, what is the easiest way to determine (roughly) whether or not the acquisition will be accretive or dilutive? A. The quick way is to look at P/E multiples. If the acquirer's P/E is higher than the target's, the acquisition will likely be accretive and vice versa. For instance, if the acquirer's P/E is 20, and the target's is 10, then you are able to pay less per dollar of earnings for the target. Q. If you are going to graph a company's cost of capital, with the cost on the Y-axis and with the company's leverage level across the X-axis (from 0% leverage to 100% leverage), what would the graph look like? A. It would look approximately like a smile; the cost of capital would initially decline as you add leverage, however as the firm becomes increasingly levered, the cost of capital would increase due to bankruptcy risk Q. Why would two companies merge / What major factors drive M&A? A. synergies (revenue - cross-selling; expenses - cost cutting); could exploit economies of

scale, common distribution channels, elimination of a competitor, etc., defensive (do not want someone else to acquire them) Q. Why might a firm choose debt over equity financing? A. Assuming the firm has the ability to take on additional leverage without damaging its creditworthiness, the firm might choose this in order not to dilute ownership; also, up to a reasonable level, debt can be seen as having a lower cost than equity. Q. How do you unlever at beta? A:: BL = Bu * [1+(1-T)*D/E] (Hamada formula) T = tax rate; D/E = debt/equity ratio Q. How do you calculate the enterprise value of a firm? A. Enterprise Value = Equity Value (i.e. shares outstanding under Treasury method * price) + debt - cash + preferred stock + minority interest Q. How do you value a company that is not CF positive, has no public comps, nor any acquisition comps? A. Look at distribution, production methods of other companies and see if you can find any operational similarities. (i.e. find value drivers and see if there are companies that could be comps) Q. Give me an example of a coverage ratio? A. EBITDA/interest expense: shows ability of the firm to generate sufficient cash flow to cover fixed charges; (EBITDA-Capex)/interest expense: shows ability to cover interest expense after spending for capex Q. What types of companies make good LBO targets? A. Has predictable, stable CF; mature, steady industry; well-established products; limited capex and product development expenses; undervalued or out of favor; owned by a motivated seller; not highly levered Q. Conglomerate X has a significant amount of debt maturing next year. With debt markets still tight, what options does the company have? A. If the company does not have excess cash, it could sell some of its assets (but would lose cashflow from that unit) or issue equity (these are the two primary answers) Q. How would you value the naming rights of a stadium?

A. You could look at comparables (adjusting for market differences, football, concerts, demographics, TV rights, size of stadium) to get the intrinsic value; you would then think about market specific details and willingness to pay of potential buyers (key points understand valuation is based on intrinsic value and willingness to pay).

Accounting Questions Q. State three events that reduce retained earnings. A. Treasury stock purchase. Net Loss. Dividend payment. Q. Construct an accounting cash flow statement. Define the sections of the statement and detail the components of each section. A. The three parts of a cash flow statement are Operating Activities, Investing Activities, and Financing Activities. A basic cash flow statement looks something like this: Operating Activities: Net Income +Non-Cash Charges Change in current accounts other than cash (- for increases in Current Assets, + for increases in Current Liabilities) = Cash Provided by Operating Activities Investing Activities: -Capital Expenditures = Cash Provided by Investing Activities Financing Activities: + Issue of Common Stock -Dividends = Cash Provided by Financing Activities =Net increase (decrease) in cash balance +Beginning Cash Balance =Ending Cash Balance Q. What are the effects of FAS 141 and 142? A.FAS 141 - all acquisitions accounted for under purchase method; FAS 142 - no amortization of goodwill or indefinite life intangibles. Amortize finite life intangibles, such as patents. Goodwill should be tested for impairment on an annual basis. Q. If you are in a business that wants to preserve cash, what type of inventory accounting method would you use (LIFO or FIFO) in a time of rising prices, and why? A. You would use LIFO because that would give you a higher cost of goods sold and would, thus, lower your pre-tax income and reduce the amount of taxes owed. Q What is a deferred tax liability (asset)? (The mother of all interview questions, can be a deal-maker if you nail it) A. Deferred tax liabilities (assets) arise in periods when temporary timing differences

between tax and financial reporting cause taxable income to be different from net income on the income statement. Deferred tax liabilities (assets) represent expected increases (decreases) in the taxes payable in future periods when these temporary timing differences reverse- at which time the deferred income tax liabilities (assets) are written off the books.

