Call option riskier than stock

Walk me through your resume. Tell me about yourself. What was the most important thing that you got out of your last or current job? Tell me about your previous work experience and walk me through a sample project from your work. What is the number one thing I should know about you that I cannot learn from your resume? Coming out of this interview, what are three things about you I should take away? How would your friends describe you?

How would your professors describe you? Why did you choose to pursue your degree MBA? Why are you working in your current industry? Why did you choose the firm you are at now? Why did you choose your college? Do you regret choosing the school or job you chose? Tell me about your college experience. What was your favorite and least favorite course in school? What were your grades in each?

Have you had a performance review? What did it say? What would your last or current boss say about you? What types of activities did you pursue in college?

What do you do in your free time? Tell me something interesting about you. What serves as your biggest motivation? What separates you from other candidates? Why should we hire you? What are some of your strengths? What do you think is the most important characteristic for this job? What qualities do you feel that you have that are transferrable to this position?

What are the qualities of a successful leader? Trustworthy, enthusiastic, confident, organized, tolerant, calm, focused, committed, and a great communicator. A good leader empowers others, allows group members to make decisions rather than micromanaging, and expresses appreciation for good work.

Why do you think you will be good in this job? Why are you interested in finance, and do you have any experience in the field? Why hedge funds or private equity? What is a hedge fund? A hedge fund is a private investment partnership, which uses aggressive strategies unavailable to other types of funds. They liberally use financial techniques to hedge against risk with the goal of making a profit in any market environment, such as short-selling, swaps, risk arbitrage, and derivatives.

Often these funds take on high risk and are highly leveraged to give their clients the potential for higher returns. They have much more latitude in the types of securities they can invest in because they are typically not restricted by most of regulations that other mutual funds must follow. Why are you applying here?

What do you hope to gain from this job? What in particular is attractive about this firm? What do you know about our firm? What is the strategy of our fund?

What three things would you change about this company? What direction would you take the firm if you were running it? If you had only three questions to ask senior management of a company, what would they be and why? What is your ideal work environment? What qualities would your ideal job have? Can ethical requirements in a firm be too high? What would you do for a living if you did not have to worry about money? Are you willing to travel or relocate for this position?

What other types of jobs are you looking at? Only in hedge funds? Who else are you interviewing with and where are you in the process with other firms? What do you plan on doing in the next 10 years? Do you plan on going to business school?

Why or why not? What aspect of finance do you find most interesting? If you have taken a finance course, present the most interesting topic you covered, and explain why you find that topic the most interesting. Provide a few different examples of careers in finance, and what exactly do they do?

Investment bankers raise capital through debt or equity offerings for companies in the public or private marketplace.

They also provide advice for companies on mergers and acquisitions and financial restructurings. At higher levels, investment bankers focus more on the clients and building relationships that can generate deal flow. At middle levels, bankers are more focused on executing the given service at a high quality to keep clients.

Investment managers manage money for individuals and institutions. What is an institutional investor? An organization that pools together large sums of money and puts that money to use in other investments. Some examples are investment banks, insurance companies, retirement funds, pensions funds, hedge funds, and mutual funds.

They act as specialized investors who invest on behalf of their clients. What are some recent trends in investment banking? JPMorgan buying Bear Stearns, Barclays buying part of Lehman Brothers. Buffett investing in Goldman Sachs, Mitsubishi in Morgan Stanley, TARP c.

What do you think you will be doing on a daily basis as an analyst? An analyst is responsible for financial modeling in Excel, comparable company analysis, precedent transaction analysis, preparing pitch books and PowerPoint presentations for clients, industry research, gathering of financial information.

Long hours, and hopefully a chance for more responsibility if my work is good. Can you handle the grunt work? Imagine that you are hired, but a few months into the job you are fired. Provide three reasons why this may happen, and what you can do to prevent this. What are your weaknesses? What is your favorite web site? What recent article in the Wall Street Journal stands out to you most, and why?

Do you read WSJ every day? What would you like for me to tell you? Do you have any questions for me? What is your opinion of where the economy is going in the next year?

Have you seen a change in deal flow due to the economic downturn? Do you think more investment banks will go under in the coming years? What do you see as the future of investment banking? How did you get into banking or this position? Have you enjoyed your experience?

Have you worked at other firms, and how do your former experiences compare to this one? What do you think separates this bank from similar banks? Culture-wise, what do you think is the biggest positive with this bank? What advice would give me going forward? What are the next steps in this process? When should I expect to hear from you? Personal Examples and Behavior Questions 1.

How do you manage stress in your life? How do you arrange your priorities when time constrained? What would you place as most and least important? Provide an example of when you have had to pick between two priorities, and how you chose between the two? Provide an example of a time where you had to handle many things at once or multitask. Provide an example of a time you had to make a split second decision. Provide an example of a time where you anticipated potential problems and took measures to prevent them.

Provide an example of a time where you learned something new in a short amount of time. Describe a situation when you or your group was at risk of missing a deadline, what did you do? Provide an example of a time where you set a goal and were able to meet or achieve it. What is the biggest risk you have taken in your life? What is the biggest obstacle or challenge you have faced and overcome in your life? Provide an example of a time where you failed and turned it into a learning experience.

What is the biggest mistake you have made in your professional life? What do you consider to be your greatest failure? What is the toughest decision you have ever had to make? What is the most difficult experience you have had? How did you approach it and how would you have done things differently? Provide an example of your greatest accomplishment or an accomplishment you are proud of. What role do you like to take in a team situation?

Do you feel more comfortable working in a group or individually? Provide an example of a situation where you worked with a team. Provide an example of a time you took a leadership role in a team situation. Provide an example of a time you had to deal with conflict in a team situation. Provide an example when you had to deal with an upset teammate or co-worker?

Provide an example when you were in a group where someone was not contributing as they should have been. What did you do? Provide an example of a project you have completed that you particularly enjoyed. How do you manage dealing with a difficult boss, co-worker, or teammate? Provide an example of a time where you successfully persuaded others to do something or see your point of view.

Provide an example of a time you had to motivate others. Provide an example of a time you went above and beyond expectations. Provide an example of a time when you were required to pay close attention to detail. Provide an example of a situation where that involved heavy analytical or quantitative thinking. How have you modeled with equations in the past? Provide an example of an experience of failure or when you failed to meet expectations.

You do not seem very driven. How will you be able to handle this position? How did you go about preparing for this interview? Knowledge and Technical Questions 1.

Explain what happened with the mortgage crisis? Mortgage market in America created a financial crisis. Interest rates were very low, and lenders allowing people to borrow large amounts with low credit ratings. Many mortgages were adjustable rate mortgages that begin with affordable payment but increase the rate later on. Borrowers with less than stellar credit ratings, called subprime borrowers, were taking out loans that they really could not afford.

Due to these loans, demand for houses increased and home value increased creating a housing bubble from to When more homeowners found themselves underwater, they had no incentive to continue paying mortgages so walked away from home.

When homeowner foreclosed upon or walks way, stop paying mortgage payments, decreasing the value of MBS that were on the balance sheets as assets of many banks and had to be written down due to the declining value causing banks to incur loss.

As capital and asset base declines, they restricted lending to meet reserve requirements and preserve liquidity. Increasing the severity of the problem, banks making these loans were selling off the future mortgage payments to other banks. They repackaged them and sold them as Mortgage Based Securities. Combination of these features led to a cycle which is largely the catalyst of the recession were currently in. What is a mortgage backed security? A class of asset-backed security that pays its holder periodic payments based on cash flows from underlying mortgages that fund the security.

MBS market allowed investors to lend money to homeowners with banks as middlemen with investor purchasing MBS and paid back over time by payments from homeowners. Many MBS rated AAA because considered highly diversified and not though that housing market would collapse across the board. Now we know housing values highly correlated and AAA rating too optimistic.

What is collateralized debt obligation? Broad asset class in which a number of interest paying assets are packaged together, securitized, and sold in the form of bonds b. A type of security that pools together a number of interest paying assets, and pays coupon payments based on those assets future cash flows. Investor pays market value for CDO and then has right to interest payments in form of coupon payments over time.

What is a credit default swap? Sold over the counter in an unregulated market. If you own the bond of a company and purchase a CDS of that bond, and the company defaults, then the party that sold you the CDS is responsible for paying you a certain amount of what you lost because of the default.

