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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 recentcollege grads can come close to six figures.)

    So whats the secret to landing a finance gig? Naturally,