Q&A were provided by Ivy League students who had been attending Wall Street interviews. Would you answer differently?
1: Suppose your client had significant excess cash on the balance sheet. How would you recommend its use?
- Invest in positive NPV projects (acquisitions, CapEx, R&D)
- Return money to shareholders in the form of share repurchases, dividends, and debt repayments
2: What are the drivers to value a company?
- Increase cash flow, such as efficiencies, technology and scale.
- Decrease risk, such as a strong compliance culture, no one client or set of clients represents large % of revenues, stability, infrastructure and a strong employee 'bench'.
3: If you were looking for a company for your client to acquire, how would you go about doing it?
- Trading Range (the range the stock has been trading in during the past 52‐weeks). If we trust the market we should assume this is a reasonable place to start our analysis.
- Discounted Cash Flow (DCF), also called Intrinsic Value, seeks to find a present value of all future cash flows of the firm that are available to stakeholders. This can be done using WACC or APV.
4: If a company was looking to raise debt or equity, what are the 3 most important questions to ask?
- Whether they will generate enough cash flows to cover interest obligations. How many multiples in excess of current interest payments is their operations generating in cash flow?
- What is their current capital structure and can they bring on more debt and leverage the company further without being too levered versus industry and peers so that their credit rating and stock price isn’t negatively impacted.
5: A company with a lower P/E is buying a company with a higher P/E. What is the effect of this transaction? Is it 'accretive' or 'dilutive'? Explain.
As a general rule, a dilutive merger or acquisition occurs when the P/E ratio of the acquiring firm is less than that of the target firm.
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