M&I 400 Questions

Explain the time value of money. Is money today worth more than money next year due to inflation?

What does the “Discount Rate” mean?

Why is the Discount Rate higher if the potential returns are higher? Shouldn’t a company with higher potential returns have a lower Discount Rate, making it more valuable?

What is WACC?

How much would you pay for a company that generates $100 of cash flow every single year into eternity?

A company generates $100 of cash flow today, and its cash flow is expected to grow at 5% per year for the long term. You could earn 10% per year by investing in other, similar companies. How much would you pay for this company?

What does “Present Value” mean, and what makes it change? How does it differ from Net Present Value?

What does the internal rate of return (IRR) mean? How do you calculate it?

What affects the IRR? How do these factors differ from the ones that affect the Present Value?

How do you use the IRR, Discount Rate, and Present Value to make investment decisions?

What are the three financial statements, and why do we need them?

How do the financial statements link together?

What’s the most important financial statement?

How might the financial statements of a company in the U.K. or Germany be different from those of a company based in the U.S.?

How do you know when a revenue or expense line item should appear on the Income Statement?

A company collects cash payments from customers for a monthly subscription service one year in advance. Why do companies do this, and what is the cash flow impact?

Why is Accounts Receivable (AR) an Asset but Deferred Revenue (DR) a Liability?

What are “Deferred Taxes,” and how do they affect the statements?

A junior accountant in your department asks about how to fund the company’s operations via external sources and how they impact the financial statements. What do you say?

Your firm recently acquired another company for $1,000 and created Goodwill of $400 and Other Intangible Assets of $200 on the Balance Sheet. A junior accountant in your department asks you why your firm did this – how would you respond?

Explain lease accounting on the financial statements under IFRS 16 / ASC 842, including the differences between Operating Leases and Finance Leases.

What’s the difference between Deferred Tax Assets and Deferred Tax Liabilities? How do Net Operating Losses (NOLs) factor in?

How do you calculate Free Cash Flow (FCF), and what does it mean?

What is Working Capital? What does it mean if it’s positive or negative?

What does the Change in Working Capital mean?

In its filings, a company states that EBITDA is a “proxy” for its Cash Flow from Operations.

How do you calculate Return on Invested Capital (ROIC), and what does it tell you?

What are the advantages and disadvantages of ROE, ROA, and ROIC for measuring company performance?

A company hires a new employee for a total cost of $100,000 per year. Walk me through how the financial statements change, assuming a 25% tax rate.

You go into a job interview, and the interviewer points out that every single Interview Guide has a question about how Depreciation going up by $10 affects the statements.

A company’s CEO has decided to sell all its assets, starting with a factory recorded at a book value of $100 on its Balance Sheet.

Walk me through the financial statements when a customer orders a product for $100 and receives it but hasn’t yet paid for it. Then, walk me through the cash collection, combining it with the first step. Ignore COGS and other delivery costs for simplicity.

A company hires a marketing agency to run an online advertising campaign for its services.

Now, walk me through what happens ONLY in Step 2, when the company finally makes payment after 60 days. Also, explain intuitively what happens from start to finish.

Your friend’s e-commerce company orders $200 of products from its main supplier. A month later, it sells these products for $500. Walk me through each step of this process SEPARATELY.

A Software-as-a-Service (SaaS) company bills customers upfront for an entire year of service and collects the cash before the contract begins. Walk me through the process for a $250 contract with a $50 delivery cost between January 1 and December 31 of the year. COMBINE the cash collection and revenue recognition. On January 1, Deferred Revenue and Cash both increase by $250 on the Balance Sheet, so the BS remains in balance. For the rest of the year, the company recognizes $250 in Revenue and $50 in Cost of Sales, so the combined steps look like this:

A company with 1000 shares issues 500 new shares worth $1.00 on January 1 to fund its business. Then, it decides to issue Dividends per Share of $0.10 to all its shareholders at the end of the year. Walk me through both steps SEPARATELY on the statements. In Step 1, the company issues 500 * $1.00 = $500 worth of new Equity. This does not appear on the Income Statement because it is a long-term action that does not affect shareholder income in the current period. Instead, it appears on the CFS under Cash Flow from Financing, boosting

A company issues $200 of Debt at a 10% interest rate. Walk me through the entire first year on the statements, including the initial issuance and the full interest payment. COMBINE both steps. In the first step, nothing changes on the IS because Debt issuances only appear on the CFS. So, Debt on the L&E side increases by $200, and Cash increases by $200 on the Assets side to balance it. In the second step, the company records Interest on this Debt. The combined steps are:

How does this change if, in addition to the 10% interest rate, the Debt now has a 20% principal repayment each year? Combine both steps and assume the principal repayment occurs on December 31.