CDS buyer promised to pay seller annual payments, receive large payout if underlying company defaults, swap will become more valuable if underlying company becomes financially distressed c. CDS seller promises to pay swap buyer certain a mount if underlying company defaults, receives annual payments in exchange for the insurance; sellers include investment banks, hedge funds, insurance companies, etc. Can be used for hedging as an insurance policy against bond defaulting or speculating purchase the swap with the thought that the bond will become distressed, and more investors will desire the insurance, raising the value of the swap which can be sold.

When an issuer bundles together a group of assets and creates a new financial instrument by combining those assets and reselling them in different tiers called tranches. One of the reasons for the recession has been the mortgage backed securities market, which is made up of a securitized pool of mortgages banks issued and then sell off the future cash flows, mortgage payments, from those mortgages to another investor.

What are the three main financial statements? The Income Statement, Balance Sheet, and Statement of Cash Flows. What is the difference between the Income Statement and Cash Flow Statement? The Income Statement records revenues and expenses, while the cash flow statement has the following categories: It records what cash is actually being used and where it is being spent by the company during that time period. Walk me through the lines on the Cash Flow Statement? Beginning cash balance, then cash from operations, then cash from investing activities, then cash from financing activities, and the ending cash balance.

What are the components of each of the items on the Cash Flows Statement? Operations is cash generated from the normal operations of the company. Investing is change in cash from activities outside normal scope of the business, including purchases of property and equipment, and other investments not reflected on the income statement. How are the three financial statements connected? Net income is added to cash flows from operations on CF statement after making adjustments for non-cash items.

Interest expense is calculated from the long term debt under liabilities. Depreciation expense on Income Statement and Cash Flow Statement is calculated based on property and equipment. Cash from operations is derived from changed in Balance sheet accounts, and is impacted by the change in net working capital CA-CL. Any change in property due to purchase or sale of that equipment affects cash from investing.

From the three financial statements, if you had to choose two, which would you and why? If you had to choose one, which would it be? The Balance Sheet and Income Statement can be used to make the St of Cash Flows. Not IS, because full of non-cash items. What happens to each of the three primary financial statements when you change a gross margin, b capital expenditures, c depreciation expense?

If it decreases, then gross profit decreases relative to sales. Less income tax and lower net income if nothing else changed on the Income Statement. On the Statement of Cash Flows, have less cash. On CF St, Capital expenditures would decrease and thus increase cash, increasing cash on Balance Sheet but decreasing level of Property and Equipment so total assets remain constant.

Lower operating profit and thus pay less taxes and decrease net income. On Cash Flows St: Reduction of net income reduces cash from operations, but increases cash from operations since depreciation is non-cash expense thus increasing ending cash. How would it affect your three main financial statements? Ask for book value of the asset. How would you put it on the balance sheet?

If after the second year, the pen runs out of ink and is thrown away, how much is it on the balance sheet? What is a K?

It also includes the bylaws of the company, other legal documents and information about any lawsuits in which the company is involved. All publicly traded companies are required to file an annual K to the SEC. What is Sarbanes-Oxley and what are the implications? A bill passed by Congress in in response to accounting scandals. To reduce the likelihood of accounting scandals, the law established new standards for publicly held companies. Those in favor of this law believe it will restore investor confidence by increasing corporate accounting controls.

Those opposed to this law believe it will hinder organizations that do not have a surplus of funds to spend on adhering to the new accounting policies. What should a company do with excess cash on the balance sheet? There is an opportunity cost to holding too much cash by giving up potential earnings from investing that cash elsewhere. A company should have enough cash to protect itself from bankruptcy, but above that level cash should be either: Growing companies tend to reinvest rather than pay dividends.

If a company has seasonal working capital, is that a deal killer? Seasonal working capital applies to firms whose business is tied to certain time periods. When current assets are higher than current liabilities, more cash is being tied up instead of being borrowed. In a season when demand is higher, the firm must build up inventories to meet this demand at this time, increasing current assets which increases liquidity risk, so if the product is not purchased the company is stuck holding the inventory.

Also, if the company cant collect owed cash from AR in time to pay creditors, it runs risk of bankruptcy. This is an issue, but not a deal killer if the company has an adequate revolver and can predict the seasonal WC requirements with some clarity.

Generally, any recurring event is fine as long as it continues to perform as planned. A massive surprise event is what kills an investment.

What happens to the working capital? The net working capital needs should decrease as the business matures, which increases cash flows. As the business develops, it becomes more efficient and invest requirements are lower. What is goodwill and how does it affect net income? Goodwill is an intangible asset on the balance sheet that includes brand name, good customer relations, and intellectual property.

If an event occurs that diminishes the value of goodwill patent running out, or event hurting brand nameit is written down and is then subtracted as a non-cash expense thus reducing net income.

Accounting rules now state that goodwill must be tested once per year for impairment. Otherwise, it remains on the BS at its historical value. PIK stands for paid in kind, an important non-cash item that refers to interest or dividends paid by issuing more of the security instead of cash.

It can be toggled on at a particular time, often times at the option of the issuer. It becomes popular with PE firms, who could pay more aggressive prices by assuming more debt. Flipping on PIK may be an indicator that the company is nearing default on interest payments due to lack of cash because of a deteriorating business.

PIK can dramatically increase the debt burden on the company at a time when it is already showing signs of difficulty with the existing levels.

If a company issues a PIK security, what impact will that have on the three financial statements? This can mean compounding profits for the lenders and flexibility for the borrower. What is a PIPE? They are made by qualified investors HF, PE, mutual funds who purchase stock in a company at a discount to the current market value.

The financing structure become prevalent due to the relative cheapness and efficiency in time versus a traditional secondary offering.

There are less regulatory requirements. The most visible PIPE transaction of What is the difference between IRR, NPV, and payback? NPV measures whether or not a project can add additional or equal value to the firm based on its associated costs. Payback measures the amount of time it takes for a firm to recoup the initial costs of a project without taking into account the time value of money. What is a coverage ratio? What is a leverage ratio? Coverage ratios determine how much cash a company has to pay its existing interest payments.

There are many forms: No immediate effect on cash. AR means that cash will be received for the product or service at a later point in time. Give examples of ways companies can manipulate earnings. Switching from LIFO to FIFO. In a rising cost environment, FIFO will show lower earnings, higher costs, and lower taxes. Switching from fair value to cash flow hedges. Changes in fair value hedges are in earnings, changes in cash flow hedges are in other comprehensive income.

Having negative fair value hedges and then shifting them to cash flow hedges will increase earnings. Taking write-downs to inventory will decrease earnings. Changing depreciation methods e. Having a more aggressive revenue recognition policy. Manipulating pre-tax or after-tax gains h.

What is enterprise value? The value of an entire firm to both debt and equity holders. If enterprise value isand equity value iswhat is net debt? Net debt is Why do you subtract cash from enterprise value? Cash is already accounted for within the market value of equity. Also, subtract cash because can either use that cash to pay off some of the debt, or pay yourself a dividend, effectively reducing the purchase price of the company. Earnings before interest, taxes, depreciation, and amortization.

Good way of comparing the performance of different companies because it removes the effects of financing and accounting decisions like interest and depreciation, and is also considered a rough estimate of free cash flow. Which makes the biggest impact? Price has a bigger cost impact than expenses. Volume will increase revenue but variable costs will increase proportionally.

Unless there are no fixed costs, EBITDA will grow more, because fixed costs stay the same so total costs will not increase as much as revenue. Given that there is no multiple expansion and flat EBITDA, how can you still generate a return? Reduce interest expense, improve tax rate, depreciation tax shield, the simple act of leverage, pay down debt, pay a dividend, reduce capes, reduce working capital requirements and reduce change in other.

What are different multiples that can be used to value a company? Different multiples may be more or less appropriate for specific industry. The relevant multiple depends on the industry. Internet companies are valued with revenue multiples, which is why companies with low profits have high market caps. Companies in the metal and mining industry are valued using EBITDA. EBITDA multiples are often used to value firms that have negative income, but positive EBITDA.

They do not factor in the effect of interest and thus allow for comparability across firms regardless of capital structure.

