wharton - finance interview guide

Wombat

Project

Delta Sigma Pi Spring 2008

Delta Sigma Pi

Beta Nu Chapter

!

• Time is like cleavage, squeeze and you will get some!

If you have 8 first-round interviews and 4 second-rounds, that’s only 10 hours of interviewing. That totals less than an entire day. Don’t stress out. Be productive.

• Every interview you go for is a FIT INTERVIEW!

Does your brain fit? Are you competent?Does your personality fit? Are you sociable?

Are you smart when you are having fun? Are you fun when you are being smart?

• Getting the answer right is 50% of the challenge; the other 50% is how you choose to deliver it!

• Don’t bring the Vault Guide to your interviews, and if you do, don’t let them see it. It is such a faux pas!

Use the following pages to organize daily WSJ headlines:

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Use the following pages to organize information about the companies you are interviewing with:

Company: CEO Name:

Date/ time of interview:Who interviewed you:Industry/ product groups:

Three recent transactions (include dates):

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I Valuing a Company The core of corporate finance and one of the most critical areas in investment banking and advisory.

Discounted Cash Flow

• Six easy steps

1. Derive adjusted EBIT 2. Arrive at free cash flows 3. Decide how to discount free cash flows 4. Determine discount rate 5. Decide how to calculate terminal value 6. Apply discount rate and find net present value

• Step 1: Derive adjusted EBIT

Reported EBIT(-) Non-Recurring Charges

= Adjusted EBIT

Common examples of non-recurring charges are legal settlement fees, restructuring charges and asset impairment charges. Adjusting for these gives a more organic and “accurate” perspective on EBIT.

Discounting cash flows isn’t difficult, it’s deriving the free cash flows that can be challenging. The method which you use to discount these cash flows is another headache in itself. Then, finding the appropriate discount rate can be problematic. Make sure you understand the various techniques used in DCFs.

Definition: This method takes the projected cash flows of a company, discounts them back at a relevant discount rate, taking into consideration the company’s capital structure and how one may want to treat leverage.

• Step 2: Arrive at free cash flows

Adjusted EBIT(+) Non-cash Operating Expenses (D&A, ESO)(-) Cash Tax Payments(-) Increase in Operating Working Capital(-) Capital Expenditures

= Free Cash Flow

D&A can be found in the Cash Flow StatementESO may be embedded into SG&A (FASB 123)

• Step 4: Determine discount rate

If using WACC... apply CAPM using given asset beta

If using APV... apply CAPM to relevered equity beta

Discounted Cash Flow, Cont’d

• Step 5: Determine how to calculate terminal value

Continuing Value MethodAssumes constant growth rate after projected period

Exit Multiple MethodAssumes multiple of free cash flows after projected period

• Step 6: Apply discount rate and find NPV


• Why add D&A to EBIT?

D&A is a non-cash operating expense. Hence, to make sure that free cash flow is derived only from cash-related items, D&A must be added back to EBIT.

• Why subtract the increase in operating working capital?

Working Capital = Net Current Assets - Net Current Liabilities

When working capital increases, it means one of two things (or both):

(i) Your net current assets are increasing Accounts Receivable ↑ (not converting recorded sales to cash quickly enough)+ Inventory ↑ (not converting goods to cash quickly enough)

(ii) Your net current liabilities are decreasing

Accounts Payable ↓ (payables are met using cash = cash outflow)

Hence, it is apparent that an increase in working capital corresponds to lower levels of cash, and must be subtracted to reflect the appropriate movement of cash in/ out of the company.

Note: You might get a variety of questions on the DCF, which are designed to evaluate your intuition behind the technique.


• What are debt tax shields and why do they matter?

Debt tax shields (“DTS”) provide tax advantages by reducing income taxes. Interest on debt is tax-deductible, as can be seen on the Income Statement:

EBIT- Interest Expense= Taxable Income- Income Taxes= Net Income

Hence, taking on debt is like having a “shield” against taxes. Bankers tend to self-glorify. It’s a way for compensating for spending that much time behind a computer screen.

DTS matters when you value a company that is levered (has debt).

• How is beta treated in the APV method?