A company that follows U.S. GAAP signs a 10-year Operating Lease on January 1. It will pay $160 in Rent each year. Assuming a 5% Discount Rate, walk me through the financial statements over this entire year. For simplicity, you may “round” and assume the Present Value of the lease payments equals $1,200. Initially, the company records the Operating Lease Assets and Liabilities on its Balance Sheet ($1,200 on both sides), and then it records the $160 Rental Expense on its Income Statement.

Now walk through the same scenario, but under IFRS rather than U.S. GAAP (or pretend it is a Finance Lease under U.S. GAAP).

A company buys a factory for $200 using $200 of Debt. What happens, INITIALLY, on the statements?

One year passes. The company pays 10% interest on its Debt, and it depreciates 10% of the factory. It also repays 5% of the Debt principal. What happens on the statements in this first year?

At the end of this first year, the company sells its factories for $220 and uses the proceeds to repay its remaining Debt principal after realizing there is little demand for its products. Walk through this step SEPARATELY from the previous two. Assume that the Net PP&E balance is $180, and the Debt is $190 because of changes in the previous step.

Walmart purchases $200 of Inventory “on credit,” sells it for $400, and records an additional $100 in Operating Expenses to support the sale. Walk me through ONLY Step 1 of this process with the Inventory purchase.

Now walk through Step 2 – the sale and delivery of the products and the supplier payments – SEPARATELY from Step 1. In this step, Walmart recognizes the additional Revenue, COGS, and OpEx: • IS: Revenue is up by $400, COGS is up by $200, and OpEx is up by $100, so Pre-Tax Income is up by $100. Net Income is up by $75 at a 25% tax rate.

What do Equity Value and Enterprise Value MEAN? Don’t explain how you calculate them – tell me what they mean!

What do Equity Value and Enterprise Value mean in plain English? Can you explain them with a real-life analogy?

Why do you need both Equity Value and Enterprise Value? Can’t you just value companies using one of them?

What is the difference between “Current” and “Implied” Enterprise Value? Can you give a real-life example to explain it?

What is the difference between Basic Equity Value and Diluted Equity Value?

Let’s say you have a company’s Diluted Equity Value. How do you move from Equity Value to Enterprise Value?

Why do you subtract Equity Investments and add Noncontrolling Interests in the Enterprise Value calculation?

Can you explain the proper treatment of pensions in Enterprise Value?

Should you add Operating Leases in the Enterprise Value calculation? What about Finance Leases?

Can you give examples of company actions that affect Equity Value but NOT Enterprise Value, Enterprise Value but NOT Equity Value, and BOTH Enterprise Value and Equity Value?

Could Equity Value ever be negative? What about Enterprise Value?

You are comparing Companies A and B. Each operates in the same industry with the same revenue, EBITDA, and other financial metrics.

A company issues $200 in Common Shares. How do Equity Value and Enterprise Value change?

This same company decides to use the $200 in Common Stock proceeds to acquire another business for $100 instead. How does everything change?

What if the company uses that same $100 from the $200 of new Common Stock to acquire an Asset rather than an entire company?

A company issues $100 in Debt to purchase a new factory. How do Equity Value and Enterprise Value change?

A company issues $100 of Common Stock and $100 of Preferred Stock and lets the proceeds sit in Cash. How do Equity Value and Enterprise Value change?

This same company now issues $10 in Common Dividends and $10 in Preferred Dividends. What happens in JUST THIS STEP?

A company issues $150 of Debt and $50 of Common Stock to acquire $175 of PP&E and $25 of Short-Term Investments. How do Equity Value and Enterprise Value change?

A company issues $50 of Debt to buy a new factory. However, AFTER this purchase, its Enterprise Value increases by $100 rather than $50.

A company purchases $100 of Inventory using Cash. How do Equity Value and Enterprise Value change?

Now assume the Inventory is sold for $200 and walk me through how the *entire* process from beginning to end affects Equity Value and Enterprise Value. On the Income Statement, Revenue is up by $200, and Pre-Tax Income is up by $100 (due to the $100 of Inventory now being recognized as COGS). Net Income increases by $75 at a 25% tax rate. On the CFS, Net Income is up by $75, and there are no other net changes (Inventory went up by $100 and then went down by $100), so Cash is up by $75 at the bottom. On the Balance Sheet, Cash is up by $75 on the Assets side, and CSE is up by $75 on the L&E side.

A company has 200 outstanding shares at a current price of $10.00. It also has 50 options at an exercise price of $8.00 each. What is its Diluted Equity Value?

A company has 10,000 shares outstanding and a current share price of $20.00. It also has 100 options at an exercise price of $10.00, 50 Restricted Stock Units (RSUs), and 100 convertible bonds at a conversion price of $10.00 and a par value of $100. What is its Diluted Equity Value?

