How to answer the financial modelling Q's when you're interviewing with IB?
✅How do u value a company?
👉Answer: Companies can be valued using different methodologies, with DCF analysis & trading multiples, also called ‘ comparable
company analysis’ being the most common ones. The third type, Leveraged Buyout Models which are often employed by PE firms that use a combination of Debt & Equity to fund acquisitions of entire companies.
In a DCF, we project a firm’s cash flows for the next 5, 10, or even 20+ years, & discount them to their “Present Value” to estimate what they’re worth today, assuming that u could invest your money elsewhere at a certain rate of return.
In trading multiples, we compute the value of other companies based on financial metrics like revenue or profits, & then apply those ‘multiples’ to value our target firm. For instance, if similar companies are worth 4x their annual revenue, & the target firm’s revenue is $180 million, then it should be worth about $720 million.
In a DCF model, similar to the 3-statement models, we begin by projecting the firm’s revenue, expenses, & cash flow line items. Unlike 3-statement models, DCF doesn’t require the full Income Statement, Balance Sheet, or Cash Flow Statement.
✅ How would you calculate a firm’s beta?
👉Answer: An industry beta should be chosen instead of computing raw betas from historical returns or even projected betas to rule out estimation errors that would result in an imprecise calculation (st&ard errors create a large potential range for beta). Since the betas of comparable companies are distorted owing to different leverage rates, we need to unlever the betas of these comparables as such:
*β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]*After estimating the average unlevered beta, we relever this beta at the target firm’s capital structure:
*β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)]*
✅ How do u calculate unlevered free cash flows for DCF analysis?
👉Answer: Free cash flows = Operating profit (EBIT) * (1 –tax rate) + depreciation & amortization – changes in net working capital – capital expenditures
✅ How are the 3 financial statements linked?
👉Answer: Net income flows into both the balance sheet & cash flow statement. In the balance sheet, net income flows into stockholder’s equity via retained earnings. We need to add the Depreciation back, while CapEx is deducted on the cash flow statement, which helps to determine PP&E on the balance sheet. Financing activities mostly impact the balance sheet & cash from finalizing, (except for interest, which is shown on the income statement). The sum of the last period’s closing cash plus this period’s cash from operations, investing, & financing would be the closing cash balance on the balance sheet.
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