Simply put, you must unlever current beta because you are assuming an all-equity firm:

Unlevered Beta =

Use the CAPM to arrive at the new cost of capital, which is your discount rate.DTS are then valued at the cost of debt, and added back.

• How does the continuing value method treat terminal value like a perpetuity?

Terminal Value =


• Projected Financials - Income Statement

Income Statement Projected FYE December 31,

($ in millions) 2008E 2009E 2010E 2011E 2012E

Revenues $73.9 $80.1 $85.2 $93.6 $99.4

Cost of Goods Sold 40.0 45.0 47.9 53.7 59.3

Gross Profit 33.9 35.1 37.3 39.9 40.1

Selling, General & Administrative Costs 12.5 14.9 16.2 18.2 19.1

EBIT 21.4 20.2 21.1 21.7 21.0

Interest Expense/ (Income) 5.1 5.7 6.6 7.1 7.4

Earnings Before Taxes 16.3 14.5 14.5 14.6 13.6

Income Taxes 5.7 5.1 5.1 5.1 4.8

Net Income $10.6 $9.4 $9.4 $9.5 $8.8

• Projected Financials - Selected Cash Flow Statement Items

Selected Cash Flow Statement Items Projected FYE December 31,


Cash Flows from Operations

Depreciation & Amortization $5.7 $5.7 $5.7 $5.7 $5.7

Cash Flows from Investing

Purchases of PP&E $10.1 $9.9 $7.5 $12.8 $6.3

Case Study: M&T stud and resident tycoon Alan Hsieh really likes Mexican and Korean food, and decides that he wants to buy Kim Jong Burritos, a national Korean-Mexican cafe chain jointly owned and operated by Bohea Suh, who is actually not Mexican at all. Alan has come to you, asking you for a preliminary valuation of Bohea’s company. You project to reach $73.9 million in revenues in FY 20008. You have also decided to do a five-year projection, after which you will use a continuing value method to derive terminal value.

Usually, you do a five-year revenue projection based on:(i) management expectations; and/or(ii) slightly increasing growth rate

Key drivers for growth include:(i) revenue enhancement(ii) improved cost management

In a DCF you’re really just interested up to the EBIT line.

The cash flow statement is used to find D&A and capex for a basic DCF. For more complex DCFs, you may have to look into details in Operating Cash Flows to find minute changes in working capital or adjustments to EBITDA.


• Projected Financials - Selected Balance Sheet Items & Working Capital Calculations

Selected Balance Sheet Items Projected FYE December 31,


Cash $29.1 $33.7 $38.7 $41.5 $43.7

Short-term Investments 6.0 4.6 5.7 6.2 7.7

Accounts Receivables 20.1 23.6 26.4 23.1 30.1

Inventory 30.2 28.7 27.9 26.0 28.1

Total Current Assets $85.4 $90.6 $98.7 $96.8 $109.6

Accounts Payable 45.1 44.2 44.3 47.8 48.1

Accrued Expenses 9.1 8.8 12.4 13.5 14.2

Total Current Liabilities $54.2 $53.0 $56.7 $61.3 $62.3

Working Capital Calculations

Total Current Assets $85.4 $90.6 $98.7 $96.8 $109.6

(-) Cash 29.1 33.7 38.7 41.5 43.7

= Net Current Assets 56.3 56.9 60.0 55.3 65.9

(-) Net Current Liabilities 54.2 53.0 56.7 61.3 62.3

= Working Capital $2.1 $3.9 $3.3 -$6.0 $3.6

Increase/ (Decrease) in Working Capital $0.4 $1.8 -$0.6 -$9.3 $9.6

• Market Data

Market Data

Asset Beta (β) 0.85

Risk-free Rate (rf) 5.0%

Market Return (rm) 8.0%Discount Rate 7.6%

This is the working capital calculation. Note that there is no debt on Bohea’s company, so that this is technically an all-equity firm.

