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Interview Questions on Finance – Acquisition & Merger

January 10, 2014
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If I were to ask a college senior student about what time of year sends the coldest chills down his spine, he would certainly say that he could certainly name one particular moment. But no matter how varying the list maybe, there would be one time that will be common in the list obtained from questioning n number of students. And that dreadful time would be the recruitment phase.

But guys, when you think of it after it is all over, it is not much of a big deal. Having fears and nervousness is justified but then, the best way to combat that would surely be to prepare for the technical interview round.

According to a survey, the maximum anxiety levels are observed in the final result phase. Well, there cannot be any doubt to that. But while talking about the anxiety levels of the period that a candidate can somehow monitor, technical interview round raises maximum curiosity and fears.

In hopes of helping our reader with that particular phase of the placement time, we are giving forward a few tips on how to attend the round and some FAQ of the technical interview round.


Be prepared. It cannot be any more obvious and there is no scope of evading this phase. So how about being well prepared to prevent yourself from the risk of being embarrassed of rejection or even worse, in person humiliation inside the interview room.

Keep your answers to the point. It is as simple as that. If you cannot express yourself in fewer words, you do not know much about the subject. Moreover, the longer you speak, the more you give the interviewer the time to gear up his ammunition for the interview battle. The bombs will definitely follow.

I don’t know- not a cliché. There is no harm in letting the interviewer know that you don’t know the answer. Because, at any point, the other person is more experienced than you and would eventually realize that you are haphazardly making up the answers.

Hold on to the basics. Do not try to take flight when you have forgotten how to walk. Specialization would definitely give you a sharp edge but then knowing the basics is the key. With lack of clear basics, that particular sharp edge would cut you deep itself.

Enough tips for now! And let us move into that part which candidates fear the most. I hope the questions discussed below will prove to be a guiding light in the otherwise dark tunnel that you are travelling in.

Q.How do you value a company?

A. Although it depends on the industry and situation of the company, basic key lies in the discounting the future earnings to the present value. It can be DCFF, DCFE or DDM depending upon the industry of company.

Q.In case of an acquisition, what would you consider - the equity value or the enterprise value?

A.While equity price reflects the market value and fundamental value of company, it is essential to consider the enterprise value in case of acquisition. This is because the enterprise value is an indicator of the company as a whole.

Q. Can a company have negative enterprise value?

A. Yes, it surely can. If the company is on the brink of bankruptcy, it will have negative enterprise value. Added to this, if the company has large cash reserves, enterprise value will swing to the negative side.

Q.If I give you the FCFF, how would you go about calculation the FCFE?

A.FCFF+ Tax on EBIT- Actual tax paid- Interest on cash (net of tax)- Interest on debt+ Repayment of debt = FCFE

Q.>What discount rates will you go about using?

A.- If you are doing a DCFF, then you would use a WACC, since it accounts for both Debt and Equity capital and the cash flows you are discounting are "pre-financing" and do not already include interest expense

- If you are doing a DCFE or a DDM, then you would use just the Cost of Equity since the cost of debt has already been taken into account in the cash flows that you are discounting.

Q. How would you know if an acquisition is dilutive?

A.If your current shareholders’ earnings per share go down after the transaction, this would be dilutive. However, if your current shareholders’ earnings per share go up, then it would be accretive. It is best to look at the effects over a number of years; otherwise, this could be a bit short sighted.

Q. I hope you are familiar with beta. Will you throw some light on how you will proceed to calculate the beta?

A.Plot the index in one column and relevant stock price in other column. Say the data is plotted for one week basis. Then calculate % change in the two parameters and plot the data in the next two columns. Beta can be calculated by dividing %changes in index by % changes in the stock prices. You can then de-lever the beta to get another beta that can be re-levered in subsequent calculations.

Q. What is the difference between asset beta and equity beta?

A. The asset beta is the unlevered beta which holds no risk to the leverage that the asset may hold. On the other side, when the beta is calculated by looking into the beta of other company, you obtain your levered beta. The mere thing left to do is to de-lever the beta.

I will certainly not hesitate to say that the range of questions will be bigger. But then, these questions often feature in the technical interviews of evaluations.


About the Author

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