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.
Similarly, Enterprise Value is also available to all shareholders so it makes sense to pair them together. When would a Liquidation Valuation produce the highest value? This is highly unusual, but it could happen if a company had substantial hard assets but the market was severely undervaluing it for a specific reason such as an earnings miss or cyclicality.
How would you value it? This is a very common wrong answer given by interviewees. Remember, Unlevered Free Cash Flow excludes Interest and thus represents money available to all investors, whereas Levered already includes Interest and the money is therefore only available to equity investors.
Never say never. The 3 main ways to select companies and transactions: 1. Industry classification 2. Geography For Precedent Transactions, you often limit the set based on date and only look at transactions within the past years. Sometimes this simple fact gets lost in discussion of Valuation methodologies. What do you actually use a valuation for? Valuations can also be used in defense analyses, merger models, LBO models, DCFs because terminal multiples are based off of comps , and pretty much anything else in finance.
Why would a company with similar growth and profitability to its Comparable Companies be valued at a premium? What are the flaws with public company comparables? Look at the 75th percentile or higher for the multiples rather than the Medians. Add in a premium to some of the multiples. Lab View Course. AutoCAD Course. PaScad Course Details. Event Management. Management Control System. Visual Basic ebooks. Computer Graphics ebooks. Lab Manuals. Google eBookstore. PDF Books World. C Programming ebooks.
JAVA ebooks. J2EE ebook. J2ME ebooks. Home equity loan, also known as the second mortgage, enables you to borrow money against the value of equity in your home. Based on equity the lender will give you a loan. The borrower can withdraw the amount at any moment of time and pay the interest only on the amount withdrawn. Payroll cards are types of smart cards issued by banks to facilitate salary payments between employer and employees.
ACH stands for Automated Clearing House, which is an electronic transfer of funds between banks or financial institutions. Availability Float is a time difference between deposits made, and the funds are actually available in the account.
It is time to process a physical cheque into your account. Yield is commonly referred as the dividend, interest or return the investor receives from a security like stock or bond, interest on fix deposit etc. COFI is an index that is used to determine interest rates or changes in the interest rates for certain types of Loans.
For certain loan, there is a provision for the borrower to change the interest rate from fixed to variable and vice versa is referred as Convertibility Clause.
Charge off is a declaration by a lender to a borrower for non-payment of the remaining amount, when borrower badly falls into debt. The unpaid amount is settled as a bad debt. As the name suggest, it is an average interest rate offered for U. S dollar or Euro dollar deposited between groups of London banks. It is an international interest rate that follows world economic condition and used as a base rate by banks to set interest rate.
LIBOR comes in 8 maturities from overnight to 12 months and in 5 different currencies. Usury rates are generally set by State Law. A pay-day loan is generally, a small amount and a short-term loan available at high interest rate.
A borrower normally writes post-dated cheques to the lender in respect to the amount they wish to borrow. It minimizes the risk of theft. Normally, in endorsing cheque, the cashier will ask you to sign at the back of the cheque. The signature should match the payee. The image over here shows the endorsed cheque. This amount is accumulated and repaid with the principal amount on maturity of the deposit.
In some cases, interest may be credited on a monthly basis. The earned interest on fixed deposits is non-taxable. You can also take a loan against your fixed deposit. This type of Loan is offered to borrower to start their business and can be used to build a storefront, to acquire inventory or pay franchise fees to get a business rolling. Lines of credit are another type of business loan provided by commercial banks.
It is more like a security for your business; the bank allows the customer to withdraw the amount from readily available funds in an adverse time. Customer or Company can pay back over time and withdraw money again without going into the loan process. It is a Federal Agency U. S that gives funding to small businesses and entrepreneurs. If the customer fails to pay the bill, the bank will put interest on the outstanding bill and ask the customer for the payment.
The money is received after 7 days, and then the interest will be recovered for 7 days along with the principal amount. Cheque discounting service is offered only by few banks. We need to more information about bank. We will be in a better position to help you , if you let us know what exactly you want us to add? I have to give an interview in bank regarding accounts and finance question.
Sir, please provide some good gd topics and some more bank interview related questions. What is payment life cycle of ACH? What are real time payments Cases of invalid payments. Payments frauds. Do you have any documents related to the same. Sir i completed my mba and want to attend interview in state street foriegn bank mnc.
Nice questions and answers about the basic banking knowledge for fresher who want to make their careers in banking industry. I want to make my career in banking sector. I am a Software Engineer by profession for the last 6 years. Share via. Copy Link. Powered by Social Snap. Copy link. Copy Copied.
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