RBC Interview
Walk me through the 3 financial statements - answer The 3 major financial statements
are the Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to
Net Income, the final line on the statement. The Balance Sheet shows the company's
Assets - its resources - such as Cash, Inventory and PP&E, as well as its Liabilities -
such as Debt and Accounts Payable - and Shareholders' Equity. Assets must equal
Liabilities plus Shareholders' Equity.
The Cash Flow Statement 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.
Tell me about the 3 statements in relation to time. - answer The income statement and
cash flow show a period of time while the balance sheet only shows a snapshot in time.
How do the 3 statements link together? - answerTo tie the statements 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 Cash and Shareholders' Equity items on the
Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
Statement.
1 statement and I wanted to review
the overall health of a company - which statement would I use and why? - answerYou
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. And that's the #1 thing you care about when analyzing the overall financial
health of any business - its cash flow.
2 statements to assess a company's prospects - which 2 would I use and why? -
answerYou would pick the 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 that correspond to the same period
the Income Statement is tracking).
Why is the Income Statement not affected by changes in Inventory? - answerIn 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's the difference between cash-based and accrual accounting? - answerCash-
based accounting recognizes revenue and expenses when cash is actually received or
paid out; accrual accounting recognizes revenue when collection is reasonably certain
(i.e. after a customer has ordered the product) and recognizes expenses when they are
incurred rather than when they are paid out in cash.
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 are the 3 major valuation methodologies? - answerComparable Companies,
Precedent Transactions and Discounted Cash Flow Analysis.
What are the most common multiples used in Valuation? - answerThe most common
multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price /
Earnings per Share), and P/BV (Share Price / Book Value).
How do you select Comparable Companies / Precedent Transactions? - answer1.
Industry classification
2. Financial criteria (Revenue, EBITDA, etc.)
3. Geography
For Precedent Transactions, you often limit the set based on date and only look at
transactions within the past 1-2 years. The most important factor is industry - that is
always used to screen for companies/transactions, and the rest may or may not be used
depending on how specific you want to be.
What's the formula for Enterprise Value? - answerEV = Equity Value + Debt + Preferred
Stock + Minority Interest - Cash
Walk me through a basic DCF. - answerA DCF values a company based on the Present
Value of its Cash Flows and the Present Value of its Terminal Value.
First, you project out a company's financials using assumptions for revenue growth,
expenses and Working Capital; then you get down to Free Cash Flow for each year,
which you then sum up and discount to a Net Present Value, based on your discount
rate - usually the Weighted Average Cost of Capital.
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.
Walk me through the 3 financial statements - answer The 3 major financial statements
are the Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company's revenue and expenses, and goes down to
Net Income, the final line on the statement. The Balance Sheet shows the company's
Assets - its resources - such as Cash, Inventory and PP&E, as well as its Liabilities -
such as Debt and Accounts Payable - and Shareholders' Equity. Assets must equal
Liabilities plus Shareholders' Equity.
The Cash Flow Statement 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.
Tell me about the 3 statements in relation to time. - answer The income statement and
cash flow show a period of time while the balance sheet only shows a snapshot in time.
How do the 3 statements link together? - answerTo tie the statements 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 Cash and Shareholders' Equity items on the
Balance Sheet act as "plugs," with Cash flowing in from the final line on the Cash Flow
Statement.
1 statement and I wanted to review
the overall health of a company - which statement would I use and why? - answerYou
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. And that's the #1 thing you care about when analyzing the overall financial
health of any business - its cash flow.
2 statements to assess a company's prospects - which 2 would I use and why? -
answerYou would pick the 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 that correspond to the same period
the Income Statement is tracking).
Why is the Income Statement not affected by changes in Inventory? - answerIn 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's the difference between cash-based and accrual accounting? - answerCash-
based accounting recognizes revenue and expenses when cash is actually received or
paid out; accrual accounting recognizes revenue when collection is reasonably certain
(i.e. after a customer has ordered the product) and recognizes expenses when they are
incurred rather than when they are paid out in cash.
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 are the 3 major valuation methodologies? - answerComparable Companies,
Precedent Transactions and Discounted Cash Flow Analysis.
What are the most common multiples used in Valuation? - answerThe most common
multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price /
Earnings per Share), and P/BV (Share Price / Book Value).
How do you select Comparable Companies / Precedent Transactions? - answer1.
Industry classification
2. Financial criteria (Revenue, EBITDA, etc.)
3. Geography
For Precedent Transactions, you often limit the set based on date and only look at
transactions within the past 1-2 years. The most important factor is industry - that is
always used to screen for companies/transactions, and the rest may or may not be used
depending on how specific you want to be.
What's the formula for Enterprise Value? - answerEV = Equity Value + Debt + Preferred
Stock + Minority Interest - Cash
Walk me through a basic DCF. - answerA DCF values a company based on the Present
Value of its Cash Flows and the Present Value of its Terminal Value.
First, you project out a company's financials using assumptions for revenue growth,
expenses and Working Capital; then you get down to Free Cash Flow for each year,
which you then sum up and discount to a Net Present Value, based on your discount
rate - usually the Weighted Average Cost of Capital.
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.