Public companies already have Market Caps and Share Prices. Why do you need to “value them” at all?

What are the advantages and disadvantages of the 3 main valuation methodologies?

Which of the 3 main methodologies will produce the highest Implied Values?

Which one should be worth more: A $500 million EBITDA healthcare company or a $500 million EBITDA industrials company? Assume the growth rates and margins are the same.

Can you walk me through how you use Public Comps and Precedent Transactions in a valuation?

Can you give a few examples of how you might screen for “similar” Comparable Public Companies and Precedent Transactions?

How do you decide which metrics and multiples to use in these methodologies?

Why do you look at BOTH historical and projected metrics in these methodologies?

When calculating the forward multiples for the comparable companies, should you use each company’s Current Equity Value or Current Enterprise Value, or should you project them to get the Year 1 or Year 2 values?

How do you interpret the Public Comps? What does it mean if the median multiples are above or below the ones of the company you’re valuing?

What is a Liquidation Valuation, and when is it useful and not so useful?

How does a Dividend Discount Model (DDM) differ from a DCF?

Why might you use an M&A Premiums analysis to value a company?

What are the advantages and disadvantages of a Sum-of-the-Parts Valuation?

How do you set up an LBO valuation, and when is it useful?

What IS a valuation multiple? Explain the theory and give a real-life analogy.

You’re valuing a mid-sized manufacturing company. This company’s TEV / EBITDA multiple is 15x, but the median TEV / EBITDA for the comparable companies is 10x. What’s the most likely explanation?

How do you decide whether to use Equity Value or Enterprise Value in valuation multiples?

A company has $100 in Revenue, a 15% EBIT margin, and D&A that is 5% of its Revenue.

For clarity, the company I just described followed U.S. GAAP, and the Lease Liabilities were for Operating Leases.

What are the advantages and disadvantages of TEV / EBITDA vs. TEV / EBIT vs. P / E?

A company is currently trading at 10x TEV / EBITDA. It wants to sell an Operating Asset for 2x the Asset’s EBITDA. Will that transaction increase or decrease the company’s Enterprise Value and its TEV / EBITDA multiple?

What happens to the company’s Equity Value and P / E multiple in this scenario?

How do you calculate and use Unlevered FCF and Levered FCF?

If a company is valued mostly based on its cash flow, why do you also use metrics such as EBIT and EBITDA that may not represent its true cash flow?

Give an example of a company change that affects UFCF but not EBITDA.

Company A has a P / E multiple of 15x, with a Net Income of $120 and a TEV / EBITDA multiple of 15x. Its EBITDA is $150. Company B has the same 15x P / E multiple but a Net Income of $100, a TEV / EBITDA of 10x, and an EBITDA of $200. Which one has a higher Net Debt balance?

A company’s Operating Income is $100, and it has a $500 Debt balance at a 4% interest rate. It also has Cash of $100, currently earning 0% interest.

Suppose you are building a set of “global” comparable companies operating in the logistics/delivery sector in the U.S., Europe, and Asia. What is the SAFEST valuation multiple in this scenario?

Why do you build a DCF analysis to value a company?

Walk me through a DCF analysis.

How do you move from Revenue to Free Cash Flow in a DCF?

How do you calculate the Terminal Value in a DCF, and which method is best?

Suppose you build a Levered DCF instead of an Unlevered DCF. What changes?

Will you get the same results from an Unlevered DCF and a Levered DCF?

A client company plans to change its capital structure. Currently, it has 10% Debt / Total Capital, but it wants to increase this to 30%. Your co-worker claims that if you use an Unlevered DCF to value this company, it won’t be affected by this change in capital structure. Are they correct?

What is the logic behind the main components of Unlevered Free Cash Flow? For example, why does it include the Change in Working Capital but not the Net Interest Expense?

What’s the relationship between subtracting an expense in the FCF projections and the Enterprise-Value-to-Equity-Value “bridge” at the end of the DCF?

Should you add back Stock-Based Compensation to calculate Free Cash Flow?

What’s the intuition behind the Gordon Growth formula for Terminal Value?

If you use the Multiples Method to calculate Terminal Value, do you use the multiples from the Public Comps or Precedent Transactions?

How do you pick the Terminal Growth Rate when calculating the Terminal Value using the Gordon Growth Method?

How can you check whether your Terminal Value estimate is reasonable?

Does it ever make sense to use a negative Terminal FCF Growth Rate?

Explain how you deal with leases and lease accounting in a DCF.

You have just finished building a DCF for a new client. What are some potential “warning signs” that your assumptions may not be correct?

Why do you use the mid-year convention in a DCF, and how does it affect the results?

Why might you include a “stub period” in a DCF, and what does it mean?

Suppose that a company goes from using 0% Debt in its capital structure to 20%. How will its WACC and Implied Value from a DCF change?

