Breaking Into Wall Street Basic Questions Exam 2024 Update
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Breaking Into Wall Street Basic
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Breaking Into Wall Street Basic
Breaking Into Wall Street Basic Questions Exam 2024 Update
What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx? - ANSWER-Take Cash Flow From Operations and subtract CapEx - t...
Breaking Into Wall
Street Basic Questions
Exam 2024 Update
What's an alternate way to calculate Free Cash Flow aside from taking Net Income,
adding back Depreciation, and subtracting Changes in Operating Assets /
Liabilities and CapEx? - ✔✔✔ANSWER-Take Cash Flow From Operations and
subtract CapEx - that gets you to Levered Cash Flow. To get to Unlevered Cash
Flow, you then need to adjust for the Interest Income / Expense, taking into
account the additional taxes saved / owed as a result of the Interest as well.
,What's an appropriate growth rate to use when calculating the Terminal Value? -
✔✔✔ANSWER-Normally you use the country's long-term GDP growth rate, the
rate of inflation, or something similarly conservative.
For companies in mature economies, a long-term growth rate over 5% would be
quite aggressive since most developed economies are growing at less than 5% per
year.
23. What's the flaw with basing terminal multiples on what public company
comparables are trading at? - ✔✔✔ANSWER-The median multiples may change
greatly in the next 510 years so it may no longer be accurate by the end of the
period you're looking at. This is why you normally look at a wide range of
multiples and do a sensitivity to see how the valuation changes over that range.
A buyer pays $100 million for the seller in an all-stock deal, but a day later the
market decides it's only worth $50 million. What happens? - ✔✔✔ANSWER-he
buyer's share price would fall by whatever per-share dollar amount corresponds to
the $50 million loss in value. Note that it would not necessarily be cut in half.
Depending on how the deal was structured, the seller would effectively only be
receiving half of what it had originally negotiated.
This illustrates one of the major risks of all-stock deals: sudden changes in share
price could dramatically impact valuation.
A company has 1 million shares outstanding at a value of $100 per share. It also
has $10 million of convertible bonds, with par value of $1,000 and a conversion
price of $50. How do I calculate diluted shares outstanding? - ✔✔✔ANSWER-
This gets a bit confusing because of the different units involved. First, note that
these convertible bonds are in-the-money because the company's share price is
,$100, but the conversion price is $50. So we count them as additional shares rather
than debt.
Next, we need to divide the value of the convertible bonds - $10 million - by the
par value - $1,000 - to figure out how many individual bonds we get:
$10 million / $1,000 = 10,000 convertible bonds.
Next, we need to figure out how many shares this number represents. The number
of shares per bond is the par value divided by the conversion price:
$1,000 / $50 = 20 shares per bond.
So we have 200,000 new shares (20 * 10,000) created by the convertibles, giving
us 1.2 million diluted shares outstanding.
A company has a high debt load and is paying off a significant portion of its
principal each year. How do you account for this in a DCF? - ✔✔✔ANSWER-
Trick question. You don't account for this at all in a DCF, because paying off debt
principal shows up in Cash Flow from Financing on the Cash Flow Statement - but
we only go down to Cash Flow from Operations and then subtract Capital
Expenditures to get to Free Cash Flow.
If we were looking at Levered Free Cash Flow, then our interest expense would
decline in future years due to the principal being paid off.
A company has had positive EBITDA for the past 10 years, but it recently went
bankrupt. How could this happen? - ✔✔✔ANSWER-1. The company is spending
, too much on Capital Expenditures - these are not reflected at all in EBITDA, but it
could still be cash-flow negative.
2. The company has high interest expense and is no longer able to afford its debt.
3. The company's debt all matures on one date and it is unable to refinance it due to
a "credit crunch" - and it runs out of cash completely when paying back the debt.
4. It has significant one-time charges (from litigation, for example) and those are
high enough to bankrupt the company.
A company with a higher P/E acquires one with a lower P/E - is this accretive or
dilutive? - ✔✔✔ANSWER-Accretive if it's an all stock deal.
The buyer is getting more earnings for less money.
All else being equal, which method would a company prefer to use when acquiring
another company - cash, stock, or debt? - ✔✔✔ANSWER-Assuming the buyer had
unlimited resources, it would always prefer to use cash when buying another
company. Why?
- Cash is "cheaper" than debt because interest rates on cash are usually under 5%
whereas debt interest rates are almost always higher than that. Thus, foregone
interest on cash is almost always less than additional interest paid on debt for the
same amount of cash/debt.
- Cash is also less "risky" than debt because there's no chance the buyer might fail
to raise sufficient funds from investors.
- It's hard to compare the "cost" directly to stock, but in general stock is the most
"expensive" way to finance a transaction - remember how the Cost of Equity is
almost always higher than the Cost of Debt? That same principle applies here.
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