Investment Banking Interview Questions & Answers

Flashcards covering frequently asked accounting, valuation, and LBO interview questions

What are the 3 major financial statements?

Income Statement, Balance Sheet, and Cash Flow Statement

What does the Income Statement show?

A company's revenue and expenses, down to Net Income.

What are the 3 major financial statements?

Income Statement, Balance Sheet, and Cash Flow Statement

What does the Income Statement show?

A company's revenue and expenses, down to Net Income.

What does the Balance Sheet show?

A company's Assets (resources) and Liabilities & Shareholders’ Equity. Assets must equal Liabilities plus Shareholders’ Equity.

What does the Cash Flow Statement Show?

The cash flow statement shows how a company’s cash moves in and out over a specific period of time. Begins with Net Income, adjusts for non-cash expenses and working capital changes, and then lists cash flow from investing and financing activities; at the end, you see the company’s net change in cash.

Name some major line items on the Income Statement.

Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating Income; Pretax Income; Net Income.

Name some major line items on the Balance Sheet.

Cash; Accounts Receivable; Inventory; Plants, Property & Equipment (PP&E); Accounts Payable; Accrued Expenses; Debt; Shareholders’ Equity.

Name some major line items on the Cash Flow Statement.

Net Income; Depreciation & Amortization; Stock-Based Compensation; Changes in Operating Assets & Liabilities; Cash Flow From Operations; Capital Expenditures; Cash Flow From Investing; Sale/Purchase of Securities; Dividends Issued; Cash Flow From Financing.

How do the 3 statements link together?

Net Income from the Income Statement flows into Shareholders’ Equity on the Balance Sheet, and into the top line of the Cash Flow Statement. Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt and Shareholders’ Equity. The final number on the cash flow statement flows into the cash account on the balance sheet

If you could only choose 1 statement to review the overall health of a company, which would you choose and why?

Cash Flow Statement; it gives a true picture of how much cash the company is actually generating, independent of all the non-cash expenses.

If you could only look at 2 statements to assess a company's prospects – which 2 would you use and why?

Income Statement and Balance Sheet, because you can create the Cash Flow Statement from both of those (assuming, of course that you have before and after versions of the Balance Sheet

Walk me through how Depreciation going up by $10 would affect the statements.

Income Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net Income would go down by $6. Cash Flow Statement: The Net Income at the top goes down by $6, but the $10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4. There are no changes elsewhere, so the overall Net Change in Cash goes up by $4. Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement. Overall, Assets is down by $6. Since Net Income fell by $6 as well, Shareholders’ Equity on the Liabilities & Shareholders’ Equity side is down by $6 and both sides of the Balance Sheet balance.

Why does Depreciation 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.

What happens when Accrued Compensation goes up by $10?

Assuming that’s the case, Operating Expenses on the Income Statement go up by $10, Pre-Tax Income falls by $10, and Net Income falls by $6 (assuming a 40% tax rate). On the Cash Flow Statement, Net Income is down by $6, and Accrued Compensation will increase Cash Flow by $10, so overall Cash Flow from Operations is up by $4 and the Net Change in Cash at the bottom is up by $4. On the Balance Sheet, Cash is up by $4 as a result, so Assets are up by $4. On the Liabilities & Equity side, Accrued Compensation is a liability so Liabilities are up by $10 and Retained Earnings are down by $6 due to the Net Income, so both sides balance.

What happens when Inventory goes up by $10, assuming you pay for it with cash?

No changes to the Income Statement. On the Cash Flow Statement, Inventory is an asset so that decreases your Cash Flow from Operations – it goes down by $10, as does the Net Change in Cash at the bottom. On the Balance Sheet under Assets, Inventory is up by $10 but Cash is down by $10, so the changes cancel out and Assets still equals Liabilities & Shareholders’ Equity.

Why is the Income Statement not affected by changes in Inventory?

In the case of Inventory, the expense is only recorded when the goods associated with it are sold – so if it’s just sitting in a warehouse, it does not count as a Cost of Good Sold or Operating Expense until the company manufactures it into a product and sells it.

What is Working Capital?

Working Capital = Current Assets – Current Liabilities. If it’s positive, it means a company can pay off its short-term liabilities with its short- term assets. It is often presented as a financial metric and its magnitude and sign (negative or positive) tells you whether or not the company is sound.