Which industries interest you? Thus, if 15 in high growth tech industry, then relatively low. Market valuations in American markets tend to be higher than in the UK. What does spreading comps mean? Task of collecting and calculating relevant multiples for comparable companies and summarizing them for easy analysis or comparison. Procedure of calculating the worth of an asset, security, company, etc. One of the primary tasks investment bankers do for clients.

Value their company or value a company they are thinking about purchasing or divesting. How do you calculate free cash flow to equity? To equity levered cash flow: Same as firm FCF and then subtract interest and any required debt amortization. What is net working capital?

It is a measure of how able a company is to pay off its short term liabilities with its short term assets. If the number is negative, the company may run into trouble paying off creditors which could result in bankruptcy if cash reserves are low enough. What happens to free cash flow if net working capital increases? Net working capital is the net dollars tied up to run the business. As more cash is tied up, there is less cash flow generated.

Since subtract change in net working capital in calculation of free cash flow, if net working capital increases then free cash flow decreases. What are the basic ways to value a company? Comparable Companies to calculate either enterprise value or equity valuehow other similar companies were valued recently as multiple i. Average multiple from comparable companies multiplied by the operating metric of the company valuing ii. Market value of equity is only for publicly traded companies.

Find historical transactions similar to this transaction. Once identified comparable transactions, look at how those companies were valued. Calculate variation multiple based on the sale prices in those transactions and apply the multiple to the appropriate metric of the company being valued.

This will often result in highest valuation due to inclusion of control premium that a company will pay for assumed synergies that they hope will occur after purchase. Discounted Cash Flow Analysis i. Project free cash flows for a period of time 5 years. Next, predict the free cash flows for the years beyond 5 years though using a terminal value multiple or using the perpetuity method.

To calculate perpetuity, establish a terminal growth rate which is usually around the rate of inflation or GDP growth. Then multiply the final, or year 5, cash flow by 1 plus the growth rate and divide it by your discount rate minus the growth rate. To do this, you must establish a discount rate using WACC Question 46and discount all your cash flows back to year 0 using that discount rate.

The sum of the present values of all those cash flows is the value of the firm. Often use the assets of the company being acquired as collateral for the loan.

When sell company, ideally the debt has been partially or fully paid off, and they can collect most of the profits from the sale as the sole equity owners of the company. Since a smaller equity check was needed up front due to higher level of debt used to purchase the company, this can result in higher returns to the original investors than if had paid for company with all own equity.

Why do you project out free cash flows for the DCF model? Because FCF is the amount of actual cash that could hypothetically be paid out to lenders and investors from the earnings of a company. How would an increase in depreciation in year 4 affect the DCF valuation of a company?

Decreases net income, but add back depreciation in calculation of free cash flow, so FCF increases and valuation increase and valuation will increase by the present value of that increase. Why might there be multiple valuations of a single company? Since there are several different methods of valuation, each yields a different valuation due to different assumption, different multiples, or different comparable companies or transactions.

The two main methods, WACC and APV, make different assumptions about interest tax shields which leads to different valuations.

Of the four main valuation techniques market value, market comps, precedent transactions and DCFthe highest valuation will normally come form the Precedent Transactions technique because a company will pay a premium for the synergies coming from the merger.

DCF will usually give next highest because those building DCF tend to be optimistic in assumptions and projections going into their model. Market comps and market values will give lowest valuation. Market comps is based on other similar companies and how they are trading in the market, so no control premium or synergies. Market valuation is based on how the target is being valued by the market, and is just equity value no premiums or synergies.

What is the risk free rate? The risk-free rate is the current yield on the government Treasury bond for the period for which the projections are being considered. The ten year treasury is often used. It is considered risk-free since the US government is considered to be a risk-free borrower. A measure of relative volatility or risk of a given investment with respect to the market. Levered beta will be the beta found on websites like yahoo finance. So you calculate the Beta under the assumption it is all-equity firm.

How would you calculate an equity beta? Perform a regression of the return of the stock versus the return of the market as a whole. The slope of the regression line is beta. What kind of an investment has a negative beta? When the stock market goes up, the price of gold drops as people leave the safe haven of gold. Opposite occurs when the market goes down, implying a negative correlation. What is the formula for the Capital Asset Pricing Model?

CAPM is used to calculate the expected return on an investment ROEor the cost of equity of a company. Beta for a company is measure of the relative volatility of the given investment with respect to the market.

How do you get the discount rate for an all-equity firm? You use CAPM to calculate the cost of equity and that would be the discount rate. Can you apply CAPM in international markets? CAPM was developed for U. This method is less dependent on the assumed growth rate. Then multiple FCF from final year by 1 plus the growth race and divide by the discount rate WACC minus the assumed growth rate.

Formula comes up with the value in that year based on future cash flows, and discounting that value back to the present day. What is WACC and how do you calculate it?

It represents the blended cost to both debt and equity holders of a firm based on the cost of debt and cost of equity for that specific firm. Cost of equity is calculated using CAPM What is the difference between APV and WACC? WACC incorporates the effect of tax shields in the discount rate used to calculate the present value of cash flows.

It is typically calculated using actual data and numbers from balance sheets and uses consistent capital structure over the period of valuation.

APV adds present value of financing effects commonly the debt tax shield to net present value assuming an all-equity value, and calculates the adjusted present value. The APV approach is useful in cases where subsidized costs of financing are more complex and if capital structure is changing, such as leveraged buyout. Why do companies like Facebook and Twitter receive billion dollar valuations when they have very low revenue and profit margins?

Investors are anticipating extremely high future earnings of these businesses due to their reach and growth trajectory and are less focused on present revenues and margins. Facebook, social media giant, inventors banking on the fact that the company will find a better way to monetize their massive user base of over mil members either through finding a better way to charge higher rates for advertising, their earnings will be large.

Also, another reason is that companies like Microsoft are willing to pay large premiums for a small equity stake in the business in order to try and catch the wave of the future and establish a close partnership. Name three companies that are undervalued, and why you think this? How about three that are overvalued?

Use the comparable transaction or multiples method to value the company rather than DCF. To use the multiples method, examine common stock information of comparable companies in the same industry, to get average industry multiples of Price to earnings.

How do you value a company with no revenue? What is operating leverage? The percentage of costs that are fixed versus variable. If costs are mostly fixed, company has high level of operating leverage.

How do you think about the credit metric: How many times a company can cover its interest burden while still being able to reinvest into the company.

Of the four debt covenants minimum EBITDA, maximum capex, minimum interest earn extra money to pay babysitting, maximum leveragewhich one is the most important? A company can sell assets to pay down debt and reduce interest expense, but that will not solve underlying business problems. What is the difference between bank loan and high-yield debt covenants?

Bank loans are stricter in terms of maintenance covenants. For looser covenants, high-yield debt is rewarded with higher interest rates. Covenants can restrict economic activities, finance activities, or accounting measurements. Economic activities restricted would include the sale of assets, capex, changes in corporate structure.

Finance activities restricted could include issuance of additional debt and payment of cash dividends. Covenants often track accounting measurements, such as interest coverage, current ratios, minimum EBITDA.

What forexclear ndf your split between bonds and bank in the deal?

If there is a higher growth capex proportion of total capex, would you still want to use same split? However, this depends on bank willingness to grant loan. The more senior the debt, like the bank debt, the more restrictive it tends to be. Bank debt usually requires collateral to be pledge. The timeline of debt payback needs to be evaluated; bank debt usually has a shorter maturity, so the bank needs to ensure that the company will be able to face its liabilities when due or else face bankruptcy.

Growth capes is more favorable than maintenance capex. Growth capex implies investments, which yield higher cash flows in the future, than can be used to support more debt. Given negative news about a company, what happens to the pricing of the equity versus the senior debt? Since equity is riskier and there is more uncertainty associated with it, the equity will be more volatile and decline in price by a greater percentage than the debt.

What is a stock purchase and what is an asset purchase? A stock purchase refers to the purchase of an entire company so that all the outstanding stock is transferred to the buyer. In an asset deal, the seller retains ownership of the stock while the buyer uses a new or different entity to assume ownership over specified assets. Which structure does the seller prefer and why?

What about the buyer? A stock deal generally favors the seller because of the tax advantage. An asset deal for a corporation causes the seller to be double-taxed; at the corporate level when the assets are sold and foreign currency rates open market pakistan the individual level when proceeds are distributed to the shareholders.

