Interview Guide Interviewing in any industry is stressful and time consuming. It takes a lot of work to ensure you’re prepared on interview day. I view job hunting as a part-time (sometimes even full-time) job. I recommend you approach it with a similar rigor and work-ethic. Research research research. Then practice, practice, practice. My check list includes
Network with friends, family and colleagues to find people in your prospective field and ask about their interview process Consult and read through all the interview preparation guides Then create a personalized prep sheet to your upcoming interviews and study it
Once you’ve got the interview that means the firms sees something they like. Now it’s your job to confirm that notion. In the interview, be confident and be succinct. The best way to achieve that confidence is through preparation and practice. I break my personalized interview prep into three categories
Behavioral Technical Consulting/Brain teasers
I’ve broken down the interview section of this website to reflect that. Hopefully you find it useful. Good luck!
Behavioral Questions Behavioral questions are what they appear. The interviewer wants to get a sense of your personality to see how you would handle the work environment - both the actual work and the people you’ll be working with. Behavioral questions are tailored to the job and the firm but for the most part you can expect a similar line of questioning. However, the intensity of questions will differ based on the role / industry – behavioral questions in an investment banking interview will be much different than for an audit role at big four accounting firm. I have not listed answers here because the answers will differ for each person. I highly recommend you write out all the answers to potential interview questions and study them. Continually refine the answers and use the sheet as a reference before the interview. Finance Behavioral Interview Questions Tell me a little about yourself? Why have you had so many jobs? Why do you want to leave your current job? Why do you want to work at this firm? Why are you passionate about equity analysis? Why did you like value investing? What type of equity analysis have you done? Tell me a specific time you used a regression analysis and for what purpose. Why stocks not bonds? When have you ever done deep analysis on a company? Do you follow a certain sector? Do you like a particular company? Why analysis, why not sales? You seem outgoing This is a much bigger company than you've ever worked at. What are your thoughts? Why should we hire you? What is your life (not necessarily career) plan for the next ten years? Why did you choose to go to your college?
What was your favourite class not in your major? What is your 3 greatest weaknesses? What good books have you read lately? What other firms are you interviewing at? What is your current salary and what do you expect this role to pay?
Technical Questions As the title indicates, the point of these questions are to test your technical knowledge in the field. They will also differ based on the role your interviewing for. I would research as much as possible and study study study. A couple interviews stand out in my mind and I've listed what I encountered for the most part. Hopefully, the question and answer I laid out below will give you insight to the preparation usually needed for an interview.
What are the current levels of the market? DJIA: XX,XXX S&P: X,XXX NASD: X,XXX What do you consider value investing? It’s a type of investment process to identify undervalued stocks relative to their price. Typically value investors select stocks that appear undervalued within an industry based on P/BV, P/E, Free cash flow and dividend yield. It was pioneered by Benjamin Graham (and David Dodd), I believe in the 1930’s and obviously now championed by Warren Buffet. What comprises value investing? Obviously, the exact investment process varies from person to person, team to team. But I believe three macro points comprise value inv 1. Search strategy – what universe of securities are you looking at. Are you searching large well known stocks or are you looking at obscure, less known names. 2. Valuation methodology – obviously, the nuts and the bolts of value investing. Traditionally, I believe you start with asset valuation (P/BV), then look at earnings-power (P/E) and lastly account for additional value such as a franchise/brand. 3. Discipline and patience – Since the value investing time horizon is usually longer, it means having confidence in your valuation judgment What Sectors are considered value plays? I generally think value sectors consist of industries that are stable, have positive cash flow and some type of distribution. Historically I believe those would consist of industrials, utilities, energy and financials. Name a couple of stocks or sectors you like? Although we might be at the end of governments lose monetary policy, there is still a lot of cheap money out there. Whether companies and people can access it is another question. Many predict we’re at the start of a new long term recovery, in such a scenario we would want to overweight cyclical’s such as energy, IT and materials and underweight defense sectors like consumer discretionary, utilities and healthcare. In energy, I like a Peabody Energy (BTU), the coal producer. From a value perspective, they look attractive to other coal producers based on P/B, P/S and are in line on P/E. In addition, their cost containment strategies have paid off resulting in widening profit margins. On the growth