Market data is often provided to you, although the risk-free rate can be found online. Asset betas can be derived from comparables if not provided. The CAPM formula is:

WACC = rf + β(rm - rf)

where (rm - rf) is also known as the “market risk premium”


• Adjusting for EBIT

• Deriving Free Cash Flows

Adjusting for EBIT Projected FYE December 31,2008E 2009E 2010E 2011E 2012E

Earnings Before Interest & Taxes 21.4 20.2 21.1 21.7 21.0(+) Non-Recurring Charges 0.0 0.0 0.0 0.0 0.0

= Adjusted EBIT 21.4 20.2 21.1 21.7 21.0

Deriving Free Cash Flows Projected FYE December 31,2008E 2009E 2010E 2011E 2012E

Adjusted EBIT $21.4 $20.2 $21.1 $21.7 $21.0

(+) Non-cash Operating Expenses 5.7 5.7 5.7 5.7 5.7

(-) Cash Tax Payments 4.6 4 4 4.1 3.8

(-) Increase in Operating Working Capital 0.4 1.8 -0.6 -9.3 9.6(-) Capital Expenditures 10.1 9.9 7.5 12.8 6.3

= Free Cash Flows $12.0 $10.1 $15.8 $19.8 $7.0

Discounted to PV at WACC = 7.6% $12.0 $9.4 $13.7 $15.9 $5.2

Terminal Value at g = 5.0%, Continuing Value $215.2

TOTAL VALUATION $271.5

Market Data

Asset Beta (β) 0.85

Risk-free Rate (rf) 5.0%

Market Return (rm) 8.0%Discount Rate 7.6%

Here we do some adjustments to EBIT. Bohea’s company is assumed to be a vanilla company with no real problems, so there are no non-recurring charges to be added back.

The total valuation is the sum of all the PV-ed cash flows and the terminal value. Here we have valued Bohea’s company at a cool $271.5 million.


• Forward-looking and incorporates growth strategy

• Capital markets volatility has little impact on the analysis

• Recognizes time value of money

• Useful when there are not many comparable companies

• Highly sensitive to assumptions used, such as WACC, long-term growth rate and terminal value

• Forecasted cash flows are uncertain

Advantages Disadvantages

Trading Comps Definition: This method looks at market values to derive price multiples used to measure a company’s value based on a specified metric, such as Sales or EBITDA

• Narrow it downIf in retail, is it in the luxury sector? If in auto parts, is it in the OEM or aftermarket sector? If in aerospace, is it in the engine or aircraft construction sector?

• Nature of businessRetailers are different from wholesalers, manufacturers and distributors, even within the same broad industry

Example: Diageo plc, an international alcoholic beverages manufacturer, is not a great comp if you are valuing a soft drinks retailer

• Customer demographic

Factors to consider include age, gender, socioeconomic status, geography

Example: Saks Fifth Avenue, a high-end luxury chain retailer, is not a good comp if you are valuing a discount apparel chain, such as Dress Barn

• Similar growth stories and conceptsNiche brands may be the only existing company in its specific space and can be hard to find comps for

Example: Seven for All Mankind and Under Armour are good comps for Crocs if looking at novel growth strategy and niche concept

• Trailing vs. forward multiplesLTM = Last Twelve Months - used for historical analysisNTM = Next Twelve Months - used to forecast numbers (get from Thomson, Bloomberg, general analyst consensus, etc.)

• Choosing your metricsTEV/ EBITDATEV/ Sales

Trading Comps, Cont’d

Company Market Total Sales EBITDA TEV as a Multiple of Gross Profit Gross

Name Cap. Ent. Value LTM LTM Sales EBITDA LTM Margin

Abercrombie & Fitch Co. $7,211.8 $6,831.5 $3,549.1 $855.6 1.92x 8.0x $2,363.7 66.6%

Aeropostale Inc. 1,509.3 1,305.3 1,479.3 224.5 0.88 5.8 505.9 34.2%

American Eagle Outfitters Inc. 5,351.2 4,716.6 2,985.2 714.0 1.58 6.6 1,426.9 47.8%