What does negative Working Capital mean?

Not necessarily bad. 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. 2. Retail and restaurant companies like Amazon, Wal-Mart, and McDonald’s often have negative Working Capital because customers pay upfront.

What is GAAP 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). GAAP is more complex and more accurately tracks assets/liabilities whereas tax accounting is only concerned with revenue/expenses in the current period and what income tax you owe.

What are deferred tax assets/liabilities and how do they arise?

They arise because of temporary differences between what a company can deduct for cash tax purposes vs. what they can deduct for book tax purposes. Deferred Tax Liabilities arise when you have a tax expense on the Income Statement, but haven’t actually paid that tax in cold, hard cash yet; Deferred Tax Assets arise when you pay taxes in cash but haven’t expensed them on the Income Statement yet.

What are examples of non-recurring charges we need to add back to a company's EBITDA when looking at its financial statements?

Restructuring Charges, Goodwill Impairment, Asset Write-Downs, Bad Debt Expenses, Legal Expenses, Disaster Expenses, Change in Accounting Procedures. All must affect Operating Income on the Income Statement.

What is Enterprise Value?

Enterprise Value represents a company’s total value

Enterprise value = equity +total debt+ preferred stock+ minority interest-cash

What is Equity Value?

Equity Value only represents the portion available to shareholders (equity investors).

Equity value=Share price x total number of outstanding shares

When looking at an acquisition of a company, do you pay more attention to Enterprise or Equity Value?

Enterprise Value, because that's how much an acquirer really pays and includes the often mandatory debt repayment.

What's the formula for Enterprise Value?

EV = Equity Value + Debt + Preferred Stock + Noncontrolling Interest – Cash

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.

What are the 3 major valuation methodologies?

Comparable Companies, Precedent Transactions and Discounted Cash Flow Analysis.

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?

Liquidation Valuation, Replacement Value, LBO Analysis, Sum of the Parts, M&A Premiums Analysis, Future Share Price Analysis

When would you use a Liquidation Valuation?

This is most common in bankruptcy scenarios and is used to see whether equity shareholders will receive any capital after the company's debts have been paid off.

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.

What are the most common multiples used in Valuation?

The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price / Earnings per Share), and P/BV (Share Price / Book Value per Share).

What are some examples of industry-specific multiples?

Technology (Internet): EV / Unique Visitors, EV / Pageviews; Retail / Airlines: EV / EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization & Rental Expense); Energy: EV / EBITDAX (Earnings Before Interest, Taxes, Depreciation, Amortization & Exploration Expense), EV / Daily Production, EV / Proved Reserve Quantities; Real Estate Investment Trusts (REITs): Price / FFO per Share, Price / AFFO per Share (Funds From Operations, Adjusted Funds From Operations)

How would you present Valuation methodologies to a company or its investors?

Usually use a football field chart where you show the valuation range implied by each methodology. You always show a range rather than one specific number.

Why can't you use Equity Value / EBITDA as a multiple rather than Enterprise Value / EBITDA?

EBITDA is available to all investors in the company – rather than just equity holders. Similarly, Enterprise Value is also available to all shareholders so it makes sense to pair them together. Equity Value / EBITDA, however, is comparing apples to oranges because Equity Value does not reflect the company’s entire capital structure – only the part available to equity investors.

What do you actually use a valuation for?

Usually you use it in pitch books and in client presentations when you’re providing updates and telling them what they should expect for their own valuation. It’s also used right before a deal closes in a Fairness Opinion, a document a bank creates that “proves” the value their client is paying or receiving is “fair” from a financial point of view.

What are the flaws with public company comparables?

No company is 100% comparable to another company. The stock market is emotional – your multiples might be dramatically higher or lower on certain dates depending on the market’s movements. Share prices for small companies with thinly-traded stocks may not reflect their full value.

What are some flaws with precedent transactions?

Past transactions are rarely 100% comparable – the transaction structure, size of the company, and market sentiment all have huge effects. Data on precedent transactions is generally more difficult to find than it is for public company comparables, especially for acquisitions of small private companies.

How do you value a private company?

Use the same methodologies as with public companies: public company comparables, precedent transactions, and DCF. But there are some differences: You might apply a 10-15% (or more) discount to the public company comparable multiples because the private company you’re valuing is not as liquid as the public comps; You can’t use a premiums analysis or future share price analysis because a private company doesn’t have a share price; Your valuation shows the Enterprise Value for the company as opposed to the implied per-share price as with public companies.

