Getting a job offer after graduating from business school in no easy task, particularly for prospective investment bankers hoping to enter an industry that’s trimming headcount. Interviews are often comprised of funky behavioral queries aimed at capturing your personality and commitment, along with quantitative questions that test your analytical skills.
Below are a handful of the latter, recently asked of students at the University of Pennsylvania's Wharton School by Goldman Sachs, Deutsche Bank, Merrill Lynch, J.P. Morgan and Morgan Stanley. The answers are also included. How would you do?
The banks in question either declined to comment or didn’t immediately respond to requests for comment.
Deutsche Bank: What kind of multiples should I use to do a comparable company analysis on ABC company? How would I calculate them?
Common ratios used to compare equity performance:
- Price / EPS
- Market Value / Net Income
- Market Value / Book Value
- Price to Earnings / Growth Rate (“PEG Ratio”)
Common ratios used to compare enterprise performance:
- Enterprise Value (EV) / EBITDA
- EV / EBIT
- EV / Sales (generally only appropriate for volume driven businesses or those with negative earnings)
Goldman Sachs: How would you evaluate the credit worthiness of a company if you were a bank?
A creditor's measure of an individual's or company's ability to meet debt obligations. Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender some controls. These covenants may:
- Limit the borrower's ability to weaken their balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further.
- Allow for monitoring the debt requiring audits and monthly reports
- Allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate.
Credit scoring models also form part of the framework used by banks or lending institutions to grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively.
Merrill Lynch: Visualize the income statement of any company you have audited. Take me through its key line items.
- Revenues: Source of income that arises from the sale of goods and/or services and is recorded when it is earned.
- Expenses: Costs incurred by a business over a specified period of time to generate the revenues earned during that same period of time. Commonly includes COGS and SG&A.
- Net Income: Revenue minus expenses.
J.P. Morgan: How do you value companies in emerging markets other than DCF?
There are three major ways to valuation:
- Comparable Companies
- Precedent Transactions
- DCF Analysis
- Liquidation Valuation – valuing company’s assets assuming they are sold off then subtracting liabilities to determine how much capital an equity investor receives.
- Replacement Value – based on cost of replacing assets.
- LBO Analysis – determine how much a PE firm could pay for a company to hit a target IRR in the range of 20‐25%.
J.P. Morgan: If your client has excess cash, what advice would you give him? What are the benefits of each one?
As a general rule, managers should do one of two things with excess cash:
Invest them in positive NPV projects (including acquisitions, capital expenditures, and research and development); or return the money to stakeholders in the form of share repurchases, dividends, and debt repayments. Considerations include the cost of debt, the cost of equity, deviation from optimal WACC levels, and tax considerations.
Morgan Stanley: Valuations in emerging markets. How would you value a bond issued by a company in an emerging market?
- Comparable companies and their bonds
- Study economic trends – inflation, GDP growth
- Determine risk and associated risk premium bond purchasers willing to pay in that market
J.P. Morgan: Advise a client how to expand into the consumer market in Mexico. (Valuation issues, whose WACC would you use etc.).
- Use acquirer’s WACC
- Study economic trends – inflation, GDP growth – and government involvement
- Review different industries within the consumer market
- Determine which company/industry has the lowest risk
- Company comparables
- Review debt possibilities
- DCF issues – difficult to project over 10-year period