Bebe 1,356.5 964.1 670.9 125.0 1.44 7.7 321.8 48.0%

Billabong International Ltd. 2,956.6 3,186.6 1,104.5 245.5 2.88 13.0 567.7 51.4%

Callaway Golf 1,195.8 1,204.7 1,088.3 120.3 1.11 10.0 466.9 42.9%

CROCS Inc 5,468.6 5,383.3 590.5 179.7 9.12 30.0 346.4 58.7%

Fortune Brands 12,883.4 19,137.7 8,289.5 1,751.7 2.31 10.9 3,615.5 43.6%

Gildan Activewear 4,784.4 4,829.6 944.7 189.8 5.11 25.4 299.1 31.7%

Guess? Inc. 4,952.2 4,777.5 1,473.4 293.6 3.24 16.3 660.4 44.8%

Hanesbrands Inc. 2,686.8 4,963.9 4,509.8 583.2 1.10 8.5 1,498.5 33.2%

Jones Apparel Group Inc. 2,325.9 3,239.3 4,722.8 421.7 0.69 7.7 1,656.5 35.1%

Jos. A Bank Clothiers Inc. 597.1 554.2 577.4 95.0 0.96 5.8 359.2 62.2%

Liz Claiborne Inc. 3,477.5 4,088.4 4,981.8 581.8 0.82 7.0 2,371.3 47.6%

Nike Inc. 30,807.2 28,583.1 16,786.9 2,495.7 1.70 11.5 7,398.3 44.1%

Oxford Industries Inc. 507.5 670.3 1,128.9 125.3 0.59 5.4 447.8 39.7%

Pacific Brands Ltd 1,406.7 2,131.0 1,634.3 194.2 1.30 11.0 681.0 41.7%

Pacific Sunwear of California 1,136.8 1,094.6 1,498.4 90.2 0.73 12.1 427.1 28.5%

Phillips-Van Heusen Corp. 2,912.6 2,945.8 2,269.6 328.8 1.30 9.0 1,130.0 49.8%

Polo Ralph Lauren Corp. 7,706.6 7,633.0 4,412.1 822.6 1.73 9.3 2,396.7 54.3%

Sequa Corp. 1,941.7 2,585.0 2,189.7 233.8 1.18 11.1 381.1 17.4%

Timberland Co. 1,243.9 1,146.4 1,551.7 165.6 0.74 6.9 728.2 46.9%

Under Armour, Inc. 2,896.6 2,876.4 507.9 76.1 5.66 37.8 252.8 49.8%

Volcom Inc 951.4 866.6 226.1 46.1 3.83 18.8 111.8 49.4%

Warnaco Group Inc. 1,849.2 2,062.9 1,941.1 257.4 1.06 8.0 808.0 41.6%

Quiksilver $1,865.2 $2,863.8 $2,547.4 $220.8 1.12x 13.0x $1,159.1 45.5%

Median 1.3x 9.3x

Mean 2.1x 12.1x

The example below is for Quiksilver, a pubicly-traded company. These comps also apply if Quiksilver were private.

Ann. Date Target Acquirer Total Tx Value LTM EBITDA Tx Value/ LTM EBITDA

Stock Premium

5/25/07 Fort Garry Brewing Co. Ltd. Russell Breweries Inc. $4.20 $0.50 9.0x 36.5%

2/1/07 Lakeport Brewing Income Fund Labatt Brewing Company Limited 163.5 15.1 10.8 36.3%

8/11/06 Sleeman Breweries Ltd. Sapporo Breweries Limited 345 28.7 12.0 13.3%

7/5/06 Bouvet-Ladubay United Spirits Ltd. 17.7 1.2 14.8 --

6/15/06 Hardys & Hansons plc Greene King plc 500.8 33.3 15.1 45.0%

6/1/06 Taittinger S.A. Caisse Régionale 1841.1 179 10.3 --

4/2/06 Vincor International Inc. Constellation Brands Inc. 1375.7 95.9 14.3 16.0%

12/21/05 Marie Brizard et Roger International Belvédère 384.6 40.3 9.5 30.0%

Max 15.1x 45.0%

Median 11.4x 33.1%

Mean 12.0x 29.5%

Min 9.0x 13.3%

Transaction Comps Definition: This method examines similar precedent transactions and their valuation characteristics to derive price multiples used to value a company

• Nature of acquisitionHostile takeovers - higher valuation due to opposing management board

• Acquirer type

Corporate acquirers - higher valuation due to projected synergies

• Timing of acquisitionIndustry booms - bubble (tech boom, real estate boom) numbers may be inflatedCredit situation - less leverage may mean depressed valuations

• Transaction structureStock-swap deals - higher valuation due to increased stock risk

These precedent transactions may be used if valuing a alcoholic beverages manufacturer...

