Exam (elaborations)
Breaking into Wall Street questions with verified solutions .
- Course
- Institution
Breaking into Wall Street questions with verified solutions .
[Show more]
Content preview
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
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller GUARANTEEDSUCCESS. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $14.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
75323 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now