What is a DCF?

A DCF values a company based on the Present Value of its Cash Flows and the Present Value of its Terminal Value. First, project out a company's financials using assumptions for revenue growth and expenses; then get down to Free Cash Flow for each year, which you then sum up and discount to a Net Present Value, based on WACC. Once you have the present value of the Cash Flows, you determine the company's Terminal Value, using either the Multiples Method or the Gordon Growth Method, and then also discount that back to its Net Present Value using WACC. Finally, you add the two together to determine the company’s Enterprise Value.

How do you calculate WACC?

The formula is: Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred).

How do you calculate the Cost of Equity?

Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium

How do you get to Beta in the Cost of Equity calculation?

You look up the Beta for each Comparable Company (usually on Bloomberg), un-lever each one, take the median of the set and then lever it based on your company’s capital structure. Then you use this Levered Beta in the Cost of Equity calculation.

How do you calculate the Terminal Value?

You can either apply an exit multiple to the company's Year 5 EBITDA, EBIT or Free Cash Flow (Multiples Method) or you can use the Gordon Growth method to estimate its value based on its growth rate into perpetuity. The formula for Terminal Value using Gordon Growth is: Terminal Value = Year 5 Free Cash Flow * (1 + Growth Rate) / (Discount Rate – Growth Rate).

What is an appropriate growth rate to use when calculating the Terminal Value?

Normally you use the country’s long-term GDP growth rate, the rate of inflation, or something similarly conservative.

What types of sensitivity analyses would we look at in a DCF?

Revenue Growth vs. Terminal Multiple, EBITDA Margin vs. Terminal Multiple, Terminal Multiple vs. Discount Rate, Long-Term Growth Rate vs. Discount Rate

What is a merger model used for?

A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and determines whether the buyer’s EPS increases or decreases.

Why would a company want to acquire another company?

The buyer wants to gain market share by buying a competitor, the buyer needs to grow more quickly and sees an acquisition as a way to do that, the buyer believes the seller is undervalued, the buyer wants to acquire the seller's customers, the buyer thinks the seller has a critical technology, or the buyer believes it can achieve significant synergies

Why would an acquisition be dilutive?

An acquisition is dilutive if the additional amount of Net Income the seller contributes is not enough to offset the buyer’s foregone interest on cash, additional interest paid on debt, and the effects of issuing additional shares.

What is the rule of thumb for assessing whether an M&A deal will be accretive or dilutive?

In an all-stock deal, if the buyer has a higher P/E than the seller, it will be accretive; if the buyer has a lower P/E, it will be dilutive.

What are synergies?

Synergies refer to cases where 2 + 2 = 5 (or 6, or 7…) in an acquisition. Basically, the buyer gets more value than out of an acquisition than what the financials would predict. There are 2 types: revenue synergies and cost (or expense) synergies.

What role does a merger model play in deal negotiations?

The model is used as a sanity check and is used to test various assumptions. A company would never decide to do a deal based on the output of a model. It might say, “Ok, the model tells us this deal could work and be moderately accretive – it’s worth exploring more.” It would never say, “Aha! This model predicts 21% accretion – we should definitely acquire them now!”

Tell me the steps to follow in an LBO model.

In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity ratio, Interest Rate on Debt and other variables. Step 2 is to create a Sources & Uses section, which shows how you finance the transaction and what you use the capital for. Step 3 is to adjust the company’s Balance Sheet for the new Debt and Equity figures, and also add in Goodwill & Other Intangibles on the Assets side to make everything balance. Step 4, you project out the company’s Income Statement, Balance Sheet and Cash Flow Statement, and determine how much debt is paid off each year. Finally, Step 5, you make assumptions about the exit after several years, usually assuming an EBITDA Exit Multiple, and calculate the return based on how much equity is returned to the firm.

Why would you use leverage when buying a company?

To increase your returns. Remember, any debt you use in an LBO is not your money

What variables impact an LBO model the most?

Purchase and exit multiples have the biggest impact on the returns of a model. After that, the amount of leverage (debt) used also has a significant impact, followed by operational characteristics such as revenue growth and EBITDA margins.

What is an ideal candidate for an LBO?