What drives variations in price multiples?

Growth ↑, Price multiple ↑

Risk ↑, Price multiple ↓

Reinvestment ↑, Price multiple ↓

Earnings sustainability ↑, Price multiple ↑

Profitability ↑, Price multiple ↑

Leveraged Buyouts Definition: LBO models help analysts see how a financial sponsor may evaluate a company. It is a useful valuation technique that backs out entry/ exit multiples given a required IRR.

A company is purchased at a multiple of its EBITDA, of which a certain % is financed by debt. The company’s future cash flows (usually 5 years) are used to pay down debt. In this process, the original equity value is increased, and upon exit, financial sponsors pay down remaining debt and extract profits from the amplified equity value.

• Key driversCash - How much cash can this company generate going forward? Can it convert revenues to income to cash effectively?Debt - How much debt can you layer onto this company? How fast can it pay back debt? What kinds of debt can it sustain?

• Tranches of debt

Revolving credit facility... (this is like Penn Bursar)plus

Senior debt (secured, “Term Loan A”)Junior debt (subordinate, “Term Loan B”)Mezzanine debt (high-yield, “junk”)

• Typical leverage multiplesSome deals are 80% financed by debt; current credit situations have made lenders much more cautious, so 50-50% deals may be more common nowadays

• Why is there “circularity” in a LBO model?There can be inherent circularity in a LBO model because to find cash available for debt repayment (ending cash balance), you need net income (beginning cash balance), but you can’t unless you have interest expense, but you can’t do that unless you find debt outstanding, which you can’t find unless you find cash available for debt repayment to determine exactly how much debt you can pay down. In short, it’s one big vicious cycle and bankers solve it (or pretend to) by setting their Excel spreadsheets to “manual”, and allow Excel to iterate the calculations 10,000 times.

• What advantages or disadvantages do LBO shops have over corporates?LBO shops are believed to have more financial muscle, but potential lack of veteran industry knowledge (especially when having to deal with labor unions, think Cerberus and Chrysler deal of summer 2007).

Basic Leveraged Buyout

$0

$37.5

$75.0

$112.5

$150.0

2007PF 2008E 2009E 2010E 2011E 2012E

Sponsor Equity Debt

You are a buyout shop and you have decided to buy Alex Good, a renowned male lingerie company. The transaction closed on the last day of 2007, and at the time, Alex Good was making $10.0 million in EBITDA. The buyout was conducted at a 10.0x LTM EBITDA multiple, the median you derived from your trading comps on the lingerie industry.

Enter in 2007

EBITDA: $20.0 millionEntry Multiple: 5.0x LTM EBITDATransaction Value: $100.0 millionLeverage: 3.0x LTM EBITDADebt: $60.0 millionSponsor Equity: $40.0 million

During the Holding Period....

Through a series of operational enhancements and working capital improvements, Alex Good’s EBITDA grew steadily over the years, leading to high levels of free cash flow. Debt was paid down at $5.0 million a year.

Exit in 2012

EBITDA: $25.0 millionExit Multiple: 5.0x LTM EBITDATransaction Value: $125.0 millionOutstanding Debt: $35.0 millionSponsor Equity: $90.0 million

Valuation Football Field

The “football field” shows the full spectrum of basic valuation techniques, and serves as a basis for your firm’s reference range.

DCF

Trading Comps (LTM EBITDA)

Transaction Comps (LTM EBITDA)

LBO

DSP Reference Range

$0 $50 $100 $150 $200

$71.2 - $151.3 million

$43.8 - $79.9 million

$50.6 - $87.4 million

$52.1 - $137.2 million

$84.6 - $146.1 million

Accretion/ Dilution Analysis

Accretion/ Dilution Analysis is used as part of merger analysis. It is primarily focused on Earnings per Share (EPS):

EPS = Net Income / Shares Outstanding

If EPS ↑= accretiveIf EPS ↓= dilutive

In a 100% stock deal, if Acquirer P/E > Target P/E, the deal is accretive to the acquirer.

