Technical Interview Workshop
Thursday, January 15, 2009
With contributions by Mike Hudgin & Ekaterina
Investment Banking Full-Time Analyst
Deutsche Bank, Toronto
• Interview Format
▫ Public Comparables
▫ Precedent Transactions
• Sample Technical Questions
• The Infamous Accounting Question
• General Interviewing Tips
Deutsche Bank’s Interview Tips
• First Round
• 30-45 minutes
• Behavioural and lots of technical
• One to six interviewers
• Second Round
• 3-4 hours
• Expect even more technical (reactions under
• One, two, or panel interviewers
Three General Ways to Value a Company:
1) Discounted Cash Flow
2) Public Comparables Analysis (Relative
3) Precedent Transaction Multiples
For each method, interviewees should address:
• Basic overview (why this method is used)
• How it’s practically used (mechanics)
• Pros & cons of method
DCF – Overview
• DCF is the method of valuation that allows for
the most flexibility (and possibly precision) in
coming up with the intrinsic value of a firm
▫ The DCF method that we use is FCFF (you might
know it as WACC method, but refrain from calling
• Mapped on many assumptions
• Based on future expectations of a firm’s cash
flows (numerator), and the risks associated with
those cash flows (denominator)
DCF – Basic Steps
• First determine WACC = D/V * Rd (1-T) + E/V * Re
▫ Effect of capital structure
Use target (optimal) D/E ratio
Rd (1-T) discuss importance of tax shield
• Mechanics of FCFF
▫ FCFF = EBIT(1-T) – CAPEX + NCC +- Δ NWC
Explain that CAPEX and NWC are all cash sources/uses that
don’t affect EBIT, therefore we must adjust.
• Analyze historical performance to come up with future
set of assumptions (COGS, SG&A, R&D, “DEP”,
“CAPEX”, “NWC” as a % sales)
▫ Therefore, we need to use revenue as a driver, and
determine its growth from year to year during our explicit
forecast period (5-10 yrs)
DCF – Basic Steps (cont’d)
• Determine FCFF’s each year using assumptions
driven off of revenue
• Determine TV at last year of forecast period
▫ 2 methods
▫ Assumes constant growth rate (2-3%) – not really used
▫ Assumes an exit multiple of an operating metric like
EBITDA or FCFF, to determine a value for the enterprise at
that point in time
• Bring everything back to present value at WACC
DCF – Basic Steps (cont’d)
• Now we have the value of the enterprise
(Enterprise Value = Net Debt + Equity +
• In order to determine Equity value, we must first
subtract Net Debt & Minority Interest
• At this point we have Equity Value
▫ Divide by Shares Outstanding to obtain PPS
• Sensitivity analysis provides for flexibility in
▫ WACC / Growth Rates / Terminal Multiples
DCF – Pros & Cons
Too many assumptions
• The model only as good as your assumptions
Allows for flexibility
• Firm can improve margins over time
• Industry outlook can change, and DCF model can
Public Market Comparables (Relative
Valuation) – Overview
• Relative Valuation is a reality check to see how
investors in the marketplace are valuing similar
companies like the one in question
• Public Market Comparables (EV/Sales, EV/
EBITDA, P/E) are used to determine typical
public market valuation with respect to certain
Relative Valuation – Basic Steps
• Determine the target company’s EPS, EBITDA,
or Sales for current year and possibly forward
year (using analyst estimates)
• Determine the set of comparable companies
(comp universe) and their trading multiples
▫ Similar companies based on industry, size, business
model, risk, capital structure – anything you can
• Multiply average industry multiple by current or
forward performance to determine the relative
value of the firm
Relative Valuation – Pros & Cons
Stock prices are determined by relative values
Don’t have to make assumptions that are
necessary for DCF
Not a gauge of intrinsic value
• Only values companies if they were valued the same
way as their peers
Often difficult to find exact comparables
• Can use sum-of-the-parts valuation, which is a
weighted-average of each division under specific
Precedent Transactions – Overview
• Value of a company if it were to be taken over by
another company (i.e. take-out value)
• Precedent transaction values should always yield
higher values than relative valuation
▫ Historical take-over premiums are 20-30%
• Not relevant if company is under some scenarios
(company is family-controlled and not looking to
Precedent Transactions – Basic Steps
• Find historical take-overs in industry
▫ Again, look for similar size if possible, and most recent
• Try to cover at least on economic cycle in
terms of precedent transactions, as some take-
over premiums might reflect a take-over boom
in an industry
• Multiply relevant multiple (P/E, EV/EBITDA,
EV/Sales, etc.) by company’s figure to obtain
firm’s value in event of a take-over
Precedent Transactions – Pros & Cons
Often very relevant, especially for undervalued
Often used when firm is selling off a division
Only useful if firm will consider takeover
Precedent transaction values are often higher
than intrinsic value (reflect over-payment in
• Interest in Finance will be tested during the
• Be prepared to discuss current events that you
are following and able to respond to questions
• Case: Credit crisis in general
• Case: $700 billion bailout [September 2008]
• Case: GM and Chrysler bailout [December 2008]
Sample Technical Questions
• If a company with a higher P/E acquires a company with a lower P/
E, is this an accretive or dilutive merger?
• Why would an acquirer be willing to pay a premium to the current
• What method of valuation would result in the highest value? Why?
• What is minority interest? Why do we add it to the Enterprise Value
• Can you walk me through a cash flow statement?
• How do you find a firm’s beta? How do you find a firm’s cost of
• What are some different ways of calculating a firm’s cost of equity?
Sample Technical Questions Cont.
• What are some common valuation metrics?
• Why can’t you use EV/Earnings or Price/EBITDA as valuation
• Why do you subtract cash in the enterprise value formula?
