9 Super Technical Wall Street Interview Questions

math questions

Wall Street interviews are notoriously difficult, and the tricky questions we included make them even harder.

Being properly prepared to answer difficult technical questions is especially vital for anyone trying to get a job on Wall Street. That goes for potential first year interns all the way up to recent MBA graduates.

So we’re here to help you figure out what to expect — here are nine difficult technical questions that are commonly asked in Wall Street interviews.

How does a comparable company analysis work?

How does a comparable company analysis work?

Step 1: Find a company with similar characteristics

The entire concept of comparable company analysis is revolving around finding a company that is similar to the one being analyzed. This mostly includes companies in the same industry and sector, but also companies that operate at a similar capacity.

So the first part of the answer is, “find a set of companies in the same industry and area that are close to the same size.”

Step 2: Compare ratios between the company and the peer group

The second part of the answer is this, “Go through annual reports and then create a spreadsheet list ratios such as earnings per share, price-to-earnings, EBITDA, and market cap. Then analyze between the original company and its peers.”

Here’s more info on comparable company analysis.

Walk me through a discounted cash flow model

Walk me through a discounted cash flow model

A discounted cash flow model, or DCF, attempts to value a company based on the present value of its future cash flows, as well as the present value of its terminal value.

The discount rate is determined most commonly by the weighted average cost of capital, or WACC.

Here is how you calculate WACC in a DCF model: Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred).

Here is more detail on discounted cash flow models.

Do you understand precedent transaction analysis?

Do you understand precedent transaction analysis?

A precedent transaction analysis uses past transactions of other companies to help determine the current valuation of the company being analyzed. This is mostly used in merger and acquisition deals.

Step 1: Select the comparable companies

The selection should be based on each company’s sector, size, products and services, who the target customer is, and location of business.

Step 2: Probe and compare the financials, and select the key trading multiples

Go through each of the comparable companies’ financials and compare the cost of the deal was. Then go through the financials of the target company at the time of the acquisition, and note key comparable multiples such as Enterprise Value / Sales, Stock Price / EPS, among others.

Step 3: Determine valuation

After comparing the financials and multiples, use step three to properly value the company being analyzed. For example, use the predicted EBITDA of your company compared to the EBITDA multiple of past deals to approximate the value of your company.

Street of Walls has more detail on precedent transaction analysis.

What makes a good LBO candidate?

What makes a good LBO candidate?

This is Macabacus’ list of characteristics that define the ideal LBO candidate.

  • Strong, predictable operating cash flows with which the leveraged company can service and pay down acquisition debt.
  • Mature, steady (non-cyclical), and perhaps even boring
  • Well-established business and products and leading industry position
  • Moderate CapEx and product development (R&D) requirements so that cash flows are not diverted from the principle goal of debt repayment
  • Limited working capital requirements
  • Strong tangible asset coverage
  • Undervalued or out-of-favor
  • Seller is motivated to cash out of his/her investment or divest non-core subsidiaries, perhaps under pressure to maximize shareholder value
  • Strong management team
  • Viable exit strategy

What is the difference between the yield and rate of return on a bond?

What is the difference between the yield and rate of return on a bond?

Return refers to what an investor has actually earned on an investment during a period of time in the past.

Yield is forward-looking,as it measures the income that an investment earns while it ignores capital gains. It is used to measure bond or debt performance, and in most cases the return of a bond will not equal the yield.

Investopedia explains the difference further.

What is beta?

What is beta?

Beta is a measure of the riskiness of a stock relative to the market. The market has a beta of 1.0, and a stock with a greater than 1.0 beta is perceived as more risky than the market while a stock with a beta of less than 1.0 is perceived to be less risky than the market. Beta is also used in the capital asset pricing model (CAPM).

I-Banking Frequently Asked Questions has a further explanation of Beta.

Describe duration and convexity.

Describe duration and convexity.

This question is often asked to those seeing graduate investment banking jobs.

Duration measures the sensitivity of a bond to a change in interest rates and is expressed in a number of years. Always, always remember that rising interest rates mean falling bond prices and vice versa.

Convexity is a risk-management tool that measures the relationship between bond prices and yields, and it explains how the duration of the bond changes as the interest rate changes.

Investopedia explains duration and convexity.

What are the benefits and negatives to raising equity vs. debt?

What are the benefits and negatives to raising equity vs. debt?

Advantages of debt compared to equity:

Debt does not dilute an owner’s ownership. A lender is only entitled to repayment of the principal of the loan and its interest, with no claim on future business profits. Principal and interest obligations are easier to plan for. Interest can be deducted on a tax return. State and federal securities law and regulations are not required to raise debt. Bondholder meetings are not held, a vote of bondholders is never taken, and messages to bondholders are unnecessary.

Advantages to equity compared to debt:

Debt must be repaid at some point. High interest costs during poor financial times increase the risk of insolvency. It is hard to grow for higher leveraged companies with larger amounts of debt rather than equity. Cash flow is needed for principal and interest payments and are included in budgets, which cannot be said for equity. Investors and lenders consider companies riskier with a very high debt-equity ratio. Companies usually have to pledge assets of the company to lenders, with owners of the company often being required to guarantee loan repayment.

Here is more detail on the debt vs. equity argument.

To prevent arbitrage, the price of the asset must equal the price of what?

To prevent arbitrage, the price of the asset must equal the price of what?

First, understand arbitrage. It is the simultaneous purchase and sale of an asset, made in order to profit from the difference in price. It essentially exploits the price differences in inefficient markets.

To prevent arbitrage, the price of the asset must equal the price of its replicating portfolio.

Investopedia explains arbitrage.

About williamk82

William Kohlmann is a student at Grand Canyon University’s Ken Blanchard College of Business where he is earning his Masters in Business Administration with an Emphasis in Finance while working full-time for a leading financial institution. He is an Eagle Scout from Troop 105 of Stroudsburg, Pennsylvania, aspires to be an entrepreneur, and currently lives in Phoenix, Arizona with his beautiful wife, Krystal.
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