In contrast, a stock deal avoids the second tax because proceeds transfer directly to the seller. In non-C corporations like LLCs and partnerships, a stock purchase can help oanda foreign exchange currency converter seller pay transaction taxes at a lower capital gains rate.

Since a stock purchase transfers the entire does 99 smithing make money, it allows the seller to completely extract itself from the business.

A buyer prefers an asset deal, because it can pick and choose which assets and liabilities to assume, decreasing the amount of due diligence needed. Second, the buyer can write up the value of the assets purchased- a step-up in basis to fair market value over the historical carrying cost, which can create an additional depreciation write-off, becoming a tax benefit.

Why should the fair market value of a company be the higher of its liquidation value and its going-concern value?

Liquidation value is the amount of money that could quickly be sold immediately, usually at a discount. The fair market value, the rightful value at which the assets should be sold, is higher. A liquidation value implies the buyer of the assets has more negotiating power than the seller, while fair market values assumes a compromise.

If positive goodwill exists, the company has intangible benefits that allow it to earn better profits than another company with the same assets; the going-concern value should be higher than the fair market value. A decrease in financial leverage lowers best binary option broker in canada beta which lowers the cost of equity capital.

With less debt, the firm is at a reduced risk of defaulting, and causes equity investors to expect a lower premium for their investments and therefore reduce the cost of equity. Would you rather have an extra dollar of debt pay-down or an extra dollar of EBITDA? An extra dollar of EBITDA because of the multiplier effect. At exit, the EV is dependant on the EBITDA times the exit multiple. Capital structure is the structure of capital that makes up the firm, or its levels of debt and equity.

Debt can be broken down into senior, mezzanine, and subordinate with senior paid off first then mezzanine then subordinate. Since senior is paid off first it has a lower interest rate. Equity is broken down into preferred and common stock. Preferred stock is a combination of debt and equity in that it has the opportunity for some appreciation in stock but pays a constant dividend that is not tied to the market price of the stock.

Common stock is traded on the exchanged. In event of bankruptcy, debt has first priority, while common stockholders have the last right to assets in the event of liquidation and thus bear the highest level of risk and the highest return on their investment.

What are you assuming when you short the junior piece of a capital structure and long the senior piece? You are assuming your return will make up the negative carry you will have to pay due to the higher interest rate on the junior piece of debt.

Why is bank debt maturity shorter than subordinated debt maturity? Bank debt will usually be cheaper lower interest rate because of its seniority, since it is less risky and needs to be paid back before debt tranches below it. To make it less risky to lenders, a shorter maturity helps, usually less than 10 years.

Bank deposits tend to have shorter maturities, so this aligns the cash flows of the center of gravity stock market business. What is your investing strategy? What are your long and short ideas? Where do you think the stock market will be in 6 months? What happened in the markets during the past three months?

What stocks do you own? What three stocks would you invest in? Where do you think the Dow Jones Industrial Average will be in 6 months? Talk about the stock price of a company in either your prior line of work or one that interests you.

Describe the stock of a company you have been watching? Why did the stock price decrease when it did and increases when it did? Tell me about your portfolio. How has it performed in the last three years? Give a bull and bear case on X energy commodity. Commodities are a strict result of supply and demand. Conversely, there is a constant discussion concerning supply: This point to bull cases for certain energy commodities, but crude oil has fallen dramatically from mid to because of the slowing global economy and rising inventories.

You have three companies in three different industries: What would you look for in their Ks beyond financials? In retail, look for strategy of make money mafia 2 differentiation and sustainability of that strategy zero in on competitors. For tech, what is the growth of its industry or market year zero in on longevity of product life?

For pharmaceuticals, measure the current patents in terms of years to expiration, and note the level of development of stock market rmbs in its pipeline. What is the difference between technical analysis and fundamental analysis? Technical analysis is the process of picking stocks based on historical trends and stock movements mainly based on charts.

What are the drivers of growth? Growth can be operationally organic from insideacquisition based, or financial recapitalizing. Would I be able to purchase a company at its current stock price?

Due to the fact that purchasing a stake in a company will require paying a control premium, most of the time forex live charts india buyer would not be able to simply purchase a company at its current stock price. The current shareholders require a premium to be convinced to tender their shares.

Correlation is the way two stocks, or investments, move in relation to each other. If two stocks have a strong positive correlation, when one moves up the other would move up as well. Correlation ranges between -1 and 1. Process of creating london stock exchange invest portfolio made up of binary options profitable trading strategies that work wide variety of investments with the goal being a higher return and lower risk than putting all capital into only a few investments.

It means investing in stocks, bonds, alternative investments, etc. Systematic risk is the risk that affects the entire market, while unsystematic risk affects only specific industries. If properly diversified, an investor can eliminate unsystematic risk from their portfolio, so they limit the risk associated with one individual stock and their portfolio will only be affected by factors affecting the entire market. If you add a risky stock into a risky portfolio, how is the overall risk of the portfolio affected?

It depends on the stock relative angies list stock options that of the portfolio, or the correlation of the new investment to the portfolio. The risk effect of adding a new stock to an existing portfolio depends on how that stock correlates with the other stocks in the portfolio. Thus, it could potentially lower the overall risk of the portfolio. Put the following portfolios consisting of 2 stocks in order from the least risky to the most risky and explain why.

247 binary options in forex hedging spot Portfolio of a shoe store stock and an oil company stock? A portfolio of a SUV car company stock and an oil company stock?

A portfolio of a shoe call option riskier than stock stock and a high-end clothing store stock? The least risky is B, then a, then c. The least risky is the one where the two securities have a strong negative correlation, since stocks with a negative correlation tend to move in the opposite direction under the same circumstances.

The value of the portfolio will remain relatively stable over time, making it less risky. High oil prices is bad for an SUV car company, since less people will want to purchase gas-guzzlers, but is good for oil companies. C is most risky because shoes and clothing are both apparel companies and have a strong positive correlation, so they tend to move together under the same circumstances, and are the most risky.

What kind of stocks would you issue for a startup? For a well-established firm? A startup has more risk than a well-established firm. The kind of stocks to issue for a startup would be those that protect the downside of equity holders while giving them upside, so the stock issued may be a combination of common stock, preferred stock, and debt notes with warrants options to buy stock.

When should a company buy back stock? What signals does this send to the market? When its stock is undervalued, has extra cash, believes it can make money by investing in itself, or when it wants to increase stock price by increasing EPS due to reduction in shares outstanding or send a positive signal to the market.

What does it mean to short a stock? It is the opposite of going long. When an investor buys a stock, they believe they can sell the stock for a higher price in the future. Normally, the short seller will borrow the stock form another investor and then sell it. Naked short selling occurs when an investor sells the stock without having any of the stock actually borrowed. How easily an asset or security can be bought and sold on the open markets.

Money market accounts and publicly traded large cap stocks are very liquid, while micro-cap stocks could be relatively low liquid due to the limited market demand for them. How quickly an asset can be converted into cash. Cash is the most liquid asset. A more liquid investment is relatively safer since the investor can sell it at any time. When should a company issue stock rather than debt to fund its operations?

If it believes its stock price is inflated, it can raise money on good terms average rmb usd exchange rate 2010 receiving a high price for shares. If it wants to adjust the debt to equity ratio, which in part determines bond rating? Bond ratings determine the pricing of its capital structure.

If bond rating is poor because struggling with large debts, the company may issue equity to pay down debt. If projects for which money is being raised may not generate predictable cash flows in immediate future, company may not be able to pay consistent coupon payments required by debt so issue stock to raise money.

When should a company issue debt instead of issuing equity? A company needs a steady cash flow before issuing debt, or else it will fall behind interest payments and get its asset seized. Once a company can issue debt, it xo stock broker prefer issuing debt since it is cheaper than equity. Interest payments are tax deductible and therefore provide interest tax shields.

It may also try to raise debt if it feels its stick is undervalued and would not raise the capital needed from an equity offering. Issuing debt sends a quieter signal to the market regarding its current cash situation.

If the expected return on equity is fund protection stock market crash than the expected return on debt, a company will generally issue debt. Thus, it will choose debt, since it is cheaper than equity. Is the dividend paid on common stock taxable to shareholders?

