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So you have an interview

scheduled, now what?

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Tips Before Going Into the Interview

Network, Network, Network

Talk to 2nd yrs that interned at target company

Talk to everyone

Find out your interviewer

Make the interviewer know who you are before the interview

Mock interviews

Practice behavioral and technical questions

Practice your story

Vault, interview mastery, analyst reports, company financials, webcast earnings reports

Network, Network, Network

Talk to 2nd yrs that interned at target company

Talk to everyone

Find out your interviewer

Make the interviewer know who you are before the interview

Mock interviews

Practice behavioral and technical questions

Practice your story

Vault, interview mastery, analyst reports, company financials, webcast earnings reports

3

Section 1: Me

Section 2: Bank/Company

Section 3: Behavioral Questions

Section 4: Technical Questions

Section 5: Market

Section 6: Other

Typical Interview Structure

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1. Let me tell you about myself:

Input your own story here

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2. Why do I want to be an investment banker?

Input your own reasons here

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3. Why should you hire me?

Input your own reasons here

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4. Strengths and Weaknesses

Input your own list here

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Uniquenesses

Input your own list here

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Why did I choose to go to business school?

Input your own story here

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Why did I choose CMU?

Input your own story here

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What do I do for fun?

Input your own story here

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What do I think Investment Bankers do?

1. Financial Activities –

1. Building Financial Models

2. Performing Valuation Work

3. Pricing Offerings

4. Formulating Financing and Capital Structure

2. Marketing –

1. Assembling Marketing Material

2. Presenting to Clients

3. Selling the transaction to the market

4. Developing target of likely investors

5. Calling clients

3. Strategy –

1. Strategic analysis

2. Conducting due diligence

3. Negotiating transaction terms and documentation

4. Managing –

1. Analysts

2. VPs, Directors

3. Process

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Stock Price of Previous Employers

Input your own story here

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What activities do I participate in?

Input your own story here

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Example of analytical or quantitative thinking

Input your own example here

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Example of Leadership

Input your own example here

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Why this firm?

Input your own reasons here

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Behavioral Questions:

What 3 qualities would your friends use to describe you?

Input your own list here

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Technical Questions: Income Statement

What is an income statement?

An income statement presents the results of operations of a business over a specified period of time. (Revenues-Expenses). This period is usually one fiscal year or one business cycle.

Net Sales – CGS = Gross Profit

Gross Profit – SG&A - Depreciation= EBIT

EBIT – Interest = EBT

EBT – Tax = Net Income

Net Income – Dividends = Transfer to Retained Earnings.

What is the link between the income statement and the balance sheet?

The main link between the two statements is that profits generated on the income statement get added to the shareholder’s equity on the balance sheet as retained earnings. Also, debt on the balance sheet is used to calculated interest expense in the Income Statement.

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Technical Questions: Balance Sheet

What is a balance sheet?

A balance sheet presents the financial position of a company at a given point in time. It comprises Assets, Liabilites and Equity. A= L&E.

What is the link between the balance sheet and the statement of cash flows?

The statement of cash flows (CFS) starts with the beginning cash balance, which comes from the cash line on the balance sheet. Cash from operations is derived using the changes in the working capital accounts (AR, AP).

The net increase in cash flow for the prior years goes back onto the next year’s Balance sheet.

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Technical Questions: Statement of Cash Flows

What is the statement of cash flows?

A CFS details al the cash inflows and outflows during a specified period of time.

It is divided into 3 parts:

cash from operating activities – presents how much cash was generated in the operations of the firm.

investing activities – presents how much cash was generated in activities outside the normal scope of business. (Sales of capital equipment. Items classified as assets on the balance sheet.)

financing activities – presents how much cash was generated spent from/in activities relating to capital.

Under operating activities it begins with Net Income and then Depreciation is added back since it is a non-cash expense. Then the changes in working capital are added or subtracted. Any CapEX is subtracted. Any cash in/outflows for financing are included and then the closing cash balance is calculated.

NOTE: A company can be profitable, but can go bankrupt if it doesn’t have the cash flow to meet interest payments.

How can net income go up but dwindling cash?

Operating – Working Capital Increases, CapEx Increases, Dividends and Stock Repurchases.

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Technical Questions: Statement of Cash Flows

How would you figure out a company’s cash flow from its net income?

Net Income

+ Depreciation

-CapEX

-Increase in Working Capital

= FREE CASH FLOW

OR

EBIT(1-Tax Rate)

+ Depreciation

-CapEX

-Increase in Working Capital

= FREE CASH FLOW

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Technical Questions: EBITDA

What is EBITDA?

A proxy for cash flow. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

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Technical Questions: Valuation

How would you value a company?