AcquirerP/E: 12.0xShare price: $60.00EPS: $5.00# of Shares: 1,000.0

Net Income: $5,000.0

TargetP/E: 10.0xShare price: $30.00EPS: $3.00# of Shares: 4,000.0


Pro-formaTotal Net Income: $5,000.0 + $12,000.0 = $17,000.01 share of Acquirer is worth: $60.00/ $30.00 = 2 shares of Target# of Shares Issued: 4,000.0/ 2 = 2,000.0New Total # of Shares: 1,000.0 + 2,000.0 = 3,000.0 New EPS: $17,000.0 / 3,000.0 = $5.67

vs. Old EPS of $5.00, accretion % = 13.3%

AcquirerP/E: 12.0xShare price: $60.00EPS: $5.00# of Shares: 1,000.0


TargetP/E: 10.0xShare price: $60.00EPS: $6.00# of Shares: 1,000.0


Pro-formaTotal Net Income: $5,000.0 + $6,000.0 = $11,000.01 share of Acquirer is worth: $60.00/ $60.00 = 1 share of Target# of Shares Issued: 1,000.0/ 1 = 1,000.0 New Total # of Shares: 1,000.0 + 1,000.0 = 2,000.0 New EPS: $11,000.0 / 2,000.0 = $5.50

vs. Old EPS of $5.00, accretion % = 10.0%

Example I Example II (share price, # of shares are the same)

Accretion/ Dilution Analysis, Cont’d

What drives accretion?

assuming Target’s statistics are constant...

Acquirer P/E ↑- Higher P/E means lower standalone EPS- Accretion based on difference between standalone EPS and pro-forma EPS- Larger difference = more accretion!

Acquirer Share Price ↑

- Higher share price means fewer shares issued to buy target- Fewer issued shares means smaller number of pro-forma shares- Smaller number of pro-forma shares means higher pro-forma EPS- Accretion based on difference between standalone EPS and pro-forma EPS- Larger difference = more accretion!

# of Acquirer Shares ↓

- Fewer standalone acquirer shares means means smaller number of pro-forma shares- Smaller number of pro-forma shares means higher pro-forma EPS- Accretion based on difference between standalone EPS and pro-forma EPS- Larger difference = more accretion!

Practice Questions

• How do you derive Free Cash Flows?

• Why do you subtract the increase in net working capital?

• What is net working capital? How do you get to it?

• What are the two ways to calculate terminal value?

• What is this equation and why does it matter?

• What are the disadvantages of using the WACC method?

Practice Questions, Cont’d

• If you are valuing a private company and do not have access to full financials, what might you use?

• What factors do you consider when selecting your trading comps?

• You are valuing a private company with no directly related comparables. What can you do?

• What factors might lead to inflated transaction values in your transaction comps?

• What are debt tax shields? Why do they matter?

• Which is more accretive: a transaction financed by stock, or by cash? Why?

• What is a leveraged buyout?

Practice Questions, Cont’d

• Name three successful recent leveraged buyouts.

• What does the recent credit situation mean for leveraged buyout shops?

• What are the key drivers of a LBO?

• If you could value a company using only one method, which would you choose?(This is a question that has no right or wrong answer, unless you say something like “I’m going to put some numbers in a hat, close my eyes and pick one at random”. As long as you set up the correct scenario and defend your choice logically, you will be fine. Bankers ask this question to see how analytical and quick you can be.)

II Financial Statements Analysis Must be completely understood before performing a valuation analysis.

SEC Filings Overview

• 10-KThis contains the company’s financial performance over the last fiscal year, as well as some rather lofty descriptions of the company’s operations.

• 10-QThis contains the company’s financial performance over the last fiscal quarter, as well as year-to-date and LTM statistics.

• Proxy Statement (DEF 14-F)This contains shareholder and ownership data, which can also be found on Bloomberg.

• 8-KThis is the current report, and is used by companies to file current reports on events like entry/ termination of a definitive material agreement, material impairments, etc.

• 20-FThis is the same as the 10-K, but for non-U.S. companies.

Walk me through the....

