Goldman sachs’ interview tips

By prof. Augustin Amaladas

Latest news this morning Nov.16 2007

• Sebi nod for new derivatives which will attract more investors on shore.

• Indian market becomes largely on shore • BSE Index 19785, NSE 5912, Gold-10483, US

dollar-39.49• New products: mini contracts on equity,

indices, option with longerlife or tenure, volatality index, F&O contracts, Option on futures, bond indices, F&O contractsand exchange trade currencies

• SEBI chairman- M.Damodaran.

Why does BSE index moves upwards and volatile?

• In USA most of the banks engaged in mortgage market by lending without seeing the client's credit worthiness. But most of the customers fail to repay the long term loan. The banks are allowed to recover such loans by sale of such properties.

• The total funds have to be reinvested in profitable way. Most of the banks see India is one of the countries where they can get better return and also india’s inflation is arround 4% and growth rate is around 9%.

What do you mean by securitisation?

• Securitization is the process of conversion of existing assets or future cash flows into marketable securities. In other words, securitization deals with the conversion of assets which are not marketable into marketable ones.

• The conversion of existing assets into marketable securities is known as asset-backed securitization and the conversion of future cash flows into marketable securities is known as future-flows securitization.

• Some of the assets that can be securitized are loans like car loans, housing loans, etc., and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables.

illustration

• Mr. X wants to open a multiplex and is in need of funds for the same. To raise funds, Mr. X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money.

• This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr. X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself.

Hedge fund

• A hedge fund is a loosely regulated investment company that charges incentive fees and usually seeks to generate returns that are not highly correlated to returns on stocks and bonds.

• While hedge funds are not unregulated, as is sometimes asserted, they are more loosely regulated than mutual funds and common trusts run by bank trust departments.

Hedge fund

• Hedge funds charge a variety of fees, including a substantial management fee and an incentive fee. The management fees are similar to management fees at mutual funds, private equity funds, and real estate funds. Incentive fees are also typical in private equity funds, real estate funds, and (to a limited extent) mutual funds.

Characteristics of a Mutual Fund

• investments Investors own the mutual fund.• Professional managers manage the affairs

for a fee.• The funds are invested in a portfolio of

marketable securities, reflecting the investment objective. Large Cap,Mid Cap & Small Cap)

• Value of the portfolio and investors’ holdings, alters with change in market value of investments.

Who is an investment banker?

• Investment Banks (IB) are the most important participant in the direct financial markets

• Assist firms and governments in selling new securities in the primary market.

• Assist in making (dealer) or arranging the buying and selling (broker) in the secondary market.

Investment And Commercial Banks Differ?

• Commercial Banks (CB) accept deposits and make commercial loans as a financial intermediary.

• CB traditionally could underwrite only low-risk securities of governments per the Glass-Steagall Act.

• Many large firms now use the direct financial markets to finance rather than bank loans.

initial public offering (IPO).

• New issues are called primary issues, first issued in the primary market.– If the issue is the first sold to the public, it

is called an unseasoned offering or an initial public offering (IPO).

– If securities are already trading, the new issue of securities is called a seasoned offering.

Underwriting

– the risk-bearing function in which the IB buys the securities at a given price and turns to the market to sell them.

• Syndicates are formed to reduce the inventory risk.

• Market price declines cut the IB's margin.

– Sales and distribution - selling quickly reduces inventory risk. Firm members of the syndicate and a wider selling group distribute the securities over a wide retail and institutional area.

How does investment banker earns money?

• the investment bank does not guarantee a price or that the issue will be sold.– The investment bank is compensated

based on the number of securities sold.– The risk of the securities not selling or not

selling at a desired price is borne by the issuing firm, not the investment bank.

Mergers and Acquisitions

• Specialized IB departments provide the following services.– Arrange mergers which would produce economic

synergy or increased total value after merger.– Assist firms which have had unwanted merger

offers (hostile takeovers).– Help establish the value of target firms.

• Mergers and acquisitions have been a profitable aspect of the IB business.

• CB have expanded their merger and acquisition departments

Venture Capitalists• Venture capital is private equity financing.• Venture capital and managerial advice is

provided, usually for an equity interest in the company involved, to higher risk businesses by institutional investors hoping for high returns.

• Venture capitalists typically invest in high-tech based firms that require large amounts of capital.

• Venture capital is usually the intermediate financing between founders' capital and the IPO.

Stages of Venture Capital Investments

• Seed financing is capital provided at the “idea” stage.

• Start-up financing is capital used in product development.

• First-stage financing is capital provided to initiate manufacturing and sales.

• Second-stage financing is for initial expansion.• Third-stage financing allows for major expansion.• Mezzanine financing prepares the company to go

public.

Derivatives

• The instruments that can be used to provide such protection are called derivative instruments

• Derivative instruments are called so because they derive their value from whatever the contract is based on

• “A derivative contract is a financial instrument whose payoff structure is derived from the value of the underlying asset”

• These instruments include futures contracts, forward contracts, options contracts, swap agreements, and cap and floor agreements

Whether dividend income income from mutual funds are taxed?

• In india dividend income and income from mutual fund , UTI units do not attract income from other sources and no capital gain as they are not capital assets.

What is the difference between capital receipt and revenue receipt?

• Capital receipts reduces capital assets and revenue receipts increases revenue assets such as cash and bank.

• Capital expenditure should appear as an asset but revenue expenditure appears in the profit and loss account.