Let’s say that the central bank has just raised short-term interest rates from 2% to 5% to fight inflation. How will this affect the WACC and the DCF valuation of a company?

You have just finished building a DCF model. Will it make more of a difference to change the average revenue growth rate from 10% to 5% or to change the Discount Rate from 10% to 5%?

The government has just decided to cut the corporate tax rate in your country from 35% to 20%. How will WACC and the DCF output of your valuation change?

You’re building a 10-year DCF for a growth-oriented tech company. Your VP reviews your model and asks you to extend the forecast period to 20 years. How will the output change?

Two companies have the same financial profiles and operate in the same industry, but one is in an emerging market, and the other is in a developed market. How will their DCF outputs differ?

What does the Cost of Equity mean intuitively?

What does WACC mean intuitively?

How do you calculate the Cost of Equity?

If a company operates in the EU, U.S., and U.K., what should you use for its Risk-Free Rate?

How do you calculate the Equity Risk Premium for a multinational company operating in many geographies?

What does Beta mean intuitively?

What are the formulas for un-levering and re-levering Beta, and what do they mean?

How do you calculate WACC, and why does it pair with Unlevered Free Cash Flow?

Why is Equity more expensive than Debt?

How do you determine the Cost of Debt and Cost of Preferred Stock in the WACC calculation, and what do they mean?

Walk me through a merger model (accretion/dilution analysis). In a merger model, you start by projecting the financial statements of the Buyer and Seller.

Why might an M&A deal be accretive or dilutive?

How can you tell whether an M&A deal will be accretive or dilutive?

That sounds complicated. Are there any shortcuts for guesstimating whether an M&A deal will be accretive or dilutive?

How do you determine the Purchase Price in an M&A deal?

What is the “true price” in an M&A deal: The Purchase Equity Value or Purchase Enterprise Value? Why?

How does an Acquirer determine the mix of Cash, Debt, and Stock to use in a deal?

Are there cases where EPS accretion/dilution is NOT important? What other analyses could you look at to assess M&A deals?

How do the assumptions for a cash-free, debt-free deal for a private Seller differ from those of a standard M&A deal for a public Seller?

What’s the purpose of a Purchase Price Allocation schedule in a merger model?

Why do Deferred Tax Liabilities get created in many M&A deals?

Give me an example of how you might estimate the Revenue and Expense Synergies in an M&A deal. With Revenue Synergies, you might assume that the Seller can sell its products to some of the Buyer’s customer base.

Why do many merger models tend to overstate the impact of Synergies?

Company A has 10 shares outstanding at a share price of $25.00, and its Net Income is $10.

Suppose that Company A now decides to use 100% Cash or 100% Debt to do this deal. If the Cash interest rate is 4%, and the Debt interest rate is 10%, will this deal be accretive or dilutive under these financing structures?

Company A has a P / E of 11x, a Debt Interest Rate of 8%, a Cash Interest Rate of 4%, and a Tax Rate of 25%.

Company A, with a current P / E multiple of 20x, acquires Company B for a P / E purchase multiple of 10x using 100% Debt. What interest rate on Debt would make the deal dilutive? Assume a 25% tax rate.

Company A has an Equity Value of $2,000 and a Net Income of $200. Company B has a Purchase Equity Value of $1,200 and a Net Income of $100. How much in Synergies must be realized for a 100% Stock deal to be accretive?

Continuing with this same example, Company A is paying a 20% premium for Company B, so Company B’s Current Equity Value is $1,000. Suppose the market doesn’t “like” this 20% premium, and investors sell off Company A’s stock. How would Company A’s stock price change? Assume it has 200 shares outstanding at $10.00 per share and assume that Company B gets a fixed share count in the deal.

Continuing with the same scenario, your co-worker reviews the changes and claims that Company A's share price would not have fallen if this had been a 100% Cash or Debt deal. Are they correct?

An Acquirer with an Equity Value of $500 million and an Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and a Purchase Enterprise Value of $150 million. What are the Combined Equity Value and Enterprise Value in a 100% Stock deal?

How do these figures change if it’s a 50% Cash / 50% Stock deal instead?

An Acquirer with an Equity Value of $500 million and an Enterprise Value of $600 million has a Net Income of $50 million and an EBITDA of $100 million.

How do the multiples change if this is a 100% Debt deal funded with an 8% interest rate issuance?

Will the Combined TEV / EBITDA and P / E multiples always be between the Acquirer’s multiples and the Target’s purchase multiples in a deal?

What is a leveraged buyout, and why does it work?

Walk me through a basic LBO model (without the full financial statements). In an LBO model, in Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and other drivers such as the company’s revenue growth and margins. In Step 2, you create a Sources & Uses schedule to show how much Investor Equity the PE firm contributes and how items like the transaction fees and the company’s Cash balance affect this contribution. In Step 3, you project the company’s Income Statement and its partial Cash Flow Statement down to Free Cash Flow.