This is a warm-up question. It is, in fact, an open lay-up. You may answer it in 2 steps:

Income Statement

I. Function of I/S

- Summary of an entity's results of operation is revealed in the income statement- Provides information about revenues generated and expenses incurred- Differences between revenues and expenses are identified as “net income” or “net loss”

II. Structure of I/SRevenues+ Other Revenues= Total Revenues

- Cost of Goods Sold= Gross Profit

-Selling, General and Administrative Costs (SG&A)- Non-recurring Expenses (Restructuring, Legal, etc)= Operating Income

- (+) Interest Expense (Income)= Taxable Income

- Income Tax Expense= Net Income

Walk me through the....BalanceSheet

I. Function of B/S

- Reveals economic resources owned and claims against those resources (liabilities and owners' equity)- Prepared as of a specific date, whereas the I/S and Statement of Retained Earnings cover a period of time

II. Structure of B/S

ASSETS

Cash & Cash Equivalents+ Short-term Investments+ Accounts Receivables+ Merchandise Inventories= Current Assets

+ PP&E, Net+ Goodwill, Net+ Intangibles, Net+ Other Assets, Net= TOTAL ASSETS

LIABILITIES

Current Portion of Long-term Debt+ Accounts Payable+ Accrued Expenses+ Income Taxes Payable= Current Liabilities

+ Long-term Debt+ Deferred Income Taxes+ Other Non-current Liabilities=TOTAL LIABILITIES

SHAREHOLDER’S EQUITY

... you don’t have to break this down, but know that Retained Earnings are subtracted here.

Stockholders’ Equity is complex....

Which is why it’s highly doubtful that you will be asked to break it down.

Source: Liz-Claiborne 10-K Filings, FY 2006

Walk me through the....Cash Flow Statement

I. Function of C/F Statement

- Presents change in cash in a period of time pertaining to Operating, Investing and Financing activities

II. Structure of C/F StatementYou only have to know the main components of each section...

Cash Flows from Operating ActivitiesNet IncomeDepreciation & Amortization

Cash Flows from Investing ActivitiesPurchases of PP&E (a.k.a. capital expenditures)Purchases of Investment Instruments

Cash Flows from Financing ActivitiesShort-term BorrowingsAny debt-related stuff... issuance/ repayment of notes

Effect of Exchange Rate Changes on Cash

Net Change in Cash & Cash Equivalents

Ending Cash Balance

This is your Beginning Cash Balance!

Very impressive if you mention this! Say, “if this were a multinational company, then realistically, it will be effected by cross-border exchange rates.”

The C/F is complex....

To the right you will see exactly why you don’t have to know EVERYTHING on the C/F Statement. Chances are, most bankers don’t know. There are only two things that are important in basic valuation:

- Depreciation & Amortization from CFO

- Capital Expenditures from CFI

Source: Liz-Claiborne 10-K Filings, FY 2006

Walk me through the....Income

Statement

I. Function of I/S

II. Structure of I/S

Fill in the relevant information:

Walk me through the....BalanceSheet

I. Function of B/S

II. Structure of B/S


Walk me through the....Cash Flow Statement

I. Function of C/F Statement

II. Structure of C/F Statement


So, uhh, how are the 3 financial statements linked?

Classic douchebag question. Many people trip up on this because it is difficult to remember on the spot!

.... But not you. You are intelligent and understand how this works!

5 main themes:1. Long-term Debt on the Opening B/S determines Interest Expense on the I/S

2. PP&E on the B/S determines D&A on the C/F

3. Net Income on the I/S determines Beginning Cash Balance on the C/F

4. Net Income on the I/S flows into Ending Retained Earnings, which flows into Shareholders’ Equity in the Ending B/S

5. Ending Cash Balance on the C/F determines Cash on the Ending B/S

Income Statement

OpeningBalanceSheet

Cash Flow Statement

Draw it here:

EndingBalanceSheet

So, D&A increases by $100 and t = 40.0%....

