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Interactive PDF. Look inside. Add Video Upgrade. First, you have to be able complete an LBO model in 30 minutes. That's very nice! Next, you must be able to spread 10 comps manually in under an hour.
Immediately, the dog sits down at the computer and completes everything in only 30 minutes. Lastly, you must be bilingual. Higher Beta means a higher potential return, but also more risk. You probably want to say above 1. If you can point to something you had to be proactive to get, this is a good time to bring it up.
What would you spend the capital on instead? Walk me through one of the deals listed on your resume. They specialized in food and beverages and sold to the US and European markets. They were interested in selling because of a string of recent acquisitions in their market, and felt they could get a premium valuation. They engaged us to run a broad sell-side process with financial and strategic buyers.
They were going public to raise funds so that they could expand beyond China and get into other markets, and we were the lead underwriter on the deal. Did you do anything quantitative for this deal? It looks like it just involved research. This is a common scenario for summer interns or if you worked at a small boutique where financial modeling was not as common.
Our team did some valuation and financial modeling work as well, but since I was an intern I supported the other Analyst and Associate by finding relevant facts and figures and then going through their models, figuring out how they worked, and then making sure the information was correct.
Why did the company you were representing want to sell? Maybe they received an unsolicited offer, maybe there were a string of recent acquisitions in their market, maybe the founder wanted to exit the business, or maybe the PE firm that owned the company wanted to exit its investment.
Why did the company you were representing want to buy another company? For this one you need to talk about what specific type of other company they wanted to buy. Did they want to expand into new geographies? Get into a new industry? They had tried to do so before, but lacked the expertise and industry contacts — so they wanted to acquire a sizable company that had already done it so they could grow their top-line and also diversify their business.
Describe the deal process. They had in mind around strategic buyers that might have been interested, and we added around 30 financial sponsors to their list. We got serious interest from about 5 of the companies we approached, which led to 1 strategic buyer and 1 financial sponsor ultimately competing to win the deal.
What were the major selling points of your client? What was attractive about it? The market as a whole was also very favorable because the Swedish population was aging and demand for healthcare could only rise in years to come. What about its weaknesses? Why might investors be hesitant? You could talk about unfavorable market trends, increased competition, uncertain financial projections, or the threat of new regulation harming the company.
Also, massive healthcare reform in the US might make it significantly more difficult to enter that market in the future. What were the major obstacles to getting the deal done? What happened? These could be anything from disagreements on price to legal issues to problems with retaining the management team.
If you can point to any obstacles that you played a role in resolving, bring them up here. Eventually we compromised on both points, and on the second issue I helped create a more detailed revenue model for the company that validated some of our assumptions, so the PE firm agreed to meet us halfway. What kind of standalone operating model did you create for your client?
Usually you do this by looking at revenue in terms of units sold, factories, or production, and you analyze expenses by fixed costs and employees. Then we combined that with projections for oil prices to estimate their yearly revenue. What was the status of this deal when you left your bank? They were moving closer and had resolved management retention and had come to agreement on the reps and warranties, but they were still locking down the final details, so the deal is pending right now.
What did you look at in the due diligence process? I came up with lists of questions for the customer due diligence calls we conducted, which was important because investors at the time were reluctant to invest in IPOs in emerging markets like Brazil — and by speaking with customers we were able to assess the risk for ourselves.
Tell me about the market your client was in. Focus on the major trends and how the company you represented compared to the competition. How did you narrow down potential targets or potential investors? We looked at some financial sponsors as well, but focused on ones that had sizable healthcare companies in their portfolios. How did you value your client? Just take the standard valuation methodologies and talk about how you applied them to the company you worked with. Note that for IPOs, you only care about public company comparables — for other types of deals you look at a wider range of methodologies.
How did you personally contribute to this deal? One of the most difficult and most important questions you can get. But most guides have ignored the fact that Restructuring even exists as a division of investment banks.