Which assumptions impact a leveraged buyout the most?

How do you select the Purchase Multiple and Exit Multiple in an LBO model?

What is an "ideal" candidate for an LBO?

Walk me through the Free Cash Flow calculation in an LBO model. How is it different from EBITDA, and why do we need both?

Explain how a company’s Free Cash Flow and the Debt principal it can repay in an LBO are related.

What are the different exit strategies in an LBO? Which one do most PE firms prefer?

How could a private equity firm boost its returns in an LBO?

How do you determine how much Debt a PE firm might use in an LBO and how many tranches there would be?

Can you describe the different types of Debt a PE firm might use in a leveraged buyout?

How do you use a Revolver in an LBO model?

How do you set up the Mandatory and Optional Debt Repayments in an LBO model?

How do you use an LBO model to value a company, and why does it set the "floor valuation"?

Would you rather achieve a high IRR or a high MoM multiple in a leveraged buyout?

A PE firm acquires a $100 million EBITDA company for a 10x purchase multiple and funds the deal with 60% Debt.

A PE firm acquires a business for a 12x EBITDA multiple, using 5x Debt / EBITDA, and plans to sell it in 5 years. The company’s initial EBITDA is $100, which grows to $200 by Year 5.

Now assume the company repays 75% of the initial Debt balance over 5 years. What exit multiple do we need for a 25% 5-year IRR?

You’re reviewing the output of an LBO model that a co-worker built. In the model, the 5- year IRR is 20%, and the company’s EBITDA grows from $100 to $150 over the holding period.

A PE firm acquires a business for a 10x EBITDA multiple, using 6x Debt / EBITDA, and plans to sell it in 5 years. The company’s initial EBITDA is $100, which grows to $150 by Year 5.

What are the main verticals within consumer/retail, and how would you expect valuation to differ in each one?

Would you expect a franchise restaurant or a restaurant that directly owns its locations to trade at higher multiples? Why?

Let’s say you’re building a 3-statement model for a retailer. What are some of the key drivers in your model?

What is the “4-Wall EBITDA” for a retailer, and how does it differ from standard EBITDA?

Suppose you are creating a set of comparable public companies in the consumer/retail sector. In which cases are the EBITDAR metric and its corresponding valuation multiple most important?

Why might a company issue Debt rather than Equity?

Walk me through a Debt vs. Equity analysis to recommend the best financing for a company.

You’re considering 3 companies that want to raise capital: A utility company, a railroad company, and a branded pharmaceutical company. Which company is most appropriate for 100% Equity, which is most appropriate for 50% Debt / 50% Equity, and which is most appropriate for 100% Debt?

How might you decide whether a company should raise Debt via Term Loans or Subordinated Notes?

You are analyzing a company whose Debt / EBITDA stays below the maximum of 4.0x and whose EBITDA / Interest stays above the minimum of 2.0x, but whose Debt Service Coverage Ratio (DSCR) falls below the minimum of 1.5x in the more pessimistic cases. Why might this happen, and how could the company improve its numbers?

A company wants to reduce its cash interest expense on Debt by negotiating with lenders to get a lower coupon rate. However, the lenders want to maintain or increase their yield. What are the company’s options?

What would cause a company's credit rating to change?

Explain the difference between a bond’s Coupon Rate, Current Yield, and Yield to Maturity (YTM).

How do you value a bond?

You purchase a $100 bond at a 5% discount to par value. The bond's coupon rate is 8%, and it matures in 5 years. What is the bond's approximate YTM?

Will a 10% or 5% coupon rate bond be more sensitive to changes in the Discount Rate?

Intuitively, what do a bond’s Duration and Convexity mean, and how do you use them?

Interest rates have fallen, and prevailing bond yields are now down by ~2% compared to when a company first issued an 8%, 7-year bond.

What is the Yield to Worst (YTW), and how is it related to the Yield to Maturity (YTM)?

What are the most important statistics in an analysis of Comparable Debt Issuances?

Why Restructuring?

What are the two different “sides” of a Restructuring deal? Do you know which one we usually advise?

How are stressed, distressed, and bankrupt companies different?

OK, so what factors might cause a company to become “stressed” and then “distressed?”

Suppose that you are advising a distressed company. What are its main options, and what are the advantages and disadvantages of each one?

What’s the difference between a Chapter 7 and Chapter 11 bankruptcy under the U.S. tax and legal code?

What is debtor-in-possession (DIP) financing, and how do distressed companies use it?

What is a Section 363 asset sale, and why might a distressed company pursue it?

What is a 13-week cash flow model, and how do you use it for a distressed company?

How does valuation change for a distressed company?

