Most Common Technical Finance
Interview Questions - Wall Street Prep
A bond with a face value of $1,000 and 5% coupon is trading at $990. What is the current yield? - Correct Answer
Yield = Coupon Payment / Bond Price
Yield = 50/990 = 5.05%
A company buys a manufacturing facility for $1m in cash on January 1, 2007. Assigns useful life of 10 years. Walk
me through the impact on the three financial statements during the year. - Correct Answer Income Statement :
depreciation expense = $100k
CF Statement :
Depreciation expense of $100k added back to CF operations
Capital Expenditures of $1m reduce CF investing
Balance Sheet:
Cash creditted (down) by $1m
PP&E debitted (up) by $1m initially
PP&E creditted (down) by depreciation exp of $100k
Retained Earnings debitted (down) by depreciation exp of $100k
Do you invest? Tell me about a few companies in your portfolio. Or, "tell me about stocks that you think are
under/over valued and why?" - Correct Answer Discuss the aforementioned valuation methodologies (DCF and
comparables) relative to the current market's valuation.
Be prepared to answer questions about your companies' capital structure, recent news, share price, management
team, etc.
How do you calculate the cost of equity? - Correct Answer CAPM is the predominant method used.
CAPM links the expected return of a security to its sensitivity to the overall market basket (often proxied using the
S&P 500)
The formula:
Re = rfr + beta * market risk premium (rm-rf)
How do you calculate unlevered FCFs for a DCF analysis? - Correct Answer FCFs =
operating profit (EBIT) * (1 - TR) + dep/amt - change WC - CapEx
How do you value a company? - Correct Answer (1) Intrinsic value = DCF; (2) Relative Value =
comparables/multiples
How to unlever Beta and relever beta? - Correct Answer B Unlevered = BETA (levered) / 1 + (D/E)(1-TR)
Relever this beta at the target company's capital structure:
B Levered = BETA (unlevered) * [1 + (D/E)(1-TR)]
How would you calculate beta for a company? - Correct Answer Calculating raw betas from historical returns and
even projected betas is an imprecise measurement of future beta because of estimation errors (i.e. standard errors
create a large potential range for beta).
Recommended that we use an industry beta. Since betas of comparable companies are distorted because of different
rates of leverage, we should unlever the betas and then relever the betas to the target company's capital structure.
How would you value a company with negative historical cash flows? - Correct Answer Given that negative
profitability will make most multiples meaningless, a DCF valuation approach is appropriate here.
Interview Questions - Wall Street Prep
A bond with a face value of $1,000 and 5% coupon is trading at $990. What is the current yield? - Correct Answer
Yield = Coupon Payment / Bond Price
Yield = 50/990 = 5.05%
A company buys a manufacturing facility for $1m in cash on January 1, 2007. Assigns useful life of 10 years. Walk
me through the impact on the three financial statements during the year. - Correct Answer Income Statement :
depreciation expense = $100k
CF Statement :
Depreciation expense of $100k added back to CF operations
Capital Expenditures of $1m reduce CF investing
Balance Sheet:
Cash creditted (down) by $1m
PP&E debitted (up) by $1m initially
PP&E creditted (down) by depreciation exp of $100k
Retained Earnings debitted (down) by depreciation exp of $100k
Do you invest? Tell me about a few companies in your portfolio. Or, "tell me about stocks that you think are
under/over valued and why?" - Correct Answer Discuss the aforementioned valuation methodologies (DCF and
comparables) relative to the current market's valuation.
Be prepared to answer questions about your companies' capital structure, recent news, share price, management
team, etc.
How do you calculate the cost of equity? - Correct Answer CAPM is the predominant method used.
CAPM links the expected return of a security to its sensitivity to the overall market basket (often proxied using the
S&P 500)
The formula:
Re = rfr + beta * market risk premium (rm-rf)
How do you calculate unlevered FCFs for a DCF analysis? - Correct Answer FCFs =
operating profit (EBIT) * (1 - TR) + dep/amt - change WC - CapEx
How do you value a company? - Correct Answer (1) Intrinsic value = DCF; (2) Relative Value =
comparables/multiples
How to unlever Beta and relever beta? - Correct Answer B Unlevered = BETA (levered) / 1 + (D/E)(1-TR)
Relever this beta at the target company's capital structure:
B Levered = BETA (unlevered) * [1 + (D/E)(1-TR)]
How would you calculate beta for a company? - Correct Answer Calculating raw betas from historical returns and
even projected betas is an imprecise measurement of future beta because of estimation errors (i.e. standard errors
create a large potential range for beta).
Recommended that we use an industry beta. Since betas of comparable companies are distorted because of different
rates of leverage, we should unlever the betas and then relever the betas to the target company's capital structure.
How would you value a company with negative historical cash flows? - Correct Answer Given that negative
profitability will make most multiples meaningless, a DCF valuation approach is appropriate here.