side, BRIC demand is increasing and forecast to rise, resulting in supply tightening and increasing pricing power On the tech side, ORCL, could be a strategic long term buy. The stock is looking slightly overvalued based on fundamentals but the company has positioned itself well going forward. With the downturn, companies delayed database upgrade or expansions, and slowly that demand will flow through. In addition, the SUN acquisition increases ORCL’s control of the vertical supply chain resulting in less hassle for customers and higher margins for the firm The last stock I have that looks interesting is Dow Chemical. Even though the stock price has gotten ahead of itself on a current earnings basis, the stock looks attractive on a forward looking basis. And again, this stock plays well if global demand follows forecasts What are some accounting gimmicks you would be cognizant of while analyzing financial statements? • Revenue recognition – like recording prior to rendering service, selling to an affiliated party, inventory method • Expense deferrals – capitalizing costs, amortizing/depreciating policies, impairment writeoffs, operating leases • One time gains or expenses – capital disposals, including items in operating line items like investment income What about financial statement footnotes? Financial Statement Footnote Analysis is an important component of company analysis. The Footnotes identifies and elaborates on the major accounting policies and like revenue recognition, depreciation policies and inventory methods. It also sheds light on topics like longterm debts, stock options, warranty reserves, and restructuring charges. These items could indicate potential soft spots that may impact quality of earnings. Microsoft vs. Kraft - what would you pick? I would develop and follow an investment philosophy and stick with it. In the context of value investing, I would determine if one of stocks were undervalued compared to their industry and/or benchmark based on fundamental ratios such as P/BV, P/E, P/FCF, Div yield. I would also analyze recent news on both and determine a general business outlook/trends. What would you take into account when building a DCF for these companies? The main inputs of a DCF model are: 1. Future cash flows – either dividends or free cash flow 2. Choose a discount rate – usually weighted avg cost of capital to represent value available to both debt and equity holders 3. Calculate the Terminal Value - Value at the end of the FCF projection period (horizon period). 4. Calculate the enterprise value (EV) by discounting future cash flows and terminal value to net present value 5. Calculate the equity value by subtracting net debt from EV
I was given IBM's balance sheet, income statement, and statement of cash flows for 2007 and 2008. What is the operating margin or net profit margin for 2008? Operating or profit margin = operating profit or net profit divided by net sales Healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. What is the debt-to-equity ratio? Debt to equity ratio = total debt divided by shareholder equity debt to equity ratio measures how much money a company should safely be able to borrow over long periods of time What is return on equity? ROE = NI / avg shareholders equity ROE = equity T/O * profit margin * financial leverage) Measures the how much profit a firm generates with the money shareholders have invested What is the free cash flow? Free cash flow = net income + Dep/Amortization – changes in working capital – cap ex Free cash flow = CFO – cap ex and P/FCF = share price divided by FCF What is the PEG ratio? PEG Ratio = P/E divided by annual EPS growth It’s a valuation metric to determine the relative trade-off between stock price and the earnings growth In general, the P/E ratio is higher for a company with a higher growth rate. So this ratio better compares firms with different growth rates What is Tobin’s Q? Tobins Q = MV of assets / Replacement Value of Assets Tobins Q provides an alternative to P/BV ratio. Good when MV of assets differ signficantly from book value usually cased by inflation. What is Enterprise value? EV = market cap + debt + minority interest + preferred shares - cash and cash equivalents EV represents the entire cost of a company if someone were to acquire it What is ROIC? Return on invested capital measure gives a sense of how well a company is using its money to generate returns ROIC = (NI – dividends) / total capital What is CAGR? CAGR = [(end value / beginning value) ^ (1/# years)] - 1 It’s Compounded Annual Growth Rate – its meant to show an annualized return for a given gain
over a period. Usually used in more growth oriented business to dampen the effects of volatility How do you un-lever and re-lever beta? Unlevered Beta = Levered Beta / [1+(1-T) * (D/E)] Levered beta includes the affects of capital structure and is the one typically reported The unlevered beta (asset beta) is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage and makes comparing a firm’s systematic risk more accurate to others in the industry where use of leverage may differ. What is typically higher – the cost of debt or the cost of equity? The cost of equity is higher than the cost of debt because the cost associated with borrowing debt (interest expense) is tax deductible, creating a tax shield. Additionally, the cost of equity is typically higher because unlike lenders, equity investors are not guaranteed fixed payments, and are last in line at liquidation. How do you calculate cost of equity? Most popular