You are worried a lot about investment banking technical questions and assessment centers. You are crazy enough to complete the book “Options, Futures and Other Derivatives” within 3 days before your interview. You even try to read CFA level 2 books before your investment banking assessment center.
Does it work?
Yes, if tomorrow you are going to the CFA exam - but not really, if you are going to an assessment center!
The good news is, of course, that there will be investment banking technical questions in your interview, but they do not require such detailed explanations from all these books. Questions are usually twisted in the way that only those who understand the principles behind the theories can answer. Memorizing all the questions and answers never works!
Here are some examples: we will explain in details about the real principle behind the most commonly asked finance theories:
1) What is a larger part of the value calculation, forecasted cash flows or terminal value?
It depends. Normally, terminal value is the larger part of the value calculation of a firm because it takes into account all the future years of the business However, forecasted cash flows are sometimes larger. For example, a startup company may offer an extremely high discount rates so its cash flow after forecasted period has little value. Another example is a pharmaceutical company that has expired patents and thus there are very few projected cash flows after the forecasted period.
2) Draw me the diagram with x axis describing the cost of capital and the y axis describing equity/ debt ratio. On this diagram, draw the costs of equity, costs of debt and the WACC line.
The picture here shows how WACC is high at low levels of leverage, but reaches an ‘optimum’ at the idealized WACC before rising quickly into the territory where financial distress (risk of bankruptcy) becomes a major factor_._
3) What are three financial statements and how do they link together?
Three financial statements are income statement, balance sheet, and cash flow statement. Net income from the income statement is used to calculate the retained earnings that later goes to the balance sheet. Net income is also used to calculate cash flows for the current year. Total cash flows are then added to the cash account on the balance sheet.