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Vault Guide to Finance Interviewsis made possible through the

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FINANINTERVGUIDE

VAULT GUIDE TO

FINANCEINTERVIEWS

D. BHATAWEDEKHAR, DAN JACOBSON,HUSSAM HAMADEHAND THE STAFF OF VAULT

Copyright 2005 by Vault Inc. All rights reserved.

All information in this book is subject to change without notice. Vault makes no claims as tothe accuracy and reliability of the information contained within and disclaims all warranties.No part of this book may be reproduced or transmitted in any form or by any means,electronic or mechanical, for any purpose, without the express written permission of Vault Inc.

Vault, the Vault logo, and The Most Trusted Name in Career InformationTM are trademarksof Vault Inc.

For information about permission to reproduce selections from this book, contact Vault Inc.,150 W. 22nd Street, 5th Floor, New York, New York 10011-1772, (212) 366-4212.

Library of Congress CIP Data is available.

ISBN 1-58131-304-7

Printed in the United States of America

ACKNOWLEDGMENTS

We are extremely grateful to Vaults entire staff for all their help in the editorial,production and marketing processes. Vault also would like to acknowledge thesupport of our investors, clients, employees, family, and friends. Thank you!

INTRODUCTION 1

Landing a Gig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

THE FINANCIAL SERVICES INDUSTRY 5

The Finance Interview: An Overview . . . . . . . . . . . . . . . . . . . . . . .6

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

VALUATION TECHNIQUES 19

How Much is it Worth? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Basic Accounting Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Market Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Discounted Cash Flow (DCF) . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Comparable Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Multiple Analysis or Comparable Company Analysis . . . . . . . . .45

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

EQUITY ANALYSIS AND PORTFOLIOMANAGEMENT 61

Investment Management and Portfolio Theory . . . . . . . . . . . . . . .62

Stock Analysis and Stock Picking . . . . . . . . . . . . . . . . . . . . . . . . .64

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

STOCKS 71

Equity vs. Debt (Stocks vs. Bonds) . . . . . . . . . . . . . . . . . . . . . . . .72

Stock Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more. ixC A R E E RL I B R A R Y

Table of Contents

Vault Guide to Finance Interviews

Table of Contents

BONDS AND INTEREST RATES 83

Bond Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84

Pricing Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86

The Fed and Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89

The Fed and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

Effect of Inflation on Bond Prices . . . . . . . . . . . . . . . . . . . . . . . .92

Leading Economic Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

CURRENCIES 99

Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100

Influence of Interest Rates on Foreign Exchange . . . . . . . . . . . .101

Influence of Inflation on Foreign Exchange . . . . . . . . . . . . . . . .102

Capital Market Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Exchange Rate Effects on Earnings . . . . . . . . . . . . . . . . . . . . . .104

Effect of Exchange Rates on Interest Rates and Inflation . . . . .105

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106

OPTIONS AND DERIVATIVES 109

The Wild West of Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110

Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110

Writing Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

Options Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113

Forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more. xiC A R E E RL I B R A R Y

Vault Guide to Finance Interviews

Table of Contents

Visit the Vault Finance Career Channel at www.vault.com/finance with insider firm profiles, message boards, the Vault Finance Job Board and more. xiiiC A R E E RL I B R A R Y

MERGERS & ACQUISITIONS 121

Why Merge? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122

Why Not Merge? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123

Stock Swaps vs. Cash Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . .124

Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125

Mergers vs. Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127

Will That Be Cash or Stock? . . . . . . . . . . . . . . . . . . . . . . . . . . . .127

Accretive vs. Dilutive Mergers . . . . . . . . . . . . . . . . . . . . . . . . . .128

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129

BRAINTEASERS AND GUESSTIMATES 133

Stress Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134

Acing Guesstimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134

Brainteasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136

Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137

FINAL ANALYSIS 147

APPENDIX 149

Finance Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150

About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158

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FINANINTERVGUID

INTRODUCTION

Landing a GigMoney makes the world go round, and those in charge of money are thefinanciers. Have thirst for relevance? The finance industry has always been acompetitive field, due in large part to the glamour and prestige assigned to theworking relationships with industry titans. Of course, the outstanding salariesexplain much of the pull as well. (Unless you can dunk a basketball or throwfootball 50 yards, its hard to beat the pay in investment banking, where rec