way is via CAPM (Capital Asset Pricing Model). Cost of equity (re) = rf + β x Market risk premium (rm-rf ) Also done via constant dividend growth model (Gordon growth) = Div1 / current price + g g is the constant growth rate of dividends Risk free rate: theoretically reflects yield to maturity of a default-free government bonds of equivalent maturity to the duration of each cash flows being discounted. In practice, lack of liquidity in long term bonds have made the current yield on 10-year U.S. Treasury bonds as the preferred proxy for the risk-free rate for US companies. Market risk premium: The market risk premium (rm-rf) represents the excess returns of investing in stocks over the risk free rate. Practitioners often use the historical excess returns method, and compare historical spreads between S&P 500 returns and the yield on 10 year treasury bonds. Beta (β): Beta provides a method to estimate a firm’s systematic (non-diversifiable) risk. Beta equals the covariance between expected returns on the asset and on the stock market, divided by the variance of expected returns on the stock market. What's the difference between perpetual growth and multiple methods? The choice matters particular when arriving at a terminal value in a DCF model, as terminal value represents a large percentage of the total DCF valuation. PE’s and VC’s tend to use the EBITDA multiple method with low multiples when buying (because the terminal value will be conservative) and the Perpetuity with Growth method with high growth rates and low discount rates when selling (because the terminal value will be aggressive.) How do you value a company? Two primary valuation methodologies: Intrinsic value (DCF) - This approach is the more academically respected approach. The DCF says that the value of a productive asset equals the present value of its cash flows. The answer should run along the line of “project free cash flows for 5-20 years, depending on the availability
and reliability of information, and then calculate a terminal value. Discount both the free cash flow projections and terminal value by an appropriate cost of capital (weighted average cost of capital for unlevered DCF and cost of equity for levered DCF). In an unlevered DCF (the more common approach) this will yield the company’s enterprise value (aka firm and transaction value), from which we need to subtract net debt to arrive at equity value. Divide equity value by diluted shares outstanding to arrive at equity value per share. Relative valuation (comparables/multiples) - The second approach involves determining a comparable peer group – companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics. Truly identical companies of course do not exist, but you should attempt to find as close to comparable companies as possible. Calculate appropriate industry multiples. Apply the median of these multiples on the relevant operating metric of the target company to arrive at a valuation. Common multiples are EV/Rev, EV/EBITDA, P/E, P/Book, although some industries place more emphasis on some multiples vs. others, while other industries use different valuation multiples altogether. It is not a bad idea to research an industry or two (the easiest way is to read an industry report by a sell-side analyst) before the interview to anticipate a follow-up question like “tell me about a particular industry you are interested in and the valuation multiples commonly used.” What is the appropriate numerator for a revenue multiple? In a private equity setting - enterprise value should be used. EBIT, EBITDA, unlevered cash flow, and revenue multiples all have enterprise value as the numerator because the denominator is an unlevered (pre-debt) measure of profitability. Conversely, EPS, after-tax cash flows, and book value of equity all have equity value as the numerator because the denominator is levered – or post-debt. When should you value a company using a revenue multiple vs. EBITDA? Companies with negative profits and EBITDA will have meaningless EBITDA multiples. As a result, Revenue multiples are more insightful. How do you value real estate companies? The capitalization rate is a general market-based number that tells you how much the market is currently paying for real estate. For example, 8% implies that investors are generally paying about 12.5 times (1 ÷ 8%) the NOI. The lower the cap rate, the more expense the potential property. What is the difference between the discount rate and the feds funds rate? Discount rate is the interest rate charged to banks who borrow from the Federal Reserve Bank Fed funds rate is the rate at which banks borrow from each other 2 companies. 1 trading at 10x. 1 trading at 5x. how would you think about an investment decision? 5X P/E, given all other factors are the same. An investor would rather pay less per unit of ownership. What's AHYDO? Applicable High Yield Discount Obligation
Internal Revenue Code defines AHYDO as any debt instrument issued by a corporation with (a) a maturity date of more than five years from the date of issue; (b) a yield to maturity that equals or exceeds the applicable federal rate plus 5%; and (c) significant OID features. Any zero coupon bond or payment-in-kind debt instrument with a maturity greater than five years must be analyzed for AHYDO attributes. If the debt instrument is classified as an AHYDO, a portion of the applicable interest deduction may be deferred, and a portion may be disqualified. There is a bond that pays $100, 90...10 for ten years and another that pays $10, 20...100 over ten years.