What is the difference between dividend and interest?

• Dividend is an appropriation of profits interest is a charge on profit

• Dividend is not deductible for tax purpose but interest is deductible for tax purpose.

• Dividend is given to share holders but interest is given to loan holder or debenture holders

Important sections in india to deal with Merger and acquisition

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)

1. ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

2. SHARE HOLDERS HOLDING NOT LESS THAN 3/4TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY

EX. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000-

20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO.NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE

SHARE HOLDERS

SEC 72 A TO BE FULFILLED• NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY

THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND

DEPRECIATION SEC 72 A TO BE FULFILLED1. ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR

MORE YEARS2. 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS

BEFORE AMALGAMATION3. THE AMALGAMATED CO. CONTINUES TO HOLD 3/4TH OF

BOOK VALUE ATLEAST FOR 5 YEARS4. NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS5. NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED

CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS

EXAMPLE

PARTICULARS DOES NOT SATISFY SEC 2(1B) & 72 A

SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A

SATISFIES BOTH 2(1B) & 72 A

A MERGES WITH B (A GOES OUT)

NO BENEFIT TO A & B

DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B

NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD

OTHER TAX BENEFITS

1. Expenditure on amalgamation or de-merger – allowed under sec 35DD both revenue and capital expenditure allowed

2. Expenditure on scientific research can be carried forward

3. Expenditure on acquisition of patent rights copyrights – depreciation can be provided

4. Expenditure for obtaining license for tele-communication service can be written off

5. Preliminary expenses6. Capital expenditure on family planning7. Bad debts are allowed

Why does share capital appears first in the balance sheet?

• Balance sheets are arranged on the basis of 1. the order of liquidity 2. the order of permanance. Goodwill is the most permanent asset.

• It is based on if business collapses all of a sudden the asset which is dispose of first should appear last in the order of liquidity

What is the journal entry for bad debts?

• Bad debt a/c debit

• to debtors a/c

Journal entry for provision for bad and doubtful debts?

• Profit and loss account Debit

• credit provision for bad and doubtful debts

Rent and rent outstanding exp

• Rent appears in the profit and loss account debit side

• Rent outstanding appears in the balance sheet under the head current liabilities.

What is contingent liability?

• Liability which may or may not happen depends on the future situations

• Example:1. Court case against the company

• 2. contract yet to be completed.

What do you mean by amortisation?

• This term is used in mortgage market where the loan will be repaid with interest upto the date of maturity

Working capital

• Short term funds which are used for short term purposes which are excess over current liabilities.

• WC= CA-CL

Operating cycle

• It is the working capital cycle. The number of days in which the business is able to convert the current assets into cash

Current ratio

• It explains the short term solvency

• Current assets / current liabilities

• The standard current ratio is 2:1 but in India as per Narashimman committee 1.5:1 is an acceptable practice.

Debt equity ratio

• It tells the long term solvency of the company

• Long term debt/ owner’s equity

How do you analyse profit and loss account?

• We have to segregate the profits into

• 1. Opperating profit

• 2. Non-operating profit

• Operating ratio can be calculated

• Gross profit ratio, Net profit ratio can be calculated

How do you analyse Balance sheet?

• Current ratio, debt equity ratio,

• Turn over ratios such as asset turn over ratio.

• Return on net worth, Return on capital employed.

Bond-meaning

• Debentures which carry interest.

Zero coupon bonds

• Such bonds are issued at a discounted value but paid back at very high value on the date of maturity.

Why does company issue debentures?

• It is because interest on debentures are considered as expenditure therefore interest can be deducted for tax purpose.

• The time value of money is not considered while redeeming debentures.

NPV,IRR, PROFITABILITY INDEX

• NPV- NET PRESENT VALUE

• PRESENT VALUE OF CASH INFLOW –Present value of cash outflow

• Positive- accepted

• Negative -rejected

IRR

• Internal rate of return

• Compounded average rate of return

• IRR assums that Future cash inflows are invested at the internal rate of return

Profitability index

• Ratio between Present value of cash inflow and present value of cash outflow

• PVCI/PVCO

• Project to be accepted if PI is above 1

• Below 1 reject

• If NPV=0 ;PI=1

Meaning of cost of capital

• It is rate at which the firm borrow or

• Interest rate or

• Interest +risk adjusted rate

• We use this rate to discount future cash inflows and outflows

• It is also known as discounting rate

• It is represented as K in finance

How do you calculate present value

n

• 1/(1+r)

Which method is suitable for income tax purpose?

• Block asset method

• Asset which has similar nature and having the same rate of depreciation are clubbed together.

Whether all assets can be depreciated?

• Only fixed assets can be depreciated

except land and building

• Current assets are not depreciated.

Preliminary expenses

• Expenditure incurred to start the company

• It appears in the asset side of the BALANCESHEET

• It is written off every year in the profit and loss account

How do you answer in the interview?

• Do not give one word answer• Complete the sentence• Do not indicate about your father’s

business.• Insist that you are ready to work any

time• Smile and talk• If you have committed mistakes ask the

answer at the end.

Tips

• Do not touch the table

• Understand the intension of the question

• It is your decision not your parents’ decision to choose your carrier or working at night.

• Do not argue too much.

• Do not ask any salary

What do you like Goldman Sachs

• We can question the existing process inorder to improve

• Every day it is new• New challenges every day• Every employees individual attention• Serious about selecting the employees• Customers are first• Team work