Dividend paid on common stock is taxed at the firm level, since the dividend comes out from the net income after taxes, and the shareholders are taxed for the dividend as ordinary income on personal income tax. Preferred stock dividend is treated stockbrokers newcastle upon tyne interest expense and is tax-free at corporate level.

When would an investor buy preferred stock? Wants the upside potential of equity and wants to minimize risk through receiving steady interest-like dividend payments that are more assured than the dividends on common brokers california list stock. Corporation would invest in preferred stock because dividends on preferred are taxed at a lower rate than interest rates on bonds.

Why would a company distribute earnings through dividends to common stockholders? Regular dividend payments signal that the company is healthy and profitable, which attracts more investors or shareholders, potentially increasing stock price. Also, if it lacks profitable investment opportunities. Why would the stock price of a company decrease when it announced increased quarterly earnings?

How can a company raise its stock price? Any type of positive news about the company, such as announcing an accretive merger or acquisition that will increase EPS, announcing a change to organization structure through cost-cutting or consolidation, could raise its stock price. If it repurchases stock, it roboforex bonus key the shares outstanding, raising EPS which will raise stock price, and also sends a positive signal to the market.

It can also produce higher earnings, raising EPS higher than anticipated. It depends on the Beta and the performance of the market. What is an Initial Public Offering? An IPO is the first sale of stock in a previously private company to the public markets, known as going public.

Many Companies will go public to raise capital in order to grow business, to allow original owners and investors to cash out some of their investment, and employee compensation. Some negatives for going public include sharing future cheating on binary options uk reviews with public investors, los of confidentiality and control, IPO expenses to investment banks, legal liabilities, etc.

Talk about a recent IPO that you have followed? Why did you choose it? How is that money left on the table? Money left on the table means the company bursa malaysia stock market prices have completed the offering at a higher price could have sold the same stock in its IPO at a higher priceand that difference in valuation goes to initial investors in the stock rather than the company raising the money.

If the stock rises a lot the first day, it is good publicity for the firm. Bankers must honestly value a company and its stock over the long term rather than guessing what the market will do.

Even if a stock trades up significantly initially, a banker looking at the long term would expect the stock to come down, as long as the market eventually correctly values it. What is insider trading and why is it illegal? The illegal activity of buying or selling stock based on information that is not public information.

Smithfield nc cattle market law against insider trading exists to prevent those with privileged information from using this information to make a tremendous amount of money unfairly.

If you have two companies that are exactly the same in terms of revenue, growth, risk, etc. Public will be priced higher due to the liquidity premium an investor willingly pays for the ability to quickly and easily trade the stock on public exchanges ad also for the transparency premium an investor pays since the public company is required to file their financial documents publicly.

Which has a higher growth potential: Growth potential has less to do with stock price than operations and revenue prospects. However, the stock with higher growth potential is most likely the stock with lower market cap. What is the primary market and what is a secondary market? The primary market is the market that an investment bank, or firm, sells new securities, a new stock or bond issuance to the first time it comes to market and thus before they go to market.

With an IPO or Bond issuance, the majority of these buyers are institutional investors who purchase large amounts of the security. The second market is the market that the security, stock or bond, will trade on after the initial offering NYSE, Nasdaq.

What are some reasons why a company might tap the high-yield market? Companies with low credit ratings are unable to access investment grade investors and would have to borrow at higher rates in the high yield markets. Other companies must have specific riskier investments that they must pay a higher cost of capital for. Past performance is not necessarily an indicator of future results. How has the overall market done? How did it do in the years before?

Can that strategy be expected to work continuously over the next five to ten years? If the days sales outstanding of company increased fnb forex 53 to 71 days, would you be more or less likely to issue a Buy rating on the stock and why? Less likely, since when the says sales outstanding increases the company is collecting money from customers slower, since customers went from taking an average of replacement stock for browning a bolt medallion days to pay bills to 71 days.

Having faster paying customers when sales grow or stay the same is a good thing, so when it takes longer it is a bad thing. A high current ratio indicates that a company has enough cash or assets that can quickly turn into cash to cover its immediate runescape stat changer and money maker download requirements on liabilities.

If the Current Ratio of a company went down from 2. Less likely, since the company is less able to cover its immediate liabilities with cash and other current assets than it was last quarter. Company B has a higher ROA, since it is able to generate the same earnings with less trade rules for binary options profitably and is thus more efficient.

From an ROE and ROI perspective, company A might be a better company but it would be riskier from a bankruptcy perspective. What is the market risk premium? The required return that investors require treatment options and strategies for antibody mediated rejection after renal transplantation investing in stocks over investing in risk-free securities.

Calculated as the average return on the market-risk free rate What is default risk? Risk of a given company going bankrupt What is default premium? Difference between the yield on a corporate bond and the yield on a government bond with the same time to maturity to compensate the investor for the default risk of the corporation, compared with the risk-free comparable government security.

What is face value? Par value of a bond is the amount the bond issuer must pay back at time of maturity. What is the coupon payment? The amount that a company will pay to a bondholder normally on an annual or semi-annual basis. It is the coupon rate x the face value of the bond.

What determines the premium you place on growth stocks relative to their peers? All the criteria that goes towards a good investment determines the premium you place on a growth stock. A fairly valued company should theoretically have a PEG ratio of 1. By setting PEG to 1 and solving for growth rate, you can gather a sense of what premium the market is putting on the particular stock.

What is the difference between an investment grade bond and a junk bond? When a bank makes a loan the money supply quizlet investment grade bond is a bond issued by a company that has a relatively low risk of bankruptcy, a good credit rating, and thus pays a low interest rate.

A junk bond is a bond issued by a company that has a high risk of bankruptcy, has poor credit rating, and thus pays a high interest rate. What is the difference between a bond and a loan? The market that it is forex bank skicka pengar on.

A bond issuance is usually for a larger amount of capital, is sold in the public market and can be traded. A loan is issued by a bank, and is not traded on a public market. How do you determine the discount rate on a bond? How do you price a bond? The net present value of all future cash flows coupon payments and par value expected from the exchange rate usd eur graph using the current interest rate.

If the price of transfer stock from sole trader to limited company bond goes up, what happens to yield? The price and yield of a bond move inversely to one another. When the price of a bond goes up, yield goes down. Define the difference between the yield and the rate of return on a bond i. The yield is the return you earn if you hold the bond to maturity versus the rate of return is the actual realized return to the bond holder.

If the bond is sold before maturity, the rate of return can be higher or lower than the yield. If you believe interest rates will fall, and want to make money due to the capital appreciation on bonds, would you buy them or short sell them? Since prices move inversely to interest rates, if you believe interest rates will fall, bond prices will rise and therefore you should buy bonds. Who is a more senior creditor, a bondholder or stockholder? A bondholder is more senior.

Stockholders must wait until bondholders are paid during a bankruptcy before claiming company assets. Interest payments are paid to bondholders before equity holders receive any dividends.

They are inversely related. What is the current yield? How are bonds priced? Bonds are priced based on the net present value of all future cash flows make money fixing broken electronics from the bond.

How are the coupons affected? When the interest rates rise, the market price of the coupon bond decreases because the investor can obtain a higher interest rate on the market than what the bond is currently yielding.

The coupons remain constant; the 1996 shutdown stock market market price instead balances the yield to keep it neutral with the current market. What are the factors that affect option pricing? An option conveys the right, not obligation, to engage in a future transaction on some underlying security. A change in the price of the underlying security either increases or decreases the value of an option, and the price changes have an opposite effect on calls and puts.

The strike price determines whether the option has intrinsic value and it generally increases as the option becomes further in the money. Time influences option pricing because as expiration approaches, the time value of the option decreases. The relationship between the price of a call option and put option with an identical strike price and expiration date. The parity shows that the implied volatility of calls and puts are identical.

Also, in a delta-neutral portfolio, a call and a put can be used interchangeably. What is meant by the term securities lending? The loan is often collateralized. Occurs when an investor buys and sells an asset or related assets at the same time in order to capture a guaranteed profit from the trade by taking advantage of the temporary price differences that occur when two assets are inaccurately priced by the markets.

What is convertible arbitrage? An investment strategy that seeks to exploit pricing inefficiencies between a convertible bond and the underlying stock. Managers will typically long the convertible bond and short the underlying stock.

If you buy a normal bond at par and you get the face managed forex trading currency converter at maturity.