The questions here cover a broad range of topics, ranging from what Restructuring bankers do to the more technical aspects of debt and transactions with distressed companies. How much do you know about what you actually do in Restructuring? Restructuring bankers advised distressed companies — businesses going bankrupt, in the midst of bankruptcy, or getting out of bankruptcy — and help them change their capital structure to get out of bankruptcy, avoid it in the first place, or assist with a sale of the company depending on the scenario.
Do you know which one we usually advise? Bankers can advise either the debtor the company itself or the creditors anyone that has lent the company money. You need to research which bank does what, but typically Blackstone and Lazard advise the debtor and Houlihan Lokey advises the creditors these 3 are commonly as the top groups in the field.
You also get broader exposure because you see both the bright sides and not-so-bright sides of companies. How are you going to use your experience in Restructuring for your future career goals? See above. How would a distressed company select its Restructuring bankers? There are only a few banks with good practices, and they are selected on the basis of their experience doing similar deals in the industry as well as their relationships with all the other parties that will be involved in the deal process.
Why would company go bankrupt in the first place? What options are available to a distressed company that can't meet debt obligations? Sell the company either as a whole or in pieces in an asset sale. File for bankruptcy and use that opportunity to obtain additional financing, restructure its obligations, and be freed of onerous contracts. What are the advantages and disadvantages of each option?
Refinance — Advantages: Least disruptive to company and would help revive confidence; Disadvantages: Difficult to attract investors to a company on the verge of going bankrupt. Sale — Advantages: Shareholders could get some value and creditors would be less infuriated, knowing that funds are coming; Disadvantages: Unlikely to obtain a good valuation in a distressed sale, so company might sell for a fraction of its true worth 3.
Bankruptcy — Advantages: Could be the best way to negotiate with lenders, reduce obligations, and get additional financing; Disadvantages: Significant business disruptions and lack of confidence from customers, and equity investors would likely lose all their money 9.
From the perspective of the creditors, what different strategies do they have available to recover their capital in a distressed situation? Conditional financing — Only agree to invest if the company cuts expenses, stops losing money, and agrees to other terms and covenants.
Sale — Force the company to hire an investment bank to sell itself, or parts of itself. Foreclosure — Bank seizes collateral and forces a bankruptcy filing. How are Restructuring deals different from other types of transactions? The debtor advisor, for example, might have to work with creditors during a forbearance period and then work with lawyers to determine collateral recoveries for each tranche of debt.
Distressed sales can happen very quickly if the company is on the brink of bankruptcy, but those are different from Bankruptcy scenarios. A trustee ensures that all this happens according to plan. If we pretend a distressed company is a cocaine addict, Chapter 7 would be like a heart attack and Chapter 11 would be like rehab. What is debtor-in-possession DIP financing and how is it used with distressed companies?
Theoretically, this makes it easier for distressed companies to emerge from the bankruptcy process — though some argue that DIP financing is actually harmful on an empirical basis. Some DIP lending firms are known for trying to take over companies at a significant discount due to the huge amount of collateral they have.
One reason companies might choose to file for Chapter 11 bankruptcy is to get access to DIP financing. Would those adjustments differ for public companies vs. New debtor-in-possession DIP lenders see explanation above 2. Subordinated debt investors similar to high-yield bonds 5.
Mezzanine investors convertibles, convertible preferred stock, preferred stock, PIK 6. For more on the different types of debt, see the LBO section where we have a chart showing the differences between everything.
How do you measure the cost of debt for a company if it is too distressed to issue additional debt i. How would valuation change for a distressed company? This distinction exists because you need to make big adjustments to liabilities with distressed companies. How would a DCF analysis be different in a distressed scenario? Even more of the value would come from the terminal value since you normally assume a few years of cash flow-negative turnaround.
You might also do a sensitivity table on hitting or missing earnings projections, and also add a premium to WACC to make it higher and account for operating distress.
Creditors often initiate the process rather than the company itself. The only real way to improve price for your client is to have multiple bidders. The 2 basic ways you can buy a company are through a stock purchase and an asset purchase. What about the seller? A buyer almost always prefers an asset purchase so it can avoid assumption of unknown liabilities there are also tax advantages for the buyer. A distressed seller almost always prefers a stock purchase so it can be rid of all its liabilities and because it gets taxed more heavily when selling assets vs.