Ideal candidates have stable and predictable cash flows, low-risk businesses, not much need for ongoing investments such as Capital Expenditures, as well as an opportunity for expense reductions to boost their margins and a strong management team or a solid base of assets to use as collateral for debt. The most important part is stable cash flow

Explain how the Balance Sheet is adjusted in an LBO model?

First, the Liabilities & Equities side is adjusted – the new debt is added on, and the Shareholders’ Equity is wiped out and replaced by however much equity the private equity firm is contributing. On the Assets side, Cash is adjusted for any cash used to finance the transaction, and then Goodwill & Other Intangibles are used as a plug to make the Balance Sheet balance.

What do you need to project in an LBO model?

You do need some form of Income Statement, something to track how the Debt balances change and some type of Cash Flow Statement to show how much cash is available to repay debt. But a full-blown Balance Sheet is not strictly required

What is the difference between bank debt and high-yield debt?

High-yield debt tends to have higher interest rates than bank debt, High-yield debt interest rates are usually fixed, whereas bank debt interest rates are floating, High-yield debt has incurrence covenants while bank debt has maintenance covenants, Bank debt is usually amortized – the principal must be paid off over time – whereas with high-yield debt, the entire principal is due at the end bullet maturity.

What is meant by the tax shield in an LBO?

This means that the interest a firm pays on debt is tax-deductible – so they save money on taxes and therefore increase their cash flow as a result of having debt from the LBO.

What is a dividend recapitalization dividend recap?

In a dividend recap, the company takes on new debt solely to pay a special dividend out to the PE firm that bought it.

What is a bond

a debt instrument issued by a borrower to raise capital

What is the difference between a bond and a loan

A bond is a formal debt security that is issued to raise funds, which can be traded in secondary markets, while a loan is typically a private agreement directly between a borrower and lender.

How does a company choose between loans or bonds

This choice is dependent on the company’s objective, market condition, and credit profile. A company may choose to issue a bond if they need to raise a larger amount of capital, lock in long term fixed rate financing, and ensure they have access to public markets for future financing needs. In contrast, they might prefer loans when there is a smaller amount, more flexibility, or if the company is private and may not have access to the public bond market

What is a bond

a debt instrument that is issued by a borrower to raise capital. the issuer promises to repay principle on a future date and pays periodic interest

What is the relationship between bond prices and yields

There is an inverse relationship[ between bond prices and yield. When interest rates rise, existing bonds with lower coupons become less attractive so their prices fall

How do you calculate yield to maturity

YTM is the internal rate of return on a bond if held to maturity. So it is the present value of all future cash flows to the bonds current price and reflects the total return an investor would earn if they bought the bond today and held it to maturity

What is duration

Duration is a measurement of a bond’s sensitivity to changes in interest rates

What’s the impact of duration on interest rate risk

The higher the duration, the more the bond’s price will fluctuate when rates change. For example a bond with a duration of 7 years will lose approximately 7% in value if interest rates rise by 1%

How does the secondary market performance affect pricing in the primary market

The secondary market allows investors to see if bonds are priced fairly in the primary market. If similar bonds are trading well, then issuers may price new debt more aggressively (lower yields), but if its weak, then new bonds may need to offer higher yields to attract buyers

what is yield

Yield is the investor’s return based on the bonds price. (investors like higher yield, issuing companies don’t like higher yield)

What is the coupon rate

Annual interest payment/face value of the bond
-for most bonds this is fixed at issuance(unless it’s floating)

-The annual interest rate that the bond issuer pays the bondholder/investor

What is the relationship between yield and bond price

When a bond is sold at discount, the yield is higher bc at maturity the bondholder receives the coupon payments in ADDITION to part of the principle.
When a bond is sold at a premium, the yield is lower because you only receive the coupon payments and you lose on part of the principal

What does it mean when a bond is trading at a premium

this means that the market price of the bond is greater than it's face value

What does it mean when a bond is trading at a discount

This means that the market price of the bond is less than it’s face value

What market does DCM work in, primary or secondary

DCM works in the primary market bc DCM helps companies issue debt. Although the secondary market is crucial in helping DCM price it’s debt issuance correctly

Why would a company choose to issue debt over equity

• a company may choose to issue debt over equity because it allows a company to raise capital without giving up ownership, in addition to take advantage of tax benefits since interest payments are tax deductible, and in many cases issuing debt is actually cheaper than issuing equity.