Case Study Questions Consulting interviews utilize case studies to test a candidate’s ability to solve real or hypothetical business problems. A candidate is expected to understand, analyze, and recommend solutions to these problems. Firms want to see that you have the skills necessary to be a successful consultant:
Comprehension of basic business concepts (E.G. Revenues & costs, suppliers & customers, market structure, etc) Analytical problem solving Business-oriented creativity and insight Communication and presentation
Case study questions vary but for the most part they all involve similar solutions:
How to increase revenue or profitability due to a change in industry dynamics Entry to new product, markets, or geography Specific identification of underperformance of company department, segment or brand and how to improve
The best way to prepare for a case study interview is to practice them. First read, dissect and understand the solution process. Then practice with a friend or relative as the interviewer. I cannot stress the importance of saying your reasoning out loud and have someone ask clarifying questions back – it will help your preparation process tremendously. I’ve always used the Vault and WetFeet guides for finance interviews and found them useful. I know those firms make books for consulting as well. Additionally, a friend who just went through interviewing process out of NYU Stern recommended Case In Point. However, my friend did say the book is a little too standard (everybody uses it) but it might be a good place to start.
Brain Teasers Brain teaser questions are meant to test your on the spot problem solving ability and pressure sensitivity. As with case study questions, the majority of what the interviewer is looking for is how you approach the question. There is a certain frame of mind that helps answer these questions - practicing a few beforehand helps warm up the mind for anything that may come on interview day. If you would like to go around a 1-mile racetrack twice in 2 minutes at an average speed of 60 mph, and you complete the first lap at a rate of 30 mph, at what rate must you complete the second lap? Well 60MPH means 60 miles per hour so you travel a mile a min at 60MPH. So traveling at 30MPH you would cover a mile in 2 min. So if you complete the first lap with is a mile long you’ve already used your 2minutes. If you look at a clock and the time is 3:15, what is the angle between the hour and the minute hands? The answer is not zero! The hour hand moves as well. The hour hand moves a quarter of the way between three and four, so it moves a quarter of a twelfth (1/48) of 360 degrees. So the answer is seven and a half degrees, to be exact. At dawn on Monday a snail fell into a bucket that was 12 inches deep. During the day it climbed up 3 inches. During the night it fell back 2 inches. On what day did the snail finally manage to climb out of the bucket? Nine days later. The following Wednesday. A man drove from Aardvark to Beeville. On the first day he travelled 1/3 of the distance. On the second he travelled 1/2 of the remaining distance. On the third he travelled 2/3 of the remaining distance. On the fourth day, after covering 3/4 of the remaining distance, he was still 5 miles away from Beeville. How many miles had he covered so far? 175 miles: the total trip is 180 miles. On the first day he travelled 60 miles, leaving 120 miles. On day two he travelled another 60 miles, leaving 60 miles. On day three he travelled 40 miles, leaving 20 miles. On day four he travelled 15 miles, leaving 5 miles. How many gallons of white house paint are sold in the U.S. every year? I assume there are 300 million people in the US. Lets say 1/2 of them live in houses (150 million). The average family size is 3 so there are 50 million houses in the US. Lets add another 20% for second homes and rental properties. So 60 million houses. Lets assume, on avg houses are painted once every 10 years. Then there are 6 million homes painted each year. Assuming that one gallon of paint covers 100 square feet of wall, and that the average house has 2,000 square feet of paintable wall space, then each house needs 20 gallons of paint. So 6 million houses x 20 gallons = 120 million gallons of paint are sold per year. If 80 percent of all houses are white, then 96 million gallons of white house paint are sold each year. (120 *.8)
