Finance Internship Interview Questions

A discounted cash flow values a company on the cash it will generate. First I project unlevered free cash flow — operating profit after tax, plus depreciation, minus capital expenditures and increases in working capital — for about five years. Then I estimate a terminal value for the years after that, using either a perpetual growth rate or an exit multiple. I discount the yearly cash flows and the terminal value back to today at the weighted average cost of capital and add them up, which gives enterprise value. To get equity value, I subtract net debt.

WACC is the weighted average cost of capital — the return a company needs to pay its lenders and shareholders. You weight the cost of equity and the after-tax cost of debt by their shares of the company's total capital. Cost of equity is usually estimated with CAPM: the risk-free rate plus beta times the equity risk premium. Debt is taken after tax because interest expense is tax-deductible, so its cost is the interest rate times one minus the tax rate.

Equity value is the value of the company to its shareholders — for a public company, share price times diluted shares outstanding. Enterprise value is the value of the core business to everyone with a claim on it, so you start from equity value, add debt, preferred stock and noncontrolling interests, and subtract cash. That's why two companies with the same equity value can have very different enterprise values if one carries a lot of debt.

There are three main methods. Comparable companies looks at how the market values similar public companies, using multiples like EV to EBITDA. Precedent transactions looks at what buyers paid for similar companies in past acquisitions, which usually includes a control premium. And a DCF values the company on its own projected cash flows. I'd use all three to build a range, since each has weaknesses — comparables depend on the market's mood and a DCF depends heavily on its assumptions.

They fall. A bond pays fixed coupons, so when new bonds start paying higher rates, an existing bond is only worth buying at a lower price that brings its yield up to the market rate. Longer-maturity bonds are more sensitive because more of their cash flows are discounted at the higher rate for longer. The same logic affects stocks: higher rates raise the discount rate in a valuation, which lowers the present value of future cash flows.

I'd buy [company]. First, [a specific driver — for example, revenue from a new product line that grew about 30 percent last year] is becoming a bigger share of sales and has higher margins. Second, it trades at [a multiple] compared with about [peer multiple] for its closest peers, even though it's growing faster. I think the market is focused on [a short-term concern] and missing [the longer-term driver]. The main risk is [a specific risk]; if [a measurable sign] happened, I'd change my view.

I got interested in finance when I managed our student investment club's small portfolio and saw how much research goes into a single decision. I chose [investment banking, corporate finance or asset management] because I want to [build models for real transactions, help one company make its financial decisions, or analyze companies over the long term]. I've talked with [a professional or alumnus] about what the day-to-day work is like, including the hours, and it's the kind of work I want to do.

I've been following [event — for example, the most recent Federal Reserve rate decision]. [What happened, with one number.] The reason was [the cause, in one sentence]. What I find interesting is what it means for [the firm's area — for example, companies planning to refinance debt this year, or deal activity]. I've been reading about it in [source].