• this can occur when a company has a good credit rating and so they are able to issue debt at a lower interest rate. And typically equity is a more expensive form of financing because equity investors may return a higher return due to their position in the capital structure

When would a company choose to use a revolver instead of a bond

A revolver is best for short tern or unpredictable funding needs. Bc it offers flexibility since the company can draw and repay funds as needed. Bonds are better for long term fixed financing.

Summarize the current market events and explain how it affects our clients

Currently, the market is in a volatile state, largely driven by macro uncertainty and changes in U.S. trade and fiscal policy. One key driver is former President Trump’s aggressive tariff policies, which have contributed to inflationary pressures. In response, the Federal Reserve has been cautious about cutting rates, as it remains uncertain how inflation will evolve under the new regime.

More recently, Moody’s downgraded the U.S. credit rating from AAA to AA1, citing concerns over rising government debt and fiscal management. This downgrade has pushed Treasury yields higher in recent days, as investors demand greater compensation for holding U.S. debt.

Additionally, the market is anticipating even larger deficits due to Trump’s proposed tax cuts — his so-called ‘big, beautiful tax bill’ — which could reduce government revenue. The expected increase in Treasury issuance to fund this shortfall may further drive down demand and push yields even higher.

For our clients, this environment creates both challenges and opportunities. In a volatile market with rising Treasury yields, DCM deal flow often slows down because the cost of issuing debt increases. Many companies may choose to delay raising capital. However, not all can afford to wait — for firms with refinancing needs, strategic investments, or a view that rates may rise even further, this may still be a window to act.

How would you evaluate if a company can raise more debt?

Evaluating a company's ability to raise more debt involves analyzing its leverage ratios (like the Debt/EBITDA ratio), cash flow generation, interest coverage ratio, and overall creditworthiness. A strong credit rating and consistent revenue streams indicate a greater capacity for additional debt financing.

What happens if a company’s leverage goes too high

The Company can face credit rating downgrades, higher borrowing costs, or even difficultly accessing capital markets. Excessive leverage increases default risk.

Tell me about yourself

My name is Kelly Yam. I am from long island, ny. And i am a second year student studying business administration with concentrations in finance and accounting with a minor in cell and molecular biology at Northeastern University. Like many other students, when I first entered college I had no idea what i wanted to study. But through my academic curriculum and the conversations I’ve had with upper classmen, I developed an interest in pursuing finance and accounting. One great thing about Northeastern is that we have a plethora of different student clubs and organizations that allow students to pursue their personal and professional interests. Through this I joined Bull and Bear research, Northeastern’s equity research club, as a market insights analyst. In this role I worked with a team of 5 other students to produce weekly reports summarize market trends, and industry and company specific news, through this role I was able to develop both technical and interpersonal skills, Which ultimately allowed me to secure my first co-op as a global tax compliance intern for Blackstone’s private equity funds. At blackstone, I serve as more of a generalist, supporting the communication between LP’s and their respective fund leads, assisting with international FATCA/CRS reporting, and working on tax distribution modeling. Although my experience at blackstone has been an incredible opportunity to develop my accounting knowledge, it has also reinforced the kind of career I wish to pursue in the long term. The experience has taught me that I want to work in a dynamic environment. A role where no two days are the same, and where i’m constantly challenged to learn something new. That’s what draws me to investment banking. I’m excited by the pace, the complexity, and the opportunity to grow.

Why DCM

DCM appeals for me for several reasons. Firstly, I enjoy how DCM roles are more fast-paced and market driven, Which would require me to stay current on market event. In addition, I think that another aspect that sets DCM apart is that it allows me to work with a wide range of industries, which I believe is a great way to build a well rounded perspective. In addition, I’m the type of person who enjoys seeing things through from start to finish. And unlike other types of deals which ay take months to close, DCM offers a fast paced environment where, as an intern, I’d have the chance to be involved in live transactions and potentially see a deal close within my internship. I believe that the hands on exposure to the full deal cycle will allow me to learn and grow more than if I were to be on a different team.