Is that most similar to buying a put, selling a put, buying a call, or selling a call? Selling a put because if the stock decreases in value, you lose money, like a bond defaulting. Why could two bonds with the same maturity, same coupon, from the same issue be trading at different prices? One of the bonds could be callable, put-able, or convertible.

A bond that is put-able or convertible demands a premium, and a callable bond trades at a discount. What are bond ratings? The lower the grade, the more speculative the stock, and all else equal, the higher the yield. They range from AAA, which are highly rated investment grade bonds with low default risk, to C, which are junk bonds, or D, which means that the bond is in default and not making payments.

Which corporate bond would have a higher coupon, AAA or BBB? What are the annual payments received by the owner of a 5 year zero coupon bonds?

The BBB bond would have a higher coupon because it is perceived to have a higher risk of defaulting. To compensate investors for this higher risk, lower rated bonds offer higher yields. Toronto work at home data entry owner of the zero coupon bond receives no annual payments, instead the owner pays a discount upfront and then receives the face value at the time of maturity.

What major factors affect the yield on a corporate bond? Interest rates on comparable U. Corporate bond yields trade at a premium, or spread, over the interest rate on comparable US treasury bonds a 5 yr corporate bond trading at a premium of. If interest rates are falling, would you buy a 10 year coupon bond or 10 year zero coupon bond? The 10 year zero coupon bond, because it is more sensitive to changes in interest rates than an equivalent coupon bond, so its price will increase more than the price of the coupon bond if interest rates fall.

A coupon how much money does an lpn make in pennsylvania pays regular interest payments than pays the principal when the bond matures, so it is less risky since you receive some money back before over time. Even if the company defaults on its debt prior to maturity, you will have received some payments with the coupon bond, while the zero coupon bond you have to wait to receive any money back.

What is the Long Bond? What is it trading at? What is the current yield on the year Treasury note? Since price and yield are inversely related, when the price of the note rises, its yield falls. What would cause the price of a treasure note to rise? If the stock market is extremely volatile and investors are fearful of losing money, they will desire risk free securities, which are government bonds. The increase in demand for these securities will drive the price up, and thus the yield will fall.

If you believe interest rates will fall, should you buy bonds or sell bonds? Since bond prices rise when interest rates fall, buy bonds. What should the interest rate be on the junior debt? What if this was an LBO scenario and you had a sponsor putting in million of equity? The company would be less risky because it has more liquidity now. What are the three ways to create quantitative trading system book value?

You have a company binary options strategy five minute 2x senior leverage and 5x junior leverage. What happens when you sell the business for 8x EBITDA? What about for 7x EBITDA? On a firm basis, it has a neutral impact, but it is de-leveraging on a senior debt basis How many basis points equal 1.

Does inflation hurt or help creditors? Creditors assign interest rates based on the risk of default as well as the expected inflation rate. When creditors lend out money at a fixed rate, the inflations cuts into the real percentage return they make. If the president historical stock market standard deviation impeached, how would interest rates be affected?

Any negative news about the country often leads to fears that the economy will decline, so the Fed would balance those fears by lowering interest rates to stimulate economic expansion.

How does the government react to fear of hyperinflation? Increasing taxes and decreasing spending slows down growth in the economy and fights inflation.

Raising key interest rates will slow the economy, reduce the money supply, and slow inflation. What is your outlook on the economy? If the stock market falls, what would happen to bond prices and interest rates? Expect bond prices to spread monitor forex and interest rates to fall. When the stock market falls, investors flee to safer securities, like bonds, which causes demand to rise and thus prices.

Since prices and yield move inversely, if bond prices rise, yield falls. The government may lower interest rates in an attempt to stimulate the economy. When unemployment decreases, what happens to inflation, interest rates, and bond prices? Inflation up, interest rates up, bond prices down. If inflation last month was very low, but bond prices closed lower, why would this happen?

A report showing last month inflation was benign would benefit bond prices to the extent that traders believed it was an indication of low future inflation as well. The rate of return, expressed as an annual rate, on a bond if it is purchased today for its current price and held through its maturity date. Calculation is based on current market price, coupon payments, face value, and time to maturity. If the yield is lower than the current yield, it is selling at a discount. What will happen to the price of a bond if the fed raises interest rates?

If interest rates rise, newly issued bonds offer higher yields to keep pace. Therefore, existing bonds with lower coupon payments are less attractive, and the price must fall to raise the yield to match the new bonds. What is a Eurodollar bond? A bond issued by a foreign company, but issued in US dollars rather than their home currency.

What is a callable bond? A bond that allows the issuer of the bond to redeem the bond prior to its maturity date, thus ending their coupon payments. However, a premium is usually paid by the issuer to redeem the bond early. What is a put bond? The opposite of a callable bond.

Gives the owner of bond the right to force the issuer to buy back the security from them at face value, prior to the maturity date.

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What is a convertible bond? Can be converted into equity over the course of the life of the bond. A bondholder can decide that equity in the company is worth more than the bond and the company can essentially buy back their debt by issuing new equity. What is a perpetual bond?

A bond that pays coupon payments every period indefinitely or the company goes into default with no repayment of the principal amount par value. How would you value a zero coupon perpetual bond? Thus if the coupon is zero and if that continues perpetually, you will never get paid so worth nothing. Divide the coupon by the current interest rate. A measure of the sensitivity of the price of a bond to changes in interest rates, expressed as a number of years.

Formally, it is the weighted average maturity of cash flows. If your cash flow occurs faster or sooner your duration is lower and vice versa.

A 4 year bond with semi-annual coupons will have a lower duration than a 10 year zero-year coupon bond. The larger the duration number, the greater the impact of interest rate fluctuations on bond prices. What does the term delta mean?

The change in price of an option for every one point move in the price of the underlying security a first derivative What is meant by gamma? A measurement of how fast delta changes, given a unit change in the underlying price a second derivative What does the term vega mean? What is meant by rho? What the term theta mean? Then those holding subordinated debt, then preferred stockholders, then common stockholders. What are some ways to determine if a company poses a credit risk?

What do you think the Fed will do with interest rates over the next 5 yrs? As the economy recovers, you can expect that the fed will raise rates slowly to stunt inflation by taking money out of the overall money supply. The increase in production as the economy betters will make up for the tightening policy. What is the Fed Funds rate? What steps can the Fed take to influence the economy?

Buying government securities increases the money supply and stimulates expansion, selling securities shrinks the money supply and slows the economy. Raise or lower interest rates: The federal funds rate is the rate banks charge each other on short-term loans. When the Fed lowers these rates, it signals an expansionary monetary policy. Manipulate the reserve requirements: When this requirement is lowered, more cash is loaned out and is pumped into the economy, and is therefore expansionary policy.

What do you think of Bernanke and how is he likely to differ from Greenspan? How is it often used? The London Interbank Offered Rate tracks the daily interest rates at which banks borrow unsecured funds from banks in the London wholesale money market, and is roughly comparable to the Fed Funds rate. What is the effect on U.

Why Are Options So Much Riskier Than Stocks? | Seeking Alpha

What is the currency risk for a company selling its products internationally? What is the currency risk for a company manufacturing its products overseas? Currency risks created by international sales: If the dollar strengthens against the other currency it is selling a product at, then it will be making less dollars than it had previously anticipated unless it reacts by changing its prices.

If foreign currency weakens, can make product cheaper, sell for lower prices, and gain competitive advantage. If it strengthens, labor costs will increase. Also if company has major competitors in foreign countries, price of currency in those countries influence prices at which foreign competitors sell cars, so at currency risk.

When currencies fall in other countries, why are US based investment banks hurt? If investment banks held currency or bonds in currencies that fell, these assets turned non-performing and are essentially worthless. When the dollar weakens, price of imported goods rise when measured in US dollars, which means higher inflation. Higher inflation puts pressure on the Fed to raise interest rates. The international currency will strengthen relative to the dollar. What is the difference between currency devaluation and currency depreciation?

Devaluation occurs in a fixed-exchange-rate system, like China, when the government changes the exchange rate of its currency, thus the exchange rate is fixed as a function of government policy. What are the main factors that govern foreign exchange rates? Interest rates, inflation, and capital market equilibrium.