Are shareholders likely to receive any compensation in a distressed sale or bankruptcy? The motivation is simple: use excess balance sheet cash to buy back debt on-the-cheap and sharply reduce interest expense and obligations going forward.
What kind of companies would most likely enact debt buy-backs? Most likely over-levered companies — ones with too much debt — that were acquired by PE firms in leveraged buyouts during the boom years, and now face interest payments they have trouble meeting, along with excess cash. Why might a creditor might have to take a loss on the debt it loaned to a distressed company?
This happens to lower-priority creditors all the time. What is the end goal of a given financial restructuring? When you acquire the assets of a distressed company, you get literally just the assets. Trick question. All of that might cause the company to fail or require more capital, but the share price decline itself does not lead to bankruptcy. In the case of Bear Stearns in , overnight lenders lost confidence as a result of the sudden share price declines and it completely ran out of liquidity as a result — which is a big problem when your entire business depends on overnight lending.
What happens to Accounts Payable Days with a distressed company? Why might it not be able to do this? Will the adjusted EBITDA of a distressed company be higher or lower than the value you would get from its financial statements? In a Liquidation Valuation you need to adjust the values of the assets to reflect how much you could get if you sold them off separately. What kind of recovery can you expect for different assets in a Liquidation Valuation?
How would an LBO model for a distressed company be different? One structural difference is that a distressed company LBO is more likely to take the form of an asset purchase rather than a stock purchase.
But these days interviewers are going beyond the basics that everyone knows and asking questions that make you think instead. There are a few exceptions — you really do need to know the basic concepts, like simple accounting and valuation.
The 3 financial statements and what each one means. How the 3 statements link together and how to walk through questions where one or multiple items change. Different methods of accounting — cash-based vs. When to expense something and when to capitalize it. Not all expenses are created equal. The questions below will cover all these concepts. Walk me through the 3 financial statements.
Can you give examples of major line items on each of the financial statements? How do the 3 statements link together? If I were stranded on a desert island, only had 1 statement and I wanted to review the overall health of a company — which statement would I use and why?
You would use the Cash Flow Statement because it gives a true picture of how much cash the company is actually generating, independent of all the non-cash expenses you might have. Note: With this type of question I always recommend going in the order: 1. Income Statement 2. Cash Flow Statement 3.
Balance Sheet This is so you can check yourself at the end and make sure the Balance Sheet balances. If Depreciation is a non-cash expense, why does it affect the cash balance? Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a cash expense, Depreciation affects cash by reducing the amount of taxes you pay. Where does Depreciation usually show up on the Income Statement?
It could be in a separate line item, or it could be embedded in Cost of Goods Sold or Operating Expenses — every company does it differently. Note that the end result for accounting questions is the same: Depreciation always reduces Pre-Tax Income. No changes to the Income Statement. Why is the Income Statement not affected by changes in Inventory? This is a common interview mistake — incorrectly stating that Working Capital changes show up on the Income Statement.
So the cash number stays the same. What happens? After a year has passed, Apple must pay interest expense and must record the depreciation. The loan must also be paid back now. Walk me through the 3 statements. They order the inventory, but they have not manufactured or sold anything yet — what happens to the 3 statements?
Walk me through the 3 statements under this scenario. What does it mean? It is common to see this in 2 scenarios: 1. Leveraged Buyouts with dividend recapitalizations — it means that the owner of the company has taken out a large portion of its equity usually in the form of cash , which can sometimes turn the number negative.
What is working capital? How is it used? What does negative Working Capital mean? Is that a bad sign? Not necessarily. It depends on the type of company and the specific situation — here are a few different things it could mean: 1. Some companies with subscriptions or longer-term contracts often have negative Working Capital because of high Deferred Revenue balances. This can be a sign of business efficiency. Recently, banks have been writing down their assets and taking huge quarterly losses.
A combination? This is counter-intuitive. When would a company collect cash from a customer and not record it as revenue?