Walk me through a typical liquidation valuation.

A distressed company with $100 of EBITDA sells for 3x EBITDA. It has Cash of $50, a $100 Revolver, a $300 Term Loan, and $200 in Subordinated Notes, with no other Liabilities. What are the recovery percentages for each Debt tranche?

A holding company (“Hold Co.”) has $100 of Debt at the holding company level and owns 100% of 3 companies: Company A: Enterprise Value of $100 and Debt of $20. Company B: Enterprise Value of $50 and Debt of $100. Company C: Enterprise Value of $100 and Debt of $50. What are the Recovery percentages for Companies A, B, and C and Hold Co. in a liquidation?

A distressed company with $50 of EBITDA has $150 in Secured Senior Notes and $100 in Unsecured Senior Notes. Peer companies that are not currently distressed trade at 5x EBITDA. What would you expect each Debt tranche to trade at?

A distressed company’s Debt is currently trading at a 50% discount to par value with a cash coupon rate of 10% and a 5-year maturity.

Walk me through an IPO model for a private company that wants to go public.

Wait a minute, how does an IPO model set the valuation? What you just described does not seem to “value” the company.

Can you explain Primary vs. Secondary Shares in an IPO or Follow-On Offering?

What's the impact of a “Greenshoe” or Overallotment provision in an IPO or FO, and when might a bank offer it?

How do you set up a Follow-On Offering model differently from an IPO model?

Walk me through how a company might go public via a Special Purpose Acquisition Company (“SPAC”). In Step 1 of the SPAC process, a “Sponsor” (a wealthy individual, financial firm, etc.) forms an empty holding company and takes it public, typically at a $10.00 share price. Investors buy these shares and end up with ~80% of the SPAC, while the Sponsor gets a “Promote” that gives them 20% of the SPAC for very little capital. The Sponsor also pays for warrants at exercise prices modestly higher than $10.00; this cash payment covers a small upfront underwriting fee. In Step 2, the Sponsor identifies a private target company that wants to go public and negotiates an acquisition in which this target company becomes the majority owner (i.e., it’s a reverse merger).

What are the trade-offs of a SPAC vs. an IPO for a company going public?

Your co-worker is creating a Payoff Diagram for a Convertible Bond. He claims that the market price will exceed the bond’s payoff value when the company’s share price reaches the Conversion Price and that above the Conversion Price, the market price will remain above the payoff value. Is he correct, incorrect, or partially correct?

Explain intuitively why a Convertible Bond is not necessarily “cheaper” than traditional Debt, even though some people claim it is.

Convertible Bonds seem “too good to be true” since they offer the upside potential of common shares and downside protection if the company’s stock price falls. Why would anyone purchase common shares if the company also has Convertible Bonds?

How do commercial banks differ from normal companies?

How are insurance companies different?

You’ve explained commercial banks and insurance firms, but what about other companies in FIG coverage, such as specialty finance, asset management, broker-dealer, and financial technology (fintech) firms?

For normal companies, there is often a relationship between the growth rates of metrics such as Revenue and EBITDA and the corresponding valuation multiples, such as TEV / Revenue and TEV / EBITDA. What types of relationships exist for banks and insurance firms?

What is “Regulatory Capital”? Why do banks and insurance firms need it?

What is Common Equity Tier 1 (CET 1), and why must banks maintain a certain level?

A commercial bank has set aside sufficient Regulatory Capital for unexpected loan losses and a sufficient Allowance for Loan Losses for expected losses.

An insurance company records $100 in Net Written Premiums and $40 in Net Earned Premiums and pays Commissions of 10%. What happens on the financial statements? Ignore the Claims and Losses corresponding to these premiums for now.

What is the Combined Ratio for insurance firms, and how does it make sense mathematically?

Can you explain, at a high level, how you forecast a bank’s financial statements?

How do you calculate the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) for banks, and what do they tell you?

Walk me through a basic Dividend Discount Model (DDM) for a commercial bank.

Walk me through an Embedded Value model for a Life Insurance firm.

How do Property & Casualty (P&C) and Life Insurance companies compare?

How does a merger model differ for commercial banks?

What are the key metrics and valuation multiples for a financial sponsor?

Suppose that you are valuing a single private equity firm that uses the same strategy and targets the same size company in each of its separate funds. Why would you use a Sum-of-the-Parts (SOTP) valuation, given that there are no different business segments?

Suppose you are an FSG banker advising a private equity client. How would you decide when to pitch the client on bringing one of its portfolio companies to the market for a sale or IPO?

Again, pretend you are an FSG banker advising a private equity client. When is the ideal time to suggest that the client review its investments and deploy its remaining committed capital?

Can you explain the different types of private equity deals that we might advise clients on?

Can you explain the different verticals within healthcare and how valuation differs?