What is the spot exchange rate? The rate of a foreign-exchange contract for immediate delivery. Spot rates are the price that a buyer will pay for a foreign currency. What is the forward exchange rate? The rate at which traders are willing to exchange currencies in the future, or the price that a foreign currency will cost at some time in the future. A company can enter into a forward contract on exchange rates to help hedge against exchange rate fluctuations in the future.

What is the difference between strong and weak currency? A strong currency is one whose value is rising, while a weak currency is one whose value is falling. The interest rate in the two countries: The rise in demand will cause the currency to strengthen. They believe that the dollar will strengthen against the pound in the coming year: What is the implied forward rate for the second half of the year?

The spot rate is the price that is to be paid immediately. Forward rates are the projected spot rates, which can fluctuate based on the market. What is a derivative? A type of investment that derives its value from the value of other assets like stocks, bonds, commodity prices or market index values.

Some derivatives are futures contracts, forwards contracts, calls, puts, etc. A call option and put option? A type of derivative that gives the bearer the option to buy or sell a security at a given date, without the option to do so.

The buyer of the option pays an amount less of the actual value of the stock and has the option to buy or sell the stock for a set price on or before a set date. A call option gives the holder the right to purchase an asset for a specified exercise price on or before a specified expiration date.

A put option gives the holder the right to sell an asset for a specified exercise price on or before a specified expiration date. A financial strategy designed to reduce risk by balancing a position in the market.

For example, an investor that owns a stock could hedge the risk of the stock going down by buying put options on that security or other related businesses in the industry. What are the main difference between futures and forward contracts? Forward contracts are a type of derivative that arranges for the future delivery of an asset on a specific date at a specific price, thus it is in an agreement that calls for future delivery and no money is changed initially in order to protect each party from future price fluctuations.

They are traded over the counter, and are more flexible because they are privately negotiated and can represent any assets and can change settlement dates should both parties agree.

Futures contracts are a financial contract obligating the buyer to purchase an asset like a commodity or another financial instrument at a specified price on a specified date. They are strictly defined in their terms and highly standardized, which allows them to be publicly traded on exchanges.

What factors influence the price of an option? Current stock price, exercise price, stock volatility, time to expiration, interest rate, and the dividend rate of the stock. When the exercise price or dividend payout increases, call option price decreases and put option price increases.

When volatility or time to expiration increase, call option and put option price increase. In the money when exercising the option means that at this point in time, if an investor decides to exercise their option, they will make money based on the difference between the exercise price and market price. A call option is in the money when its exercise price is below the market price, so an investor can purchase the asset at the exercise price and instantly sell it at the market price.

A put option is in the money when its exercise price is above the market price since an investor can buy the asset at the market price and instantly sell it at the exercise price. Explain how a swap works. A swap is an agreement to exchange future cash flows, such as a credit default swap issued by banks as a type of insurance against companies not being able to pay back their debt. The most popular forms include foreign exchange swaps and interest rate swaps.

They are used to hedge volatile rates, such as currency exchange rates or interest rates. Swaps can benefit both companies if one has access to a lower floating rate, and one has access to a lower fixed rate, and each desires the rate the other company has access to. The profit made would be equal to the option premium you received when you sold the option. Buying a put option gives the option to sell the stock at a certain price, so would do this if expect the price of the stock to fall.

If the strike price on a put option is below the current price, is the option holder at the money, in the money or out of the money?

A put option gives the holder the right to sell a security at a certain price, the face that the strike or exercise price is below the current price would mean that the option holder would lose money, so out of the money. If the current price of a stock is above the strike price of a call option, is the option holder at the money, in the money, or out of the money? A call option gives the holder the right to buy a security, the holder is in the money making money.

About how much is my put worth, and why? If the expiration date were in the future, the option would be more valuable, because the stock could conceivably drop more. What is the Black-Sholes model? The industry standard model for pricing option. When would a trader seeking profit from a long-term possession of a future be in the long position? The trader in the long position is committed to buying a commodity on a delivery date.

They would hold this position if they believe the commodity price will increase. All else being equal, which would be less valuable: How about a more volatile stock or less volatile stock?

All else being equal, which would be more valuable: A December call option or a January call option? Why do interest rates matter when figuring the price of options? Due to net present value: Deal was advertised as a merger of equals and the Sears name will remain, but Kmart acted as an acquirer by the structure of the deal.

Does that transaction make sense? The deal created the 3rd largest retailer in the country behind Wal-Mart and Home Deport. Increased shopping convenience is expected to allow the combined firm to formidably battle against competitors.

Target lost its No. Name two companies that you think should merge. Identify synergies between two companies, will not raise antitrust issues with FTC What are the three types of mergers and what are the benefits of each? A horizontal merger is a merger with a competitor and will ideally result in synergies.

A vertical merger is a merger with a supplier or distributor and will ideally result in cost cutting. A conglomerate merger is a merger with a company in a completely unrelated business and is most likely done for market or product expansions, or to diversify its product platform and reduce risk exposure.

What are some reasons that two companies would want to merge? The target company is seen as undervalued. A larger company is more industry-defensible more resilient to downturns or more formidable competitor. Provides growth versus organic growth which may have slowed or stalledand can be a use for excess cash.

Also, management ego in the desire to run a larger company and increase their own compensation. What are some reasons that two companies would not want to merge?

Synergies they are looking to gain through the merge will not occur, many times a company will just want to merge due to management ego and wanting to gain media attention, and high investment banking fees associated with completing a merger. Improvements that result from the combination of two companies, resulting in a more valuable company than the sum of the values of the two individual companies together.

Can result from cost cuts due to reduction in redundant management, employees, office size, etc, or can include revenue generating synergies such as ability to raise prices because of reduced competition, cross-marketing, and economies of scale.

Options outstanding represent the total amount of options issued. Options exercisable are options that have vested and can actually be exercised at the strike price. What is the difference between a strategic buyer and a financial buyer?

A strategic buyer is a corporation that wants to acquire another company for strategic business reasons in order to enhance their business strategically, through synergies, cost cutting, or growth potential. A financial buyer is traditionally a group of investors that wants to acquire a company purely as a financial investment, looking to gain the income the company produces.

An example is a private equity fund doing a leveraged buyout of the company. Which will normally pay a higher price for a company, a strategic or financial buyer? A strategic buyer will normally pay a higher price, due to their willingness to pay a premium to potentially gain the synergies of lowering costs, improving their existing business, and revenue synergies.

The financial buyer look at the company purely in terms of return on a standalone basis unless they have other companies in their portfolio that could significantly improve operations of the target. You are advising a client in the potential sale of the company. Who would pay more for the company: A strategic buyer would typically pay more due to the additional benefits, synergies, from the purchase and thus higher cash flows from the purchase than would an LBO fund which is traditionally a financial buyer.

How Risky Is It to Invest in Options? | DailyWorth

What is a stock swap? When a company purchases another company by issuing new stock of the combined company to the old owners of the company being acquired, rather than paying in cash.

The acquired company agrees to be paid in stock of the new company because they believe in the potential for success in the merger. They are more likely to occur when the stock market is performing well and the stock price of the acquiring firm is relatively high, giving them something of high value to purchase the company with.

Are most mergers stock swaps or cash transactions and why? In strong markets, most mergers are stock swaps because the stock prices of companies are so high, and because the current owners will most likely desire stock in the new company anticipating growth in the strong market.

Why pay in stock versus cash? If a company pays in cash, the owners receiving the cash pay taxes on the cash received. If the owners of the company being acquired want to be part of the new company, they may prefer to gain stock. If the market is performing poorly, or is highly volatile, the company being acquired may prefer cash. What is a dilutive merger? What is an accretive merger? If you merge two companies, what does the pro-forma income statement look like?

Revenues and operational expenses can be added together, plus any synergies. Fixed costs tend to have more potential synergies than variable costs.

This brings you to operating income. Any changes in cash will affect interest income. Interest expense will change based on new capital structure. New or refinanced debt will change pro-forma interest expense. For rolled over debt, since your cash flows will change, your debt pay-down may alter, which also affects interest. Based on all the changes previously, this will cause taxes to differ so cant add the two old tax amounts.

Nothing can simply be added together. What is the difference between shares outstanding and fully diluted shares? Shares outstanding represent the actual number of shares of common stock that have been issued as of the current date. How do you calculate the number of fully dilated shares?