What happens on the I/S?D&A is embedded in SG&A. So, an increase in D&A of $100 = decrease in pre-tax income of $100Decrease in pre-tax income of $100 = decrease in post-tax net income of $60, because t = 40.0%Decrease in net income of $60 = decrease in beginning cash balance of $60, because net income from I/S flows to the C/F

Income Statement

BalanceSheet

Cash Flow Statement

RECONCILE

Income Statement

BalanceSheet

Cash Flow Statement

Assets Liabilities

Stockholders’ Equity

Draw it here:

What happens on the B/S?Increase in D&A of $100 = decrease in PP&E of $100Decrease in net income of $60 = decrease in Retained Earnings of $60.... there seems to be a gap of positive $40, let’s look for it....

What happens on the C/F?Increase in D&A of $100 = increase in Cash Flows from Operations by $100, because D&A is added back in the C/F as a non-cash expenseRecall the decrease in beginning cash balance of $60... here you find the increase in ending cash balance of $40....

Does this belong to the B/S?Increase in ending cash balance of $40 = Increase in cash of $40... the balance sheet balances!....

So, D&A decreases by $80 and t = 30.0%....

What happens on the I/S?Income

Statement

BalanceSheet

Cash Flow Statement

RECONCILE

Income Statement

BalanceSheet

Cash Flow Statement

Assets Liabilities


Draw it here:

What happens on the B/S?

.... there seems to be a gap of , let’s look for it....

What happens on the C/F?

... here you find the in ending cash balance of $ ....

Does this belong to the B/S?

... the balance sheet balances!....

So, D&A increases by $20 and t = 50.0%....

What happens on the I/S?Income

Statement

BalanceSheet

Cash Flow Statement

RECONCILE

Income Statement

BalanceSheet

Cash Flow Statement

Assets Liabilities


Draw it here:

What happens on the B/S?

.... there seems to be a gap of , let’s look for it....

What happens on the C/F?

... here you find the in ending cash balance of $ ....

Does this belong to the B/S?

... the balance sheet balances!....

III Fielding Interview Questions

Annoying Qualitative Questions

• “I see you have done your research on investment banking. What do you think is the worst thing about the job?”

This tests whether you understand the reality of the job. You can say “the hours”, “watching a deal die” or whatever you honestly believe is the worst part of the job. You can be honest, as long as you show that you understand that it is inherent and can be coped with. If you are interviewing with an associate, mention that part of an analyst’s job is to make the associate’s life easier. Also state that by being efficient (which you are) and a quick learner (which you also are), these problems can be easily mitigated.

• “What do you think about your GPA? Do you think you should be doing better?”

This tests your reaction to questions that are on the offense. Be honest and say that you could be doing better, but you are well-rounded and hence, satisfied with your performance. You are proud that you are involved in many extra-curricular activities and that if you were graded on them, you would probably have a 4.0 GPA. Mention that every semester is a new slate and that you always strive to allocate your time efficiently.

• “If I could only write three words to remember you by, what would they be?”

I tend to answer this with two serious buzzwords and a funny, memorable one; example: “driven”, “efficient” and “diet Coke fanatic”. Answer this question at your discretion! Have a backup in case no laughter ensues. Some bankers suck.

• “What was on the Wall Street Journal today?”

They aren’t asking you this question because they don’t know what’s on the WSJ. They want to see how you answer this question. I always said, “Usually I skim through the columns on the first page between classes. What jumped out at me today were the news about <x>, <y> and <z>.”

Sometimes, I’d have an extra something-something, such as an interesting, non-financial article in the back pages. Again, use this only if you feel good rapport with your interviewer (which you should have!). It shows that you are interesting and that you actually read the WSJ, even if you don’t. Anyone can spit out the top three headlines.. differentiate yourself!

Annoying Qualitative Questions

• “What are your greatest strengths?”

DING DING DING JACKPOT!!!!!!!!!!!!! Good for you if you get asked this question. Don’t be corny, like “you know, Ashley, I’ve always felt that Excel is like an extension of my nervous system...”. Say good, unique things. Back them up with tangible examples!

List them here:

1. I am Example:

2. I am Example:

3. I am Example:

• “What is/ are your greatest weaknesses?”

The granddaddy of all bullshit. Change your weakness into something good. Self-deprecation can be humorous.

List two (incl. one backup) here:

1. I can be BUT :

2. I can be BUT:

• “What sets you apart from the other applicants?”

1. I am

2. I am

3. I am

wharton - finance interview guide

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