Walk me through a valuation for a pre-revenue biotech company that’s currently in Phase II clinical trials, aiming to develop and sell branded drugs.

Are valuation multiples from public comps and precedent transactions relevant for pre- revenue / clinical-stage biotech companies? If so, which ones are useful? If not, why not?

Suppose you are valuing a “platform biotech company” with a mix of existing, patent- protected drugs that already generate sales and new drugs in its pipeline. How does the valuation approach differ from a pre-revenue firm?

What are the key drivers for a healthcare facilities company, such as a nursing home provider? How would you forecast its cash flows?

Can you explain how industrials is different from other groups and what the main verticals are?

Walk me through how you would forecast an airline’s cash flows, including its key metrics and drivers.

What are some accounting and valuation differences in the maritime/shipping sector within the transportation vertical?

Many industrials companies, such as plane and railroad manufacturers, have long lead times to produce and deliver orders. What differences does this create in their key metrics and financial statements?

In which verticals within industrials is the Sum-of-the-Parts (SOTP) valuation most and least useful?

Explain the main verticals within metals & mining and the valuation differences.

Walk me through the valuation of a steel producer in the base metals/bulk commodities segment (i.e., this company produces steel but does not mine the raw materials).

Your VP reviews your valuation of this steel producer and says that you should use TEV / NOPAT rather than TEV / EBITDA to value the firm. Is he correct?

Walk me through a NAV model for a gold mining company.

Can you explain the differences between Reserves and Resources and Measured, Indicated, and Inferred Resources?

While it is possible to value mining companies using traditional TEV / EBITDA and P / E multiples, there are other options. Which industry-specific multiples are common in the mining sector, and why do you use them?

You’re comparing two sets of comparable companies: Pure-play gold miners and pure-play copper miners. How would you expect their valuation multiples to differ? Why?

Why do you create and use “equivalent” metrics, such as “Au Eq.” for gold or “Cu Eq.” for copper?

How would you select a set of comparable public companies in the mining sector?

Would you expect NAV growth and P / NAV to have a strong correlation for mining companies?

What are the main verticals in oil & gas, and how does valuation differ in each one?

Walk me through a NAV model for an E&P company.

You are analyzing a new oil well with a 12-month IP rate of 1,000 Barrels of Oil per day. The EUR is 1 million Barrels, the Decline Rate is 20%, and the D&C Costs are $10 million. The production company has an 80% Working Interest in the well and must pay a 10% Royalty on sales. Walk me through the IRR calculation for this specific well. To calculate the IRR, you need the upfront investment, which is the $10 million D&C Costs here. But since the company has an 80% Working Interest, it’s $8 million.

You are working with an E&P client company that claims it is undervalued. According to its internal model, its Net Asset Value is $5 billion, but its Current Equity Value is only $3 billion.

Can you explain successful efforts and full cost accounting and their valuation impact?

A company is natural gas-dominant and has 10 billion cubic feet equivalent (10 Bcfe) in Proved Reserves. It produces 600 million cubic feet (600 MMcf) of natural gas and 50,000 barrels of oil (50 MBbl) annually. What is its approximate Reserve Life Ratio? For conversion purposes based on energy content, 1 Bbl of oil = 6 Mcf of natural gas, and 1 MBbl of oil = 6 MMcf of natural gas.

How would you select comparable public companies for an E&P company?

How would you value a midstream company, such as an oil & gas pipeline operator?

How does the MLP structure used for many midstream companies in the U.S. affect their valuation?

How would you value a downstream company like an oil refinery operator?

Can you explain the main verticals within power & utilities and how valuation differs?

Walk me through how you would determine the rates charged by a regulated electric utility company with the following profile (financials are in millions): • Rate Base: $2,000 • Allowed Debt / Total Capital: 50% • Authorized ROE: 12% • Pre-Tax Cost of Debt: 6% • Operating & Maintenance Expense: $60

What advantages do multiples such as TEV / Rate Base or TEV / Power Capacity provide over TEV / EBITDA?

Suppose you are valuing a regulated multi-utility company that distributes electricity, gas, and water. If you built a Sum-of-the-Parts valuation for it, which segment would you expect to be valued at the highest multiples?

Would you expect an independent power producer (IPP) to be valued at higher or lower multiples than a regulated utility focusing on distribution?

How do LP-led and GP-led secondaries transactions differ?

You are evaluating a $100 million commitment in a private equity fund with a 2.0x TVPI multiple, a 0.2x DPI, and a 1.8x RVPI. What factors could influence the pricing of this stake?

Why might a PE fund’s Limited Partners liquidate their stakes early, even if the fund has performed well?

Why might the GPs of a PE firm set up a continuation fund?

From a banker’s perspective, what are the differences between LP-led and GP-led secondaries transactions?

How are private companies different from public companies?