The most common way is the treasury stock method, which involves finding the number of current shares outstanding, adding the number of options and warrants that are currently in the money, and then subtracting the number of shares that could be repurchased using the proceeds form the exercising of the options and warrants. What is the treasury stock method?

Assumes that acquirers will use option proceeds to buy back exercised options at the offered share price. What is a cash offer? A payment for the ownership of a corporation in cash. What are some defensive tactics that a target firm may employ to block a hostile takeover? A poison pill shareholder rights plan gives existing shareholders the right to purchase more shares at a discount in the event of a takeover, making the takeover less attractive by diluting the acquirer.

A Pac-Man defense is when the company which is the target of the hostile takeover turns around and tries to acquire the firm that originally attempted the hostile takeover. A white knight is a company which comes in which a friendly takeover offer in the target company which is being targeted in a hostile takeover.

What is a tender offer? There are SEC regulations governing this. What is a leveraged buyout? How is it different than a merger? Why do private equity firms use leverage when buying a company? It is a leveraged buyout because the acquirer will fund the purchase of the company with a relatively high level of debt and then pay off the debt with the cash flows produced by the firm.

By the time the fund is ready to sell the company, the business will ideally have little to no debt and the PE firm will collect a higher percentage of the selling price or use the excess cash flow to pay themselves a dividend since the debt has been reduced or paid off.

How could a firm increase the returns on an LBO acquisition? A PE fund can increase potential returns on an investment by changing a number of drivers: Although, the higher the leverage, the higher the return, increase the leverage puts financial stress on the company being acquired and increases the bankruptcy risk.

What makes a company an attractive target for a leveraged buy out? The most important characteristic of a good LBO candidate is steady cash flows, so that the firm can ideally pay off a significant portion or all of the debt raised in the acquisition over the life of the investment horizon, with minimal bankruptcy risk.

Some other good characteristics are strong management, cost-cutting opportunities, and a non-cyclical industry. What are the potential investment exit strategies for an LBO fund? Sale to strategic or another financial buyer, IPO or recapitalization re-leveraging by replacing equity with more debt in order to extract cash from the company. Why use EBITDA multiples instead of PE multiples? It can be used for firms reporting losses, it allows you to compare firms regardless of leverage, and because it represents operational cash flow.

Advantages of LBO Financing? Interest payments on debt are tax deductible iii. What are some characteristics of a company that is a good LBO candidate? Steady cash flows, strong management, opportunities for earnings growth or cost reductions, high asset base for collateral to raise more debtlow business risk and low need for ongoing investment capex and working capital.

Most important is steady cash flows, because sponsors need to be able to pay off the relatively high interest expense each year. Sources contain the variable tranches of capital structure.

Some examples from senior to junior are bank debt; junior subordinated noted, convertible preferred, hybrids and sponsor equity. Cash belonging to the target can also be used as a source. Finally, proceeds form options exercised as the target are a source. You need to determine how these sources are used; the main component is the purchase of the company, either of the assets or shares.

Since interest is tax deductible, the break-even return is the after-tax cost of debt. In a leveraged buyout, what would be the ideal amount to put on a company? To maximize returns, the acquiring firm wants to finance the deal with the least amount of equity possible, but has to be careful not to put the company into financial distress by overburdening the acquired company with debt. How many gallons of white house paint are sold in the U. Assume million people in US, and half, mil, live in houses.

Average family size is 3, so 50 mil houses in the US. If houses painted every 10 years on average, then 5. Half town lives in houses in groups of three: Painted every 10 years, so houses painted annually. Each house has 2, square feet of wall, so need 20 gallons since each gallon covers square feet per house. Thus, 11, gallons of house paint each year. Multiply by 10, and have 77 mil gallons of house paint. How many square feet of loaves of bread is consumed in the United States each month?

Average person eats it twice a month, two slices at a time so four slices per month. How would you estimate the weight of a Building? Dimensions of building height, weight, depth to determine volume. Does it taper at top? How much these components weigh per square inch? If you were going to build a building in a city, and has no physical restraints, no capital restraints, nothing, how tall would you build it? Measuring the demand for space in a new building, how high people would be willing to purchase space due to safety concerns, how much you can sell the space for in comparison with how much it costs to maintain, how much the demand for the space will grow over the life of the building, so how much extra space should you build into the design.

Why are manhole covers round? If other shape, it would make it harder to fit with a cover, so would have to rotate it exactly the right way. Concerning corners, cannot cut self on round cover with no corner and easier to transport since can roll it. If the time on a clock is 4: Two boats are going towards each other at 10 miles per hour.

They are 10 miles apart. How long until they hit? You have a 5-gallon jug and 3-gallon jug. How will you obtain exactly four gallons of water? Fill the three gallon jug and pour it into the 5 gallon jug.

Repeat, but 1 gallon will remain in the 3 gallon jug since the 5 gallon jug is full. Empty the 5 gallon jug, pour in the 1 gallon and then fill the 3 gallon jug and pour it into the 5 gallon to get 4 gallons. If there are two doors, one that leads to the job offer and the other to the exit that each have one guard in front of the door.

One guard always tells the truth, the other one always lies. You can ask one question to decide which door is the correct one. What will you ask? Ask question that provides same answer no matter who you ask. If I were to ask the other guard which way is correct, what would he say? Truthful guard tell you wrong way, since lying guard would lie.

Lying guard tell you wrong way, sine lying about what truth guard would say. So right way is opposite then answer.

If there are 10 machines that produce gold coins, but one of the machines produces coins that are a gram light, how do you know which machine is making defective coins with one weighing? Have each machine crank different number of coins machine 1 gives 1 coin, machine 2 gives 2 coins, etcweigh all coins together- number of grams short of theoretical weight will indicate which machine 2 grams short, machine 2 defective What is 43 x 12?

There are 1 million shares outstanding. What is the sum of the numbers from ? Pair up numbers into groups ofso 50 groups: How much is the discounted price? How many Jet Blue planes will take off in the next hour in the US? Number of airports in US: If you have 5 white socks and 7 black socks in a drawer, how many do you have to pull out blindly in order to get a matching pair?

First one is one color, and second is other color, then third has to be one of the previous colors to make a pair. Tell me a good joke that is not racist or sexist.

If you are driving two miles on a one mile track, and do one lap at 30 miles an hour, how fast must you go to average 60 miles an hour? Since have already gone 2 minutes, impossible to average 60 miles an hour which is supposed to take a total amount of time of 2 minutes.

You play a game of dice where you are paid the equivalent amount of dollars to the number you roll. You roll one fair six-sided die.

How much are you willing to pay for this roll? The expected return is every possibility multiplied by the probability of the possibilities. How much would you pay to play the same game with the option to roll again? If you only roll once you get that score, if you choose to roll again you get the score of the second roll. The price should be higher since given the option to roll again.

Should only roll a second time if the first role is less than 3. Since the expected roll is 3. Same game, but now option for third roll, how much will you pay. Two rolls have an expected return of 4. You have an expected return of 4. You are given a length of rope, which can be lit to burn for an hour.

The rope burns unevenly so half of it burnt does not indicate a half hour passed. How would you burn the rope to know that a half hour has passed? To measure a half hour, burn both ends at once. When they meet, half the time has passed. If you were given two ropes, how would you measure 45 minutes?

Burn both ends of one rope at once, and at same time burn one end of the other rope. Once the two ends of the first rope meet, 30 minutes have passed, so then light other end of second rope.

When they meet, 15 more minutes has passed. What is the probability of drawing two sevens in a card deck? Multiple the individual probabilities to get the cumulative probability.

There are 4 sevens in a deck of 52 cards. The outside of the larger cube is completely painted. On how many of the smaller cubes is there any paint? The larger cube is made up of 1, cubes.

What is the square root of 6,? A closet has three light bulbs inside. Next to the door are three switches for each light bulb.

If you can only enter the closet one time, how do you determine which switch controls which light bulb? Turn on two switches for a few minutes. Then turn one switch off, and enter the room. The light on corresponds to the switch that is still on, the light bulb that is still warm corresponds to the switch that was turned off, and the light bulb that is off and cold is controlled by the last switch.

A lily in a pond doubles every minute. After an hour, the lily fills the entire pond. At 59 minutes, it is half full. Try to figure this one out in your head without the aid of the calculator.

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Finance Interview Questions Background Questions 1.