Three examples come to mind: 1. Web-based subscription software 2. Cell phone carriers that cell annual contracts 3. Per the rules of GAAP Generally Accepted Accounting Principles , you only record revenue when you actually perform the services — so the company would not record everything as revenue right away.
If cash collected is not recorded as revenue, what happens to it? Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred revenue represents how much it is waiting to record as revenue. How long does it usually take for a company to collect its accounts receivable balance? Most large companies use accrual accounting because paying with credit cards and lines of credit is so prevalent these days; very small businesses may use cash-based accounting to simplify their financial statements.
What would this look like under cash-based vs. In accrual accounting, it would show up as Revenue right away but instead of appearing in Cash on the Balance Sheet, it would go into Accounts Receivable at first. How do you decide when to capitalize rather than expense a purchase? If the asset has a useful life of over 1 year, it is capitalized put on the Balance Sheet rather than shown as an expense on the Income Statement.
Then it is depreciated tangible assets or amortized intangible assets over a certain number of years. Purchases like factories, equipment and land all last longer than a year and therefore show up on the Balance Sheet. Employee salaries and the cost of manufacturing products COGS only cover a short period of operations and therefore show up on the Income Statement as normal expenses instead.
Non-GAAP earnings are almost always higher because these expenses are excluded. How could this happen? Several possibilities: 1. The company has high interest expense and is no longer able to afford its debt. It has significant one-time charges from litigation, for example and those are high enough to bankrupt the company.
Remember, EBITDA excludes investment in and depreciation of long-term assets, interest and one-time charges — and all of these could end up bankrupting the company.
Normally Goodwill remains constant on the Balance Sheet — why would it be impaired and what does Goodwill Impairment mean? Usually this happens when a company has been acquired and the acquirer re-assesses its intangible assets such as customers, brand, and intellectual property and finds that they are worth significantly less than they originally thought.
It can also happen when a company discontinues part of its operations and must impair the associated goodwill. Under what circumstances would Goodwill increase? Technically Goodwill can increase if the company re-assesses its value and finds that it is worth more, but that is rare.
What usually happens is 1 of 2 scenarios: 1. The company acquires another company and pays more than what its assets are worth — this is then reflected in the Goodwill number. How is GAAP accounting different from tax accounting? GAAP is accrual-based but tax is cash-based. GAAP uses straight-line depreciation or a few other methods whereas tax accounting is different accelerated depreciation.
They arise because of temporary differences between what a company can deduct for cash tax purposes vs. Walk me through how you create a revenue model for a company.
There are 2 ways you could do this: a bottoms-up build and a tops-down build. Walk me through how you create an expense model for a company.
To do a true bottoms-up build, you start with each different department of a company, the of employees in each, the average salary, bonuses, and benefits, and then make assumptions on those going forward. Usually you assume that the number of employees is tied to revenue, and then you assume growth rates for salary, bonuses, benefits, and other metrics. Use estimates. It also includes how much over par value a company raises in an IPO or other equity offering.
Walk me through what flows into Retained Earnings. Normally you make very simple assumptions here and assume these are percentages of revenue, operating expenses, or cost of goods sold.
Then you either carry the same percentages across in future years or assume slight changes depending on the company. The way you should do this: create a book vs. Operating leases are used for short-term leasing of equipment and property, and do not involve ownership of anything. Operating lease expenses show up as operating expenses on the Income Statement. Capital leases are used for longer-term items and give the lessee ownership rights; they depreciate and incur interest payments, and are counted as debt.
A lease is a capital lease if any one of the following 4 conditions is true: 1. Just make sure you know all the relevant formulas and understand concepts like the Treasury Stock Method for calculating diluted shares. Why do we look at both Enterprise Value and Equity Value? Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders equity investors.
You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value. When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value? Most of the time you can get away with stating this formula in an interview, though. Why do you need to add Minority Interest to Enterprise Value? How do you calculate fully diluted shares? Take the basic share count and add in the dilutive effect of stock options and any other dilutive securities, such as warrants, convertible debt or convertible preferred stock.
