Q. How do you value a company?

A. Although it depends on the industry and situation of the company, basic key lies in the
discounting the future earnings to the present value. It can be DCFF, DCFE or DDM
depending upon the industry of company.
Q. In case of an acquisition, what would you consider - the equity value or the
enterprise value?
A. While equity price reflects the market value and fundamental value of company, it is
essential to consider the enterprise value in case of acquisition. This is because the enterprise
value is an indicator of the company as a whole.
Q. Can a company have negative enterprise value?
A. Yes, it surely can. If the company is on the brink of bankruptcy, it will have negative
enterprise value. Added to this, if the company has large cash reserves, enterprise value will
swing to the negative side.
Q. If I give you the FCFF, how would you go about calculation the FCFE?

A. FCFF+ Tax on EBIT- Actual tax paid- Interest on cash (net of tax)- Interest on debt+
Repayment of debt = FCFE
Q. What discount rates will you go about using?
A. If you are doing a DCFF, then you would use a WACC, since it accounts for both Debt and
Equity capital and the cash flows you are discounting are "pre-financing" and do not already
include interest expense

- If you are doing a DCFE or a DDM, then you would use just the Cost of Equity since the
cost of debt has already been taken into account in the cash flows that you are discounting.
Q. How would you know if an acquisition is dilutive?
A. If your current shareholders earnings per share go down after the transaction, this would
be dilutive. However, if your current shareholders earnings per share go up, then it would be
accretive. It is best to look at the effects over a number of years; otherwise, this could be a bit
short sighted.

Q. I hope you are familiar with beta. Will you throw some light on how you will proceed
to calculate the beta?
A. Plot the index in one column and relevant stock price in other column. Say the data is
plotted for one week basis. Then calculate % change in the two parameters and plot the data
in the next two columns. Beta can be calculated by dividing %changes in index by % changes
in the stock prices. You can then de-lever the beta to get another beta that can be re-levered in
subsequent calculations.

Q. What is the difference between asset beta and equity beta?

A. The asset beta is the unlevered beta which holds no risk to the leverage that the asset may
hold. On the other side, when the beta is calculated by looking into the beta of other
company, you obtain your levered beta. The mere thing left to do is to de-lever the beta.
I will certainly not hesitate to say that the range of questions will be bigger. But then, these
questions often feature in the technical interviews of evaluations.
Q. What is working capital?
A: Working capital is equal to current assets minus current liabilities. It informs a user
about how much money is being used for business operations, and how much more will be
necessary throughout the year.
Q. What does WACC mean?
A: It stands for weighted average cost of capital, and this is a calculation of an
organizations capital that is weighted proportionally. It includes every source of capital,
and takes into account factors like depreciation, tax rates, debt, and equity.
Q. What is a deferred tax asset?
A: A deferred tax asset is created when a business pays more tax to the IRS than is reported
on their income statement. They can be created from net operating losses and differences
in revenue recognition.
Q. What are the steps that occur during a cash flow statement?
A: Begin with the net income, and examine each line of the major adjustments. These
include changes in deferred taxes and working capital, as well as depreciation. Be sure to

mention asset purchases and sales, investment securities, and capital expenditures. Create
cash flows for financing, business operations, and investments, and add them together to
get the total cash flow. The end-of-period balance can be derived by adding the change in
cash to the beginning-of-period balance.
Q. What is a DCF?
A: A discounted cash flow. This type of cash flow is used to determine how lucrative a
potential investment might be. It is similar to the cash flow described above, but uses future
projections of free cash flow to discount the price on the investment. Taking into account
future trends results in a more accurate valuation to judge the investment by.
Q. What is the financial impact of a business buying a new piece of equipment, in
terms of income statements, balance sheets, and cash flows?
A: There is no initial impact on the income statement, but PP&E (property, plant, and
equipment) will go up and cash will go down on the balance sheet. This represents a cash
outflow. Depreciation causes net income to go down, as well as PP&E and retained
earnings. Because depreciation is a non-cash expense that ends up reducing net income, this
value is added back into the cash flow in the operations section.
Define Beta for a layman

Beta tells you how much the price of a given security moves relative to movements in the
overall market.

