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Breaking into Wall Street questions with verified solutions .
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Breaking into Wall Street questions with verified solutions .
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Breaking into Wall Streetquestions with verified
solutions 2024-2025
What is financial modeling? - answer Outlines similar to blueprints
that show quantifiable views of a company
What are the basic financial modeling steps? - answer 1. Identify
purpose of the analysis - stock pitch, calculating ratios, M&A,
buyout
2. Background research - company reports, investor presentations
and outside research, equity research, channel checks via
interviews
3. Identify key drivers - retailer, F&B, SAAS, hotel
4. Gather data on other companies
5. Build analysis - financial statements, sometimes comparable
outside data and scenarios
6. Present conclusions - what (buy the company, sell the stock, fund
the project), why (supporting reasons with supporting numbers),
and how (best structure and timing)
What Makes Financial Modeling Hard? - answer Determining
company value across all investor types - equity, debt, convertible
bonds, etc; Measured by calculating equity value and enterprise
value
Evaluating different factors for different valuations:
- LBO looks at IRR vs targeted return
- M&A looks at metrics such as P/E, EPS, etc
- Recaps look at credit metrics
,Time Value of Money - answer Money today is worth more than
money tomorrow
Opportunity cost is based on how much you can earn from today's
cash by investing it elsewhere
PV formula = I / (1+R)^t; present value heavily depends on the
opportunity cost
Methods to Make Investment Decisions - answer Method 1) asking
price < intrinsic value (+ NPV; IV is the calculated PV of all future CF
using the discount rate)
Method 2) potential returns > opportunity cost (useful when you
know the cash flows and discount rate)
Discount Rate - answer Calculates what future CFs are worth today
Otherwise known as the "opportunity cost", if better opportunities
available
Investor's perspective: where money should be allocated in stocks
Companies perspective: allocation across equity and debt
Cost of Capital - answer Cost of equity can be based on past stock
market returns of the company
Cost of debt could be based on the debt interest rate charged
,Weighted Average Cost of Capital (WACC) - answer WACC = (cost of
equity * % equity) + (cost of debt * (1-tax rate) * % debt) + (cost of
preferred * % preferred)
Evaluating all of the different sources of capital, applying the
discount rate for each one, and getting to a weighted average
As leverage increases, cost of both debt and equity also increase
because it becomes more risky
E.g., $1,000 investment allocated across a savings account (1%
discount rate), bonds / loans (5% discount rate), stocks (10%
discount rate)
Present Value - answer What a payoff in the future is worth today,
assuming there is a discount rate associated and the returns
compound each year; intrinsic value is the calculated PV of all
future CFs using the discount rate
PV results will change if CFs change or discount rate(s) change;
lower discount rate = higher PVs
Formulas:
Manual) = CF Yr1 / ((1 + discount rate)^t) + CF Yr2 / ((1 + discount
rate)^t) + CF Yr3 / ((1 + discount rate)^t)...
Excel) = NPV
Internal Rate of Return (IRR) - answer Another type of discount rate,
but more useful when you know the CFs and asking price
IRR is what you'll actually receive vs WACC is what's expected; so, if
IRR > WACC, then invest because it's a +NPV
, The Most Important Formula in Finance - answer Company Value =
Cash Flow / (Discount Rate - Cash Flow Growth Rate)
Assumptions:
- CF growth rate must be < discount rate
- If CF is higher, the company is worth more; vice versa
- If discount rate is higher, the company is worth less; vice versa
The amount to invest in a company at a given time depends on the
opportunity cost elsewhere
Companies growth rates could change over time, as well as the
discount rate as a company's risk and potential returns change
Income Statement - answer P&L statement which shows revenue,
expenses, and 4 income metrics
All items must:
1) correspond to the current period
2) impact the company's taxes
Revenue - answer Recognized when product/service is actually
delivered
If it takes a long time to deliver (annual subscription), must
recognize over time
Gross Profit - answer How much additional potential profit the
company could make with each sale before any fixed expenses
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