Investment Banking - Finance Technicals Mock Interview

foreign thank you for coming in I will be your interviewer today and I just have a list of technical questions for you that we can just run through today does that work perfect that works for me awesome uh let's start with just general Finance technicals um can you walk me through how you go from revenue to free cash flow in the projections yeah of course so with starting with Revenue you subtract cost of goods sold minus operating expenses which brings you down to operating income at operating income you multiply that by one minus the tax

rate to take you to net income net income will be the first line item on your cash flow statement you will add back depreciation and other non-cash expenses and then you will subtract Capital expenditures and changes in working capital and then what do you usually use for the discount rate for the discount rate assuming we're talking about a public company is it okay to make that assumption yes for a public company I would use the weighted average cost of capital for the discount rate okay and uh how do you calculate that the equation to calculate

the weighted average cost of capital and I'll use whack from here on forward is the cost of equity times the percentage of equity plus the cost of debt times the percentage of debt times one minus the tax rate plus the cost of preferred stock times the percentage of preferred stock and then how do you calculate the cost of equity that's a great question the cost of equity is calculated by taking the risk-free rate adding it to Beta times the risk-free premium okay and let's say that you use the leverage free cash flow rather than the

unlevered free cash flow in your DCF what would be the effect of doing so the effect of doing so would calculate your cost of equity and the free cash flows uh free cash flows would give you your cost of equity since you're effectively repaying your debt back through interest payments so you mentioned that for public companies you would use wac as the discount rate what would you use for private companies so for a private company it's fairly difficult to use whack based on the idea that there is no private Market or there is no market

capitalization in a private market and so typically the best way to use a discounted rate in a in private markets is to either run it through an auditor or to take a public market comparable and to use the whack that they used and you can find that through some of the their public filings what does beta mean intuitively intuitively beta is measuring a stock Price's volatility against the volatility of the market okay okay awesome so we finished the finance portion I want to move on to the equity value-based interview questions and let's just start with

the first one which is what is the formula for Enterprise Value formula for Enterprise Value is calculated by market capitalization plus debt plus preferred stock plus minority interest minus cash why do we look at both Enterprise Value and Equity value so the reason we look at Enterprise Value and Equity value is because Equity value is attributed only to shareholders who own Equity if you were to bring in debt holders debt holders plus Equity would get you to Enterprise Value which would represent the value of the entire firm and then could a company have a negative

equity value and if so what would that mean no a company cannot have a negative equity value because you cannot have a negative shares outstanding and you also cannot have a negative share price and can a company's Enterprise Value ever be negative yes the reason why a company's Enterprise Value can be negative is because as I mentioned before as part of the formula you subtract cash so if a company is has excessive cash on their balance sheet more so than the debt and the capitalization of the business you could have a negative Enterprise Value cool

awesome that concludes it for the Enterprise value-based questions I have a few more questions on industry based and my first one for you is let's say you had 10 million dollars to invest in anything that you want what would you invest it in it's a really good question I think that if I was given 10 million dollars I would create a diversified portfolio that had a heightened level of risk just based on the fact that I'm young and so because I'm young I can increase my risk level because if I were to lose that I

would have a longer period of time to be able to make up those losses I would have 40 percent of my portfolio be invested in venture capital and private Equity I would have 20 percent of my portfolio be invested in private and public real estate I would have 20 percent of my portfolio be invested in public equities and the remainder of the 10 million dollars I would spread across Angel Investments okay and that if you owned a small business and you're approached by a larger company about an acquisition how would you think about the offer

and how would you make a decision on what to do and would you just do it yeah well if I was approached to um have my business be acquired I would first be excited about the opportunity the factors that would that I would consider in a Cell would be number one the price of the acquisition how much was this company looking to buy my business for the second would be and what form of payment would this acquire buy my business for would they give me stock options would they try to buy me in form of

debt or would they give me a cash option and then I would look at you know as I built this business I had a vision for it originally and so I would like to see what this acquirer has in store for the future plans of the company sense so I'll close that with a final question and I just want to know what's a company that you admire and why a company that I admire is a company called early admit and this business operates in the educational Consulting Market the value proposition of this business is twofold

one is a focus on affordability and the second is a focus on diversity the business originally went to Market servicing deferred MBA candidates and has since focused on the early career Consulting Market their mission is to help college students recruit and land jobs at top finance and consulting firms and I'm really excited to see the impact that this business is going to have okay awesome thank you so much thank you so much for tuning in to our investment banking mock interview I thought that Devon did extremely extremely well on one side he remained extremely calm

and poised during the entire interview and then on the second side he did really well with the finance technicals he was able to Showcase his knowledge and explain it in a very concise manner as you saw this was a sample of a few questions and not the entire list but if you want to see more examples of questions we've actually linked a much larger list in our written guide so I would highly recommend for you to go and see it but then this is the end of the course I'll see you next time foreign [Music]