Why Citizens

One reason I’m particularly interested in Citizens is the firm’s strong presence in the middle market and its lean team structure. This setup means that, as an intern, I’d have the opportunity to be very hands-on and contribute meaningfully to live deals, while also getting to know my team on a personal level — something that’s really important to me as I look to learn and grow.
What truly stood out to me, though, is the firm’s culture. I had the chance to experience it firsthand at the BankHER Summit earlier this year, and it was an incredible experience. Everyone I met — regardless of their role or seniority — was incredibly kind, welcoming, and genuinely open to speaking with me. That openness speaks volumes about the supportive environment at Citizens. It’s clear that people here are not only invested in their work, but also in each other’s personal and professional growth. And that’s the type of environment I would be excited to be a part of and learn in.

How come there is lighter/less modeling in DCM than other teams in IB?

It’s Not that DCM doesn’t have any modeling, it’s just that the modeling is lighter. This is bc unlike in M&A, ECM, or Lev Fin, your not trying to value a business, but your trying to help a company access capital in the most efficient way based on market conditions and it’s credit profile.

Types of models that might be used in a DCM Deal

• Debt Capacity Model

  • Estimates how much debt a company can take on without breaching credit rating targets or becoming overleveraged

• Pro Forma Capital Structure Model

  • Shows what the mix of financing (loans +investments) looks like after a new issuance

• Interest Expense Forecasting

  • Determines the impact of new and existing debt on the income statement

• Market Comparables

  • Looks at recent issuances by similar companies to determine the appropriate pricing and structure for a new bond or loan issuance

Step by step Debt Capacity model

1. Start with EBITDA and multiply it by the target leverage ratio (benchmarked from the market) to get the Max debt by leverage

2. Calculate interest expense from max debt by multiplying max debt by the interest rate

3. Calculate the interest coverage ratio (EBITDA /Interest expense)

4. Solve for the max debt under interest coverage constraint

   1. EBITA/ (Minimum coverage ratio x interest rate)

5. compare the max debt by leverage and the max debt by interest coverage and take the lower value

What is the interest coverage ratio and what does it tell you

The interest coverage ratio is EBITDA/Interest expense

It tells us how easily a company is able to meet its debt obligations/ can pay interest on its debt. Mainly used to asses default risk

What is the Debt to equity ratio

Total debt/Total equity

Shows the proportion of a company’s financing that comes from debt compared to shareholders

What is the debt to capital ratio

Total debt/ Total debt + total equity

Shows what % of total capital is funded by debt

What is the Debt to EBITA ratio

Total debt/EBITDA

Shows how many years it would take to repay debt using operating earnings

What is the current ratio

Current Assets / current liabilities

Shows a company’s ability to pay its short term liabilities using its short term assets

Whats the difference between investment grade vs High yield

Investment grade includes debt instruments that are rated BBB or higher and are lower risk than High yield

High yield is rated below BBB and is riskier but also higher return

Secured Vs Unsecured

Secured means backed by collateral

Walk me through a Market comparables analysis

1. Identify comparable bonds

   1. Look for similar bonds in terms of issuer, credit profile, currency, tenor, etc

2. Gather Key metrics

   1. For each comparable bond, look at the credit rating, coupon, maturity date, market price, YTM, Spread to benchmark, etc

3. Calculate the Credit spread

   1. Bond yield-treasury yield

4. Compare and analyze spreads

   1. To determine a fair value range for the new bond’s spread

5. Calculate the Expected yield

   1. Add the spread to the benchmark rate to propose a yeild

6. Bookbuilding

   1. See how investors react to the current pricing. If the demand is strong then lower the yield, if demand is weak that you may need to widen the spread

What is spread

Spread is the difference between a corporate bond’s yield and a benchmark lie a government bond’s yield of the same maturity. Is used to price new bonds

How does a DCF work/walk me through (high level)

A DCF analysis values a company by projecting its future free cash flows and terminal value and discounting them back to the present value using the WACC. The terminal value is calculated by using the perpetuity growth model or an exit multiple. Ans the final value gives the enterprise value of the company

What are the key drivers of a DCF

Some key drivers are

• Revenue growth

• The discount rate (WACC)

• EBIT and EBITDA margins

• Terminal value assumptions

How would rising interest rates affect a DCF Evaluation

When interest rates increase, then the cost of debt increases. As a result in the DCF evaluation the WACC increase which results in the lower present value of future cash flows and a lower valuation

How do cash flows affect a company’s ability to raise debt

Healthy and predictable cash flows make a company more creditworthy. This directly affects pricing, structure, and whether the company can access capital markets at all