1. FCF: Project the company’s cash flows for some forecastable period, 5 or 10 years. To do this we need either forecasts of Net Income or EBIT. Given that we simply take NI and add back depreciation, subtract out CapEX, and Increases in Working Capital Expenditures. This gives us FCF. Discount the FCF back using the appropriate discount rate provided by CAPM.

2. Terminal Value: Add back terminal value. Take last year of FCF and assume some constant growth rate. Multiply FCF last year (1-g)/(r-g)

3. Compute cost of capital using CAPM and WACC to find discount rate. CAPM = reL = rf + BetaL(rm-rf) and WACC = rwacc = (re) e/d+e + (1-t)(rd) d/d+e

4. Discount FCF and Terminal value to present period.

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Technical Questions: Comparable

How would you value a company?

Comparables

1. Select Comparable Firms

1. Select based on business strategies, products, growth rate, size, etc.

2. Compute relevant trading multiples

3. Compute mean and median multiples for industry

2. Adjust Financial Data

1. Remove the effects of one time , non-recurring events

2. Compute EBIT, EBITDA

3. Select Multiples

1. EV/EBITDA, EV/EBIT

2. EV/SALES if negative EBIT

3. Price/Earnings multiples used only when capital structure is similar

4. Compute Enterprise Value

1. Apply peer multiples to the firm’s performance

2. Arrive at a range of values using judgment and past experience.

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Technical Questions: Precedent Transactions

How would you value a company?

Precedent Transactions

1. Identify Precedent Transactions

1. Select comparable transactions within the industry

2. Compute multiples at which the targets were valued

3. Compute mean and median multiples for industry

2. Adjust Financial Data

1. Remove the effects of one time , non-recurring events

2. Compute EBIT, EBITDA

3. Select Multiples

1. EV/EBITDA, EV/EBIT

2. EV/SALES if negative EBIT

3. Price/Earnings multiples used only when capital structure is similar

4. Compute Enterprise Value

1. Apply peer multiples to the firm’s performance

2. Arrive at a range of values using judgment and past experience.

3. Reflects impact of synergies and control premium

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Technical Questions: Football Field

DCF – Highest valuation since reflects optimism.

Precedent Transactions – Starting point for most M&A transactions. Reflects synergies and control premium.

LBO Valuations – No synergies. Lowest valuations. LBO value comes from financial engineering, operational improvement.

Public Comparables – Starting point for equity offerings.

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Technical Questions: Beta

What is beta?

Beta is the value that represents the stock’s volatility with respect to the overall market volatility.

How do you unlever beta?

Unlevering a company’s beta means calculating the Beta under the assumption that it is an all-equity firm. The formula:

BL = BU[1+ (1-t)(D)/(E)]

For a valuation of a firm –

1. Start with the industry levered beta

2. Then calculate the unlevered average industry beta

3. Utilizing the firm’s capital structure (target or industry average) get Beta or Firm

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Technical Questions: Depreciation

Scenario: Buy an asset – truck

1. Take out loan $100, debit cash, credit liabilities

2. Purchase truck $100, credit cash, debit pp&e

3. After 1 year depreciate – need years of service, salvage value and depreciation method

4. Assuming 10 years straight line depreciation,$0 salvage value – debit depreciation expense, credit accumulated depreciation

5. Income Statement Effect – Depreciation expense reduces Net Income by $10

6. Cash Flow Statement – Add back depreciation (In American financial statements depreciation expense only appears in the Cash Flow Statement)

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Technical Questions: Deferred Taxes

Deferred taxes are a result of temporary differences between the determination of accounting income, but affects taxable income in a different period.

AI>TI Debit Income Tax Expense (I/S) Credit Deferred Tax Liability (B/S)

AI<TI Debit Deferred Tax Asset (B/S) Credit Income Tax Expense (I/S)

Scenario: Depreciation – Usually accelerated for TI

Bad debt expense – allowance method under AI, write off method in TI

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Technical Questions: Accounting Ratios

How do you calculate Day Sales Outstanding? Accounts Receivable/sales*365

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Technical Questions: Due Diligence Checklist

• Management:

Company Organization

Ownership/Control

• Financial

Audits

Verifications of A.R. , Inventory

• Operations

Assets and Operations

Employee Benefits

• Legal

Intellectual Property

Reports

Significant Contracts and Commitments

• Environmental

• Tax Matters

• Customers

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Technical Questions: Cash vs. Stock

Cash Stock

Risk is solely on buyer Risk is shared

Tax Penalty on Seller Tax Penalty Incurred at Stock Sale

SVA = Synergies - Premium Acquirer can revalues assets increasing depreciation expense

Acquired company has vested interest in attaining synergies

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Technical Questions: LBO

A leveraged buyout occurs when a financial sponsor gains control of a majority of a target company's equity through the use of borrowed money or debt.

