Wall Street Prep Exam Questions and
Answers10
What is investment banking? - ANSWERS-The investment bank performs two basic, critical
functions: acting as an intermediary for capital raising, and as an advisor on M&A transactions
and other major corporate actions. As an intermediary, it connects companies that need capital
with investors who have capital to spend. It facilitates this through debt and equity offerings. As
an advisor, an investment bank counsels companies on such corporate actions as mergers,
acquisitions, spinoffs, and restructurings.
has 3 main types of activities:
1. Helping corporate customers obtain funding by selling securities such as stocks and bonds to
investors
2. Providing advice to corporate clients on strategic transactions such as mergers and
acquisitions
3. Trading debt and equity securities for customers or for the firm's own account
Walk me through how $10 of depreciation affects the statements... - ANSWERS-Income
Statement: decreases operating income by $10, assuming a 40% tax rates, decreases net income
by $6
Cash Flow: from there, the $6 less of net income flows into the top line of the cash flow
statement, but since depreciation is a non-cash expense, it could be added back in below net
income, resulting in a $4 net change in cash
, Balance Sheet: this $4 increase in cash would flow into the balance sheet, and the actual $10 of
depreciation would decrease the value of PP&E, meaning there is a $6 reduction in assets. The
$6 decreases in net income mentioned before would impact the SE section of the balance
sheet, making the L+SE side balance with assets.
Valuation - ANSWERS-Process of determining the "right" value of a business, several approaches
used, influenced by objectives of those doing the valuation
How do you value a company? - ANSWERS-There are a number of ways, mainly fall under two
categories:
1. Intrinsic Valuation - based on ability of company to generate cash flows. DCF is most common
type of intrinsic valuation - looks at company's cash flow forecasts and risks.
-Discounted Cash flow: value a company by looking at the future cash flows it can generate and
discount them to the present to arrive at a present value of your business
2. Relative Valuation - looks at multiples of comparable companies and applies mean/median
multiple from peer group. Can be multiples of current market values (trading comps) or
historical acquisition multiples (deal comps)
-Comparable company analysis: value a company by finding similar companies that are public
and have readily observable market prices.
-Comparable (precedent) transactions analysis: value a company by looking at the amount
buyers have paid for acquiring similar companies in the recent past
How do you value a company when not using DCF or relative valuation? - ANSWERS-1.
Leveraged Buyout Analysis: a specific type of valuation approach that looks at the value of a
company to new acquirers under a highly leveraged scenario with specific return requirements.
Hybrid of DCF and comps valuation.
2. Liquidation (Bankruptcy) Analysis: value a company under a worst case liquidation scenario.
Answers10
What is investment banking? - ANSWERS-The investment bank performs two basic, critical
functions: acting as an intermediary for capital raising, and as an advisor on M&A transactions
and other major corporate actions. As an intermediary, it connects companies that need capital
with investors who have capital to spend. It facilitates this through debt and equity offerings. As
an advisor, an investment bank counsels companies on such corporate actions as mergers,
acquisitions, spinoffs, and restructurings.
has 3 main types of activities:
1. Helping corporate customers obtain funding by selling securities such as stocks and bonds to
investors
2. Providing advice to corporate clients on strategic transactions such as mergers and
acquisitions
3. Trading debt and equity securities for customers or for the firm's own account
Walk me through how $10 of depreciation affects the statements... - ANSWERS-Income
Statement: decreases operating income by $10, assuming a 40% tax rates, decreases net income
by $6
Cash Flow: from there, the $6 less of net income flows into the top line of the cash flow
statement, but since depreciation is a non-cash expense, it could be added back in below net
income, resulting in a $4 net change in cash
, Balance Sheet: this $4 increase in cash would flow into the balance sheet, and the actual $10 of
depreciation would decrease the value of PP&E, meaning there is a $6 reduction in assets. The
$6 decreases in net income mentioned before would impact the SE section of the balance
sheet, making the L+SE side balance with assets.
Valuation - ANSWERS-Process of determining the "right" value of a business, several approaches
used, influenced by objectives of those doing the valuation
How do you value a company? - ANSWERS-There are a number of ways, mainly fall under two
categories:
1. Intrinsic Valuation - based on ability of company to generate cash flows. DCF is most common
type of intrinsic valuation - looks at company's cash flow forecasts and risks.
-Discounted Cash flow: value a company by looking at the future cash flows it can generate and
discount them to the present to arrive at a present value of your business
2. Relative Valuation - looks at multiples of comparable companies and applies mean/median
multiple from peer group. Can be multiples of current market values (trading comps) or
historical acquisition multiples (deal comps)
-Comparable company analysis: value a company by finding similar companies that are public
and have readily observable market prices.
-Comparable (precedent) transactions analysis: value a company by looking at the amount
buyers have paid for acquiring similar companies in the recent past
How do you value a company when not using DCF or relative valuation? - ANSWERS-1.
Leveraged Buyout Analysis: a specific type of valuation approach that looks at the value of a
company to new acquirers under a highly leveraged scenario with specific return requirements.
Hybrid of DCF and comps valuation.
2. Liquidation (Bankruptcy) Analysis: value a company under a worst case liquidation scenario.