To calculate the dilutive effect of options, you use the Treasury Stock Method detail on this below. When these options are exercised, there will be 10 new shares created — so the share count is now rather than Why do you subtract cash in the formula for Enterprise Value? Is that always accurate? In most cases, yes, because the terms of a debt agreement usually say that debt must be refinanced in an acquisition. However, there could always be exceptions where the buyer does not pay off the debt.
Could a company have a negative Enterprise Value? What would that mean? It means that the company has an extremely large cash balance, or an extremely low market capitalization or both.
You see it with: 1. Companies on the brink of bankruptcy. Financial institutions, such as banks, that have large cash balances. Could a company have a negative Equity Value? This is not possible because you cannot have a negative share count and you cannot have a negative share price. Why do we add Preferred Stock to get to Enterprise Value? As a result, it is seen as more similar to debt than common stock. How do you account for convertible bonds in the Enterprise Value formula?
How do I calculate diluted shares outstanding? This gets confusing because of the different units involved. So we count them as additional shares rather than debt. Next, we need to figure out how many shares this number represents.
Are there any problems with the Enterprise Value formula you just gave me? Should you use the book value or market value of each item when calculating Enterprise Value?
Technically, you should use market value for everything. What are the 3 major valuation methodologies? Rank the 3 valuation methodologies from highest to lowest expected value. Trick question — there is no ranking that always holds. In general, Precedent Transactions will be higher than Comparable Companies due to the Control Premium built into acquisitions. Often it produces the highest value, but it can produce the lowest value as well depending on your assumptions.
When would you not use a DCF in a Valuation? You do not use a DCF if the company has unstable or unpredictable cash flows tech or bio-tech startup or when debt and working capital serve a fundamentally different role. What other Valuation methodologies are there? When would you use a Liquidation Valuation?
When would you use Sum of the Parts? This is most often used when a company has completely different, unrelated divisions — a conglomerate like General Electric, for example. If you have a plastics division, a TV and entertainment division, an energy division, a consumer financing division and a technology division, you should not use the same set of Comparable Companies and Precedent Transactions for the entire company. Instead, you should use different sets for each division, value each one separately, and then add them together to get the Combined Value.
What are the most common multiples used in Valuation? What are some examples of industry-specific multiples? Technically it could go either way, but in most cases the LBO will give you a lower valuation. Instead, you set a desired IRR and determine how much you could pay for the company the valuation based on that. How would you present these Valuation methodologies to a company or its investors? You always show a range rather than one specific number.
How would you value an apple tree? Yes, you could do a DCF for anything — even an apple tree. Other guides skip this step entirely. You'll also get 15 sample "story" templates for interviewees from different backgrounds — finance, non- finance, undergraduate, MBA-level, and then more specific situations such as moving from investment banking to private equity, going from the back office to the front office, law or liberal arts to finance, and more.
In addition to learning how interview questions differ depending on your background and how to answer them appropriately, you can also review the video critique and analysis that accompanies each sample interview. While learning individual questions and answers is helpful, it's no substitute for listening to real interviews and learning exactly what each person did correctly and what could use improvement — which is why we added this course to the program.
Start with our Quick Start Guide and the Interview Action Plan first, and then review the rest of the sections and focus on what you need to know the most.
We explain what to focus on, what to ignore, and what to return back to depending on how much time you have available. You should use these models and the video tutorials that go along with them in conjunction with the Rules of Thumb for all the technical topics, and you should refer to them as you move through the textual guides and follow along with the models here.
You can also review the answer keys for the quizzes here, but do that only after you have completed the quizzes on your own first — otherwise it defeats the purpose of taking the quizzes in the first place. Asset vs. We have a team you can read more about everyone here who is on call to answer questions days per year — and you can access all previous questions and answers from the thousands who have already signed up for the course.
Good luck finding anything with interactive quizzes, Excel models, video tutorials, sample interviews, advanced and industry-specific questions, and more. Plus, the community of the site and the ability to get your questions answered whenever you want. Now, that may be a little more expensive than some other interview guides, but most of those are essentially just PDF e-books with very little meaty, specialized content.
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