What is the size of the market for disposable diapers in China? About a billion people live in China. Population of China is young, let's say 60% or 600 million might be of child-bearing age. Due to the 1 child policy and the preference for males 1/3 are women, so there are about 200 million Chinese women of childbearing age. Let's say 3/4 of Chinese women have children so 150 million of women have children. Since the average family size in China is restricted, it might be 1.5 children, on average, per family. That means that there are about 225 million children in China. How many of those kids are under the age of two? About a tenth, or 22.5 million. So there are at least 22.5 million possible consumers of disposable diapers. To summarize: 1 billion people x 60% childbearing age = 600,000,000 people 600,000,000 people x 1/3 are women = 200,000,000 women of childbearing age 200,000,000 women x 3/4 have children = 150,000,000 women with children 150,000,000 women x 1.5 children each = 225,000,000 children 300,000,000 children x 1/10 under age 2 = 22.5 million How many square feet of pizza are eaten in the United States each month? Take your figure of 300 million people in America. How many people eat pizza? Let's say 2/3 or 200 million. Now let's say the average pizza-eating person eats pizza twice a month, and eats two slices at a time. That's four slices a month. If the average slice of pizza is perhaps six inches at the base and 10 inches long times 1/2 cause it’s a triangle, then the slice is 30 square inches of pizza. So four pizza slices would be 120 square inches of pizza per person per month. So times 120 sq inch * 200 mil people means that 24 billion square inches of pizza is eaten every month How would you estimate the weight of the Chrysler building? This is a process guesstimate - the interviewer wants to know if you know what questions to ask. 1. Ask about the dimensions of the building (height, weight, depth). Then determine the volume of the building. 2. Does it taper at the top? (Yes.) take 1/2 or 1/3 (volume of cone = 1/3 * pie * radius2 * height 3. Then, you need to estimate the composition of the Chrysler building. Is it mostly steel? Concrete? - How much would those components weigh per square inch? 4. Find out whether you're considering the building totally empty or with office furniture, people, etc.? - If you're including the contents, you might have to add 20 percent or so to the building's weight. You have a five-gallon jug and a three-gallon jug. You must obtain exactly four gallons of water. How will you do it? Fill the 3 gallon jug with water and pour it into the 5 gallon jug. After that, fill the 3 gallon jug again and pour it into the 5 gallon jug. This will leave one gallon in the 3 gallon jug. Empty out the 5 gallon jug and pour in the one gallon. Now fill the three-gallon jug again and pour it into the five-gallon jug. (Mathematically, this can be represented 3 + 3 - 5 + 3 = 4)
A company has 10 machines that produce gold coins. One of the machines is producing coins that are a gram light. How do you tell which machine is making the defective coins with only one weighing? Think this through - clearly, every machine will have to produce a sample coin or coins, and you must weigh all these coins together. How can you somehow indicate which coins came from which machine? The best way to do it is to have every machine crank a different number of coins, so that machine 1 will make one coin, machine 2 will make two coins, and so on. Take all the coins, weigh them together, and consider their weight against the total theoretical weight. If you're four grams short, for example, you'll know that machine 4 is defective. If you have seven white socks and nine black socks in a drawer, how many do you have to pull out blindly in order to ensure that you have a matching pair? Three. Let's see - if the first one is one color, and the second one is the other color, the third one, no matter what the color, will make a matching pair. Sometimes you're not supposed to think that hard. You have a painting that is $320 that is selling for 20 percent off. How much is the discounted price? 10% would be 32, times 2 is $64 320 - 60 = 260 - 4 = $256 How much would you pay for $100 of cash flow in perpetuity? PV of Perpetuity = MV / i Assume 5% rate of return so, $100 / .05 = $2,000 Although it may seem a bit illogical, an infinite series of cash flows can have a finite present value. Because of the time value of money, each payment is only a fraction of the last.