A Beta of 1 means that if the market moves, the stock moves in unison with the market.
A Beta < 1 means that if the market moves a certain amount, the stock will move less than
that amount
A Beta >1 means that if the market moves a certain amount, the stock will move more than
that amount.
Q. What is CAPM?
Answer: CAPM is the Capital Asset Pricing Model, and it is a model designed to find the
expected return on an investment and therefore the appropriate discount rate for a companys
cash flows. It is a linear model with one independent variable: beta.

CAPM divides the risk of holding risky assets into systemic and specific risks. To the extent
that any asset is affected by general market moves, that asset entails systematic risk. Specific
risk is the risk which is unique to an individual asset. It represents the component of an

assets volatility which is uncorrelated with general market moves. According to CAPM, the
marketplace compensates investors for taking systematic risk, but not specific risk.

CAPM considers a simplified world in which there are no taxes or transaction costs. All
investors have identical investment horizons. All investors have identical perceptions
regarding the expected returns, volatilities and correlations of available risky investments.

Formula: Ri = Rf + Beta * (MRP)

Rf = riskfree rate (use 10year Treasury)
MRP = Market Risk Premium (Rm Rf)
Rm = Expected Return of Market

Q. Of the three main valuation methods (DCF, public comparables and transaction
comparables), rank them in terms of which gives you the highest price? Which one
yields the highest valuation?
A:It depends. Depends on discount rate in DCF model, depends on the comparable
companies used, depends on whether the market is hot/cold and the companies are
overvalued/undervalued for no good reason.
Generally, however, transaction comps would give the highest valuation, since a transaction
value would include a premium for shareholders over the actual value.
The second highest valuation would probably be the DCF, since there are a lot more
assumptions that are involved (growth rate, discount rate, terminal value, tax rates, etc.), but
it can also be the most accurate depending on how good the assumptions are.
Trading comps offer the least wiggle room and will solely depend on the choice of companies
and how the market treats them.

Q. If you had to pick one statement to look at (balance sheet, cash flow, income
statement), which one would it be and why?
A. No right answer. Can go with whichever one you like. Each has its advantages. Income
statement shows the profitability of a company, trends in sales/expenses margins, etc.;
balance sheet is a great way to see what items make up the companys assets and whom the
company needs to pay back for those assets. Personally, I would go with cash flow statement.
At the end of the day, cash is king. A company that has positive income but very little cash is
in deep trouble.
Cash flows are used for DCF models, not net income. The cash flow statement allows
observing important performance metrics from both income statements and balance sheets
such as net income, depreciation, sources and uses of funds, changes in assets and liabilities.

Q. What is the difference between commercial and investment banking?

A. There are many definitions, but these are some of the broader ideas that differentiate the
two:
Commercial bank: accepts deposits from customers and makes consumer and commercial
loans using these deposits. The vast majority of loans made by commercial banks are held as
assets on the banks balance sheet.

Investment bank: acts as an intermediary between companies and investors. Does not accept
deposits, but rather sells investments, advises on M&A, etcloans and debt/equity issues
originated by the bank are not typically held by the bank, but rather sold to third parties on
the buy side through their sales and trading arms.

Q. What is accretion and dilution? Give an example

A. Accretion is asset growth through addition or expansion. Accretion can occur through a
companys internal development or by way of mergers and acquisitions.
Dilution is a reduction in earnings per share of common stock that occurs through the
issuance of additional shares or the conversion of convertible securities. Adding to the
number of shares outstanding reduces the value of holdings of existing shareholders.
An acquisition is accretive when the combined (pro forma) EPS is greater than the acquirers
standalone EPS. For example, suppose analysts expect Procter & Gambles EPS to be $3.05
next year. You are a banker charged with the task of modeling the impact to Procter &
Gambles EPS if they were to acquire Colgate-Palmolive (this is purely hypothetical by the
way). So you build your model and determine that the pro form EPS next year would actually
be $3.10 $0.05 higher than had the acquisition not taken place. In other words, the deal
would be $0.05 accretive next year. An acquisition is dilutive if the opposite is determined:
that pro forma EPS would be lower than $3.05. A deal is considered breakeven when there is
virtually no impact on EPS.

Accretion: When pro forma EPS > Acquirers EPS

Dilution: When pro forma EPS < Acquirers EPS
Breakeven: No impact on Acquirers EPS