Investment banking can cover a lot of different areas and skills. One focus you may need to study up on is corporate valuation. If you are interested in working in Mergers and Acquisitions or as an underwriter on IPOs, you will need to know specifics about how companies report their earnings, how they are structured and how a company is valued. Especially if you already have a year or two of investment banking experience under your belt, you will be expected to know all about these topics. Here are some real questions asked in actual interviews that may help you ace your corporate valuation interview.
What is an income statement?
This is just a simple record of a company's gains and losses, including expenses. The income sheet represents a specified amount of time and includes everything from the cost of renting the office to the depreciation of assets.
What is a cash flow statement?
A cash flow statement tracks the actual cash that goes in and out of a company. This is important to see how liquid the company is. If it is rich in assets but not necessarily cash, there could be problems.
Explain to me what makes up a cash flow statement.
The place to start when looking at a cash flow statement is the beginning cash balance. Then you must look at cash from operations, then the cash made from any investments, then cash from financing. All of that will make up the ending cash balance.
What is free cash flow?
This is the cash that can be taken, and in theory, given to the equity holders, debt holders, stock holders, etc. You calculate it by taking the operating cash flow and subtracting the capital expenditure, or the amount that the company has spent on fixed assets, not including those fixed assets bought as part of an acquisition. This is something valuers look at when assessing a company as it is a pretty straightforward equation and final figure.
What is EBITDA?
This is an acronym that stands for: earnings before interest, taxes, depreciation, and amortization. You use EBITDA as a multiple to value a company. Other multiples to value a company are: price-to-earnings multiple (P/E ratio), EBT and book value.
How do you value a company?
This is quite a broad question, so start with the methods you would use and go through them one at a time. It will also impress if you discuss the pros and cons of each method.
The main ways to value a company are: precedent transactions analysis, comparable company analysis and discounted cash flow analysis.
1. Precedent Transactions Analysis
This is when you look at how much others have paid for similar companies to the one you are valuing to determine how much the company is worth. To use this method effectively you need to be extremely familiar with the industry of the company you are valuing as well as the normal premiums paid for such a company. This can be a relatively easy method to use since all the information is public and thus easy to obtain and also since the past transactions actually happened, you can be confident that analysis based on this is extremely plausible. But on the other hand, what if the market during the past transactions was extremely different from present market conditions? Can you really base the value of one company on the value of another that is not exactly the same? These are some issues you should think about before your interview so you can discuss them at length with your interviewer.
2. Comparable Company Analysis
This is similar to Precedent Transactions Analysis except you are using the whole company as a comparison unit, not the purchase of a company. So to use this method you would also seek out similar companies to the one you are valuing and look at their price vs. earnings, EBITDA, stock price and any other variables you think would be an indicator of the health of a company.
3. Discounted Cash Flow Analysis
This is when you use future cash flow, or what the company will make in the future, to determine what the company is worth now. To calculate DCF you need to work out what the projected or future cash flow is for a company for the next 10 years. Then work out how much that would be in today's terms by "discounting" it at the rate that would give a return on investment. Then you add in the terminal value of the company and that will tell you how much the company is worth. Though this is the preferred method to value a company, it still has its flaws because the projected earning and discounted rate are figures that you set using your best guess, there's no concrete maths equation to work it out so DCF does have a certain amount of subjectivity to it.
How do you value a company with no revenue?
This may seem like a trick question, but it can be answered. You have to really make an educated estimate about future projected revenue and cash flow. Take what you come up with and then calculate the net present value.
What does Beta mean?
Beta represents the volatility of a company's stock based on the natural volatility of the stock market.
Let's discuss a company that you think is undervalued. Why are they undervalued?
Give me an example of a company you think is overvalued and why.
It goes without saying: if you don't read up on the financial aspects of multinational companies, the latest industry news or study any trends, then you will not have a successful interview. Look into some companies and their stocks and then decide whether you think they are overvalued or undervalued. Write down why you think that along with facts to bolster your argument. Try to memorise your points but it wouldn't hurt to have them with you so you can quickly refer to them (avoid blatantly reading off the page). If you can pick out a company whose stock has gone down based on some bad press, but you're not convinced that the bad press is really going to affect the bottom line, which would be an example of a company that you think is undervalued. Obviously, go into as much detail as possible. Any knowledge of the industry, history of specific companies and any other knowledge you can display in your interview, the better.
What is a current ratio?
This measures if a company can pay back its short-term payments it is obligated to pay. If the ratio is high, that is good and means the company has the means to make the payments
What is a quick ratio?
A quick ratio is the same as the current ratio but it does not include any inventory the company may have. The inventory is obviously not considered a liquid asset and thus would not be quickly liquidated, that's a way you can remember the definition of a quick ratio.
What is goodwill?
Goodwill is a slightly vague term that cannot be arrived at by doing a maths equation. Basically goodwill is a premium that goes over the actual value of a company. A company might have a lot of goodwill because of a strong brand or a constant positive public opinion.
Download your free copy of our guides: What's Investment Banking? and Top Investment Banking Employers, 2012 editions.
Download your free copy of our guides: What's Investment Banking? and Top Investment Banking Employers, 2012 editions.