• How would you calculate the return on equity for a private firm with
• What is cheaper, debt or equity?
• If you own a start-up mining company in Canada and you require
additional capital, would you rather finance your company with debt
or equity? Why?
• What would have a greater impact on the value of a firm: a
$1,000,000 rise in FCFF for the next five years, or a $500,000 rise
in the terminal value FCFF?
• Interviewers are not looking for you to answer the question
immediately, it’s not a test of smarts
• Do not panic!
• Logically think through the question, interviewers are analyzing
your capacity to think logically in stressful situations
• Think out loud, don’t sit in silence
• Ask questions if you’re confused but totally stumped (but make sure
to listen to the question well)
• Sometimes thinking backwards is the key to many brainteasers
• Don’t feel rushed, work through everything and they may help you
along the way
• Speak confidently and clearly
The Infamous Accounting Question …
If you are able to land interviews, particularly final rounds,
you will be asked this question!
Question: A company makes a $100 purchase of equipment on
Dec. 31. Half of this amount is paid for with cash, the other half is
financed by debt. How does this impact the three financial
statements this year and next year?
• Equipment Capital expenditure
• Order of financial statements 1) Income Statement 2) Cash Flow
Statement 3) Balance Sheet (most difficult is to balance)
• Assume the company’s fiscal year end is Dec. 31
• This year and next year
• The numbers are not important, but use them when
learning the important underlying concepts
• A purchase of equipment is considered a capital expenditure
which does not impact earnings.
• Further, since the fiscal year end is Dec. 31, we are assuming no
depreciation in the first year, and there is no impact to net
income, thus no impact to the income statement.
• This holds true regardless of whether the capital expenditure is
financed by debt or equity.
Cash Flow Statement:
• No change to net income so no change to cash flow from
• $100 increase in capital expenditure: therefore a $100 use
of cash in cash flow from investing activities.
Cash Flow Statement Cont.:
• In our cash flow from financing section, we have an increase
in debt of $50 (source of cash).
• Net effect is a use of cash of $50 (-$100 + $50)
• Cash (asset) down by $50
• PP&E (asset) up by $100
• Debt (liability) up by $50
• Therefore, we balance!
• Let’s assume straight-line depreciation over 5 years and a
40% tax rate.
• Let’s also assume a 10% interest rate on the debt and no debt
• Depreciation is an expense so operating income (EBIT)
declines by $20 ($100/5 years).
• $5 of interest expense (0.10 * $50).
• Net result is a $15 reduction to net income [$25 * (1 – 0.40)].
Cash Flow Statement:
• Net income down by $15 and depreciation up $20.
• No change to cash flow from investing or financing activities.
(If we assumed some debt amortization, we would
have a use of cash in financing activities.)
Cash Flow Statement Cont.:
• Net effect is cash up $5.
• Cash (asset) up $5
• PP&E (asset) down $20
• Therefore left-side of Balance Sheet down $15
• Retained earnings (shareholders’ equity) down $15 (remember,
net income decreased by $15?)
• And we balance!
Final Part of the Question …
If depreciation is non-cash, explain how this transaction caused
cash to increase $5.
Because of the depreciation and interest expenses, the company
had to pay the government $5 less of taxes so it increased its cash
position by $5 from what it would have been without the
depreciation and interest expenses.
General Interviewing Tips
• Take the time to think about the question before you answer it
• The last thing you want to do is go on a tangent or talk too much
• If you don’t know the answer right away, walk through your logical
• Always try to work out the problem. Don’t say I don’t know!!
• Don’t stress and keep your cool
• Be confident and comfortable
• Always have questions to ask them
• Don’t be cocky or pretend like you know everything about banking.
Bankers, especially analysts, find this extremely aggravating and
can see through it
• Don’t forget to e-mail them after your interview and thank them for
General Interviewing Tips (cont’d)
Tell me about yourself …
Have a story (1-2 minutes)
For everything you did, explain why (i.e. I chose business
school because I’ve always been fascinated about what
makes a good business)
• Be convincing that I-banking is what you want
Super Day Dinners
• Everything is part of the interview
• DO NOT get drunk
• Try not to ask too many nerdy finance questions or talk about how bad the
markets are – unless, of course, a banker asks you your opinion
• Expect out of the blue questions about the economy and investing
• Do not talk about things you don’t know anything about, try to learn from
others, don’t be cocky
• Try to sneak your interests into conversations that aren’t always relevant in
interviews (e.g., interest in art or different cultures)
• Goal: Try to come across as an interesting and ambitious person who can
also have some fun and be enjoyable to work with
• One slight mess up can definitely cost you your offer
• Judgment and social skills are extremely important parts of your job as an
investment banking analyst, and the Super Day dinner is a quick way to
General Interviewing Tips (cont’d)
• Many good answers
• Being able to learn a boatload in a short amount of time
• Being surrounded by intelligent people willing to teach
• Interest in financial markets
• Like to work on projects and see rewarding results (even see
it in the paper …)
• Intense environment, fast-paced, pressure
• Anything else that suits you …
Questions to Ask Them
• What made you choose [insert firm’s name]?
• Have you seen the current economic turmoil/credit crisis affecting your
everyday work? If so, how?
• In what industries does your office see the most dealflow?
• As a summer analyst will I be placed in one industry group or will I be a
• How would you describe the culture of your office?
• What, in your opinion, is the most important aspect or quality that a
summer analyst should possess and display?
• Finally, ask questions pertaining to your interviewer specifically to show
you’ve been listening. For example, “What made you initially switch to
private equity and then what drew you back to investment banking?” or,
“How did you find the New York/London office compares to the Toronto
• CC website: Vault Guide to Finance Interviews
• Damodaran online: more material on valuation
• News: Wall Street Journal, Bloomberg, Financial