Other Questions Q. You won a contest that paid you one chocolate bar every day for the rest of your life. The IRS intends to tax you for this prize, but is looking to you to justify the tax basis that you feel is appropriate for this prize. What amount do you report for tax purposes? A. This is nothing more than a valuation question. The chocolate contest scenario is intended to see if you really understand the concepts involved in valuation of a stream of cash flows. There are questions to ask such as 1) Can you use an average life expectancy?, 2) Will that expectancy be lowered by excessive chocolate intake?, 3) What is the value of a candy bar?, etc.... After the parameters had been fairly established, my answer eventually ended in a discussion of what is the appropriate cost of capital with which to discount this chocolate-flow. Is it better to use a high cost of capital or low cost of capital? Since you are looking to minimize the valuation (thereby lowering your tax basis), you would likely choose the higher personal cost of capital. This will return a lower tax basis in present value. When asked how to justify a high cost of capital, you can talk about the relative risk of your various investments or internal rate of returns. Creativity is key in this discussion. I believe the interviewer was looking for three things: 1) Do you understand valuation concepts and the mechanics involved?, 2) Can you ask the right questions to frame the parameters of the valuation?, and 3) Do you understand the meaning of cost of capital and risk? Q. What is 73 ? (Definitely a Sales & Trading type question) A. The wrong way to answer this question is to try to think quietly and determine what 49*7 is in your head. They want you to think out loud so they understand your thought process. The best way to do it is to say " 7*7 is 49. And 7* 50 is 350, so by subtracting 7, I get 343. Try to think of other numbers where this would work. Q. What is 6/7ths ? A. Answer like the last one. 1/7th is approximately 0.14, and six times 14 is 84, so the answer is approximately .84. Getting the answer right to the fifth decimal place is not what they are testing. Make sure you know all the 8ths and 16ths too (ie 1/8th is .125). Q. What is a stock you follow and why should I buy it? Definitely more common in research and sales and trading type interviews. The point of this question is not whether you are "correct", but rather, can you sell an idea to them.

Any job you take always involves some type of sales. Know some basic highlights of one stock (it doesn't matter which, but probably one in some area that interests you) and be able hit those highlights in bullet point format (don't ramble, you want to be concise and be able to tell a quick and dirty story). Get a copy of an analyst report from the CBI if you need some highlights. For example an answer might be something like this: "A stock I would recommend is Cisco. The company is the dominant player in providing technology infrastructure, which is a rapidly expanding market. Its sales have been growing at 20% per year and are forecasted to grow at that rate for the next 3 years. It has operating margins that are superior to its competitors that continuing to grow as it leverages economies of scale." (Note: I made up everything I just said, but you get the point) Q. How much would it cost to fill the Statue of Liberty with liters of Vodka? A. Yes, I was actually asked this once. Try to break it down into pieces. Your numbers don't have to make sense, it's just your thought process. The statue of Liberty is X high by Y wide by Z deep. From that you can calculate a volume. Approximate how many liters that would be and then decide how much a liter a vodka costs. Q. What is the current unemployment rate? Q. What was the lead story on the front page of the WSJ summary section today? Q. What kind of effect will the rise in oil prices have on the U.S. economy? Q. Can you describe the shape of the yield curve currently? Q. Where are the Dow, Nasdaq, and S&P 500 trading currently? Q. Where are 10-year Treasurys trading? Q. Where is the Federal Funds rate? Q. Where is 3-month LIBOR? Q. Where is the dollar versus the Yen and Euro?

Source: http://www.bus.emory.edu/fin/mba_finance_interview_questions.htm#accountingquestions