How might you adjust a private company's financial statements in a valuation or deal analysis?

At a high level, how is private company valuation different?

How does the WACC calculation change for a private company?

How might the acquisition of a private company be different from a public company deal?

How does Project Finance differ from Corporate Finance?

Walk me through an acquisition model for a “brownfield asset” that already exists.

How does the modeling process differ for a “greenfield asset” that does not yet exist?

How would you forecast the revenue and expenses for an individual power asset, such as a natural gas plant?

Consider three infrastructure assets: An airport, a utility-scale solar plant governed by a 10- year PPA, and a utility-scale solar plant governed by merchant pricing. How would you compare the risk and potential returns of each one?

Why is Debt often “sized and sculpted” based on the future cash flows of assets in the infrastructure sector?

What are the DSCR and LLCR, and how do you use them in this Debt sculpting/sizing process?

If you can use simple formulas to sculpt and size the Debt based on the DSCR and LLCR requirements, why are they complex to implement in Excel?

From a lender’s perspective, how would you evaluate infrastructure assets and determine “worst-case outcomes”?

Why do Construction Loans create circular references in models, and how can you avoid or eliminate them?

Explain the main property types and how they differ.

What is a property’s Net Operating Income, and why is it important?

What is the “Cap Rate,” and how do you use it in real estate?

How can property acquisitions use 60% or 70% leverage? Private equity firms do not use that much leverage for normal companies in leveraged buyouts.

Walk me through a property Pro-Forma and explain what it tells you. Assuming this is an office, industrial, or retail Pro-Forma, you start at the top with the Base Rental Income, which represents the total potential rental income if the property were 100% occupied at market rental rates.

How do NOI, Adjusted NOI, and Cash Flow to Equity differ?

Walk me through a property development model (i.e., one where a new property is constructed and eventually sold).

Walk me through a stabilized property acquisition model.

What are the 3 main valuation methodologies for properties?

Explain the waterfall returns schedule and why it is common in real estate.

How do REITs operate, and what are their main requirements?

How do you value an Equity REIT?

Walk me through a NAV Model for a REIT and explain when it is useful.

What are the main differences between U.S.-based and IFRS-based REITs?

Why do REITs use Funds from Operations (FFO), and how do you calculate it?

How would you compare a Dividend Discount Model (DDM), Unlevered DCF, and Levered DCF for valuing a REIT?

At a high level, how does a REIT decide to issue Debt or Equity to fund its operations?

At a high level, how do REIT M&A deals differ from deals involving normal companies?

Why are the Contribution Analysis and Value Creation Analysis especially useful in REIT M&A Deals?

How do REIT LBOs differ from leveraged buyouts of “normal companies”?

What are the main verticals within renewables, and how is valuation different at a high level?

Can you explain the metrics and multiples commonly used to value renewable companies and their advantages?

Suppose that you are valuing Solar Developer A and Solar Developer B, both of which have 2,000 MW of capacity and similar revenue and EBITDA levels.

How would you compare solar, onshore wind, and offshore wind assets at a high level?

You are valuing a company in the biofuels and renewable natural gas (RNG) vertical. How would you think about the forecast and valuation?

Can you explain the main verticals within TMT and the accounting and valuation differences?

Let’s focus on the telecom segment. What differentiates a telecom company like a wireless carrier from a semiconductor or enterprise software company?

You are building a credit analysis for Netflix and have calculated its FCF Conversion based on this definition: FCF = EBITDA – Net Interest Expense – Taxes +/- Change in Working Capital – CapEx. You have also adjusted for Deferred Taxes and Stock-Based Compensation.

Suppose you are valuing a semiconductor company, such as TSMC, and a broader “hardware company,” such as Samsung. What types of accounting and valuation differences would you expect?

How would you value an unprofitable tech startup that is years away from positive Net Income and cash flow?

A Software-as-a-Service (SaaS) company sells a $240 2-year contract on January 1 that will be billed every 6 months. Walk me through the Bookings, Billings, and Revenue for January and February.

Continuing with the same question, if it takes 2 months to collect the cash from customers following receipt of the invoice, explain how Accounts Receivable and Deferred Revenue change in January and February. On January 1, Accounts Receivable and Deferred Revenue both increase by $60 because of the $60 in Billings based on the invoiced amount.

A software company has annual contracts with an average value of $10K per year, and its annual cancellation rate is currently 10%. Customers who do not cancel pay 5% more once every 2 years. What is this company’s approximate average Lifetime Value (LTV)? You may assume this $10K per year figure already deducts the associated Cost of Sales.

You are analyzing a SaaS company’s performance. The company claims its LTV / CAC is 4.0x, but its CAC Payback Period is 24 months. What conclusions can you draw?

How does SaaS valuation differ from the valuation of other tech companies?