Targets: Steady cash flow firms whose stock may be trading at an unrealistically low price or may be under leveraged.

Process: Financial Sponsors improve firms through financial engineering, operational improvement and ultimately through private vs. public market arbitrage.

Valuation: The financial sponsor typically pays a multiple of EBITDA that included a premium for the company. They acquisition currency is typically 20% cash and 80% debt. The goal is to pay off the debt with the cash flows and then sell the company at the same multiple ultimately earning a rate of return of about 20-40% within a 2-7 year time frame.

Exit Strategy: Go public, sell to strategic buyer or recap.

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Technical Questions: 10 Ways To Create Value

1. Strategic Acquisition

2. Partnership/Merger

3. Sell/Divest of Business Unit

4. Sell Assets

5. IPO

6. Borrow/Lever

7. Operational Efficiencies

8. Make it known that company is up for sale

9. Go private

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Market Questions:

Index/Currency Last Last Year Other

DJIA 10962.36 Down .6% 3 days above 11K

S&P 1286 Up 3% 18 x P/E

NASDAQ 2316.7 1.4%

2 Year 4.37

10 Year 4.41

30 Year 4.59 Corporate Spread ~ 3.65%

Dollar/Yen 114.57

Dollar/Euro 1.203

Lehman 135.3

P/E 12.4

Up 50% over last year

CEO – Richard Fuld

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Typical Corporate Finance Interview Questions

Tell me what you know about the company’s financial performance.

What are some recommendations you have for the company to improve its financial performance?

Tell me about the company’s dividend policy.

What is the company’s biggest exposure?

How would you go about evaluating a project?

Why is capital structure important?

What are my net cash flows from the following transactions?

How do you calculate cost of capital?

Should you use the same cost of capital for all projects? Why or why not?

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S&T Interviews

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• Length – 30 to 60 minutes• Number of Interviewers – 1 to 2• Styles vary – relaxed/conversational to rapid fire no frills Q&A

1 – 5 minutes Introduction

10 minutes Behavioral Questions

10 minutes Technical Questions

5 minutes Your Time to Answer Questions

Typical S&T Interview Structure

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What to Expect: Introduction

• Interviewer will retrieve you from the waiting area

• Handshake

• Friendly exchange – how are you doing? How was your trip? Etc.

• Brief overview of interviewers background

• History at company

Strategy:

• Use this as time to relax and get comfortable

• “Size up” the interviewer(s)

• Introduction will set the stage for the remainder of the interview – try to make it as conversational as possible

• Pay close attention to what they say – question opportunity

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What to Expect: Behavioral Questions

• Tell me about yourself – your opportunity to pitch you

• Resume specific questions

• Why did you choose to go back to business school?

• Why are you interested in sales and trading?

• Why are you interested in working for this firm?

• How do you work under pressure?

• Have you ever failed?

• Did you ever get a bad performance review? What did you do about it?

• Tell me about a time when you had to make a decision when the answer wasn’t clear

• What are your favorite classes and why?

• Pretend you work for your previous employer and I’m a potential client, sell the firm to me

• Have you ever been in a situation where you knew your boss was wrong? What did you do about it?

• Have you read any books about trading?

Strategy:

• Practice, Practice, Practice

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What to Expect: Technical Questions

• What do you think makes a good trader?

• Trading games

• What do you think the Fed is going to do? Inflation/Interest Rates

• Bond price/yield relationships and Duration/Convexity – also know how prepayment option affects this relationship

• Why is the yield on a 10 year corporate bond, greater than the yield on a T-bill with 1 year until maturity?

• Pitch a stock trade to me

• Options – payoff diagrams, the “Greeks”, why price changes

• I’m trying to hedge Microsoft with IBM, what are the problems with that?

• Coin flip/Dice roll games – Be comfortable with expected value and conditional probability calculations

• What do you think happened to the price of gold after 9/11?

• How does a trader make money?

• Know what delta hedging is, and what it’s problems are

• Market efficiency – What are your thoughts on it? Do you think markets are efficient?

• Shape of the yield cure – be able to explain, and how you would expect it to change if X occurs.

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Strategy for Technical Questions/Brainteasers

• Practice

• Show your thinking process, ask lots of questions, make sure you completely understand the problem

• Relax

• Take your time, be systematic

• If you really get stuck, ask for a hint

• Use a pen and paper, don’t try to do it all in your head unless they insist

• If you can’t get the answer, don’t sweat it.