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PLEASE USE THESE QUESTIONS TO PREPARE FOR INTERVIEWS IN INVESTMENT BANKING, INVESTMENT MANAGEMENT,
PRIVATE EQUITY, COMMERCIAL BANKING, LEVERAGED FINANCE, RESTRUCTURING, AND OTHER FINANCE RELATED JOBS.
THANK YOU JASMINE FOR YOUR HARD WORK AND DEDICATION.
Finance Interview Questions
Background Questions
1. Walk me through your resume. Tell me about yourself.
2. What was the most important thing that you got out of your last or current job?
3. Tell me about your previous work experience and walk me through a sample project from your work.
4. What is the number one thing I should know about you that I cannot learn from your resume?
5. Coming out of this interview, what are three things about you I should take away?
6. How would your friends describe you? How would your professors describe you?
7. Why did you choose to pursue your degree (MBA)?
8. 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?
9. Tell me about your college experience.
10. What was your favorite and least favorite course in school? Why? What were your grades in each?
11. Have you had a performance review? What did it say?
a. What would your last or current boss say about you?
12. What types of activities did you pursue in college?
13. What do you do in your free time? Tell me something interesting about you.
14. What serves as your biggest motivation?
15. What is the most recent book youve read?
16. What separates you from other candidates? Why should we hire you?
17. What are some of your strengths?
18. Why this firm? Be specific.
19. What do you think is the most important characteristic for this job?
20. What qualities do you feel that you have that are transferrable to this position?
21. What are the qualities of a successful leader?
a. 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.
22. Why do you think you will be good in this job?
23. Why are you interested in finance, and do you have any experience in the field?
a. Why hedge funds or private equity?
24. What is a hedge fund?
a. A hedge fund is a private investment partnership, which uses aggressive strategies unavailable to other types of funds. It is a loosely regulated
investment pool that are open only to high net worth individuals since they are limited by law to 100 investors and thus typically require a minimum
investment of $1 million. 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.
25. Why are you applying here? What do you hope to gain from this job? What in particular is attractive about this firm?
26. What do you know about our firm?
27. What is the strategy of our fund?
28. What three things would you change about this company? What direction would you take the firm if you were running it?
29. If you had only three questions to ask senior management of a company, what would they be and why?
30. What is your ideal work environment? What qualities would your ideal job have?
31. Can ethical requirements in a firm be too high?
32. If there were no such businesses as hedge funds/private equity, what would you do?
33. What would you do for a living if you did not have to worry about money?
34. Are you willing to travel or relocate for this position?
35. What other types of jobs are you looking at? Only in hedge funds? Private Equity?
36. Who else are you interviewing with and where are you in the process with other firms?
37. What do you plan on doing in the next 10 years?
38. Do you plan on going to business school? Why or why not?
39. What aspect of finance do you find most interesting?
40. If you have taken a finance course, present the most interesting topic you covered, and explain why you find that topic the most interesting.
41. Provide a few different examples of careers in finance, and what exactly do they do? (i.e. investment bankers or investment managers)
a. 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. They often do valuation work and pitch their banks expertise to potential client
companies. 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.
b. Investment managers manage money for individuals and institutions.
42. What is an institutional investor?
a. 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.
43. What are some recent trends in investment banking?
a. Consolidation: banks being acquired by other banks. JPMorgan buying Bear Stearns, Barclays buying part of Lehman Brothers.
b. Capital Infusions: Buffett investing in Goldman Sachs, Mitsubishi in Morgan Stanley, TARP
c. Global Expansions: firms looking to expand into other, fast growing nations
d. Technology: high technology is being used to execute trades and distribute information more quickly.
44. What do you think you will be doing on a daily basis as an analyst?
a. 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.
45. Can you handle the grunt work?
46. 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.
a. What are your weaknesses?
47. What is your favorite web site?
48. What recent article in the Wall Street Journal stands out to you most, and why?
49. Do you read WSJ every day? Whats on todays front page?
50. What would you like for me to tell you? Do you have any questions for me?
a. Financial:
i. What is your opinion of where the economy is going in the next year?
ii. Have you seen a change in deal flow due to the economic downturn?
iii. In your opinion, what desks/product groups have the best reputation and/or the most promising future at this firm?
iv. Do you think more investment banks will go under in the coming years?
v. What do you see as the future of investment banking?
b. Lifestyle
i. How did you get into banking or this position?
ii. Have you enjoyed your experience?
iii. Have you worked at other firms, and how do your former experiences compare to this one?
iv. What do you think separates this bank from similar banks?
v. Culture-wise, what do you think is the biggest positive with this bank? The biggest negative?
vi. What advice would give me going forward?
c. Other
i. 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?
2. How do you arrange your priorities when time constrained? What would you place as most and least important?
3. Provide an example of when you have had to pick between two priorities, and how you chose between the two? (i.e. attending a last minute meeting
over attending an event you previously committed too)
4. Provide an example of a time where you had to handle many things at once or multitask.
5. Provide an example of a time you had to make a split second decision.
6. Provide an example of a time where you anticipated potential problems and took measures to prevent them.
7. Provide an example of a time where you learned something new in a short amount of time.
8. Describe a situation when you or your group was at risk of missing a deadline, what did you do?
9. Provide an example of a time where you set a goal and were able to meet or achieve it.
10. What is the biggest risk you have taken in your life?
11. What is the biggest obstacle or challenge you have faced and overcome in your life?
12. Provide an example of a time where you failed and turned it into a learning experience.
13. What is the biggest mistake you have made in your professional life?
14. What do you consider to be your greatest failure?
15. What is the toughest decision you have ever had to make?
16. What is the most difficult experience you have had? Why? How did you approach it and how would you have done things differently?
17. Provide an example of your greatest accomplishment or an accomplishment you are proud of.
18. What role do you like to take in a team situation?
19. Do you feel more comfortable working in a group or individually?
20. 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.
21. Provide an example of a time you had to deal with conflict in a team situation.
22. Provide an example when you had to deal with an upset teammate or co-worker?
23. Provide an example when you were in a group where someone was not contributing as they should have been. What did you do?
24. Provide an example of a project you have completed that you particularly enjoyed.
25. How do you manage dealing with a difficult boss, co-worker, or teammate?
26. Provide an example of a time where you successfully persuaded others to do something or see your point of view.
27. Provide an example of a time you had to motivate others.
28. Provide an example of a time you went above and beyond expectations.
29. Provide an example of a time when you were required to pay close attention to detail.
30. Provide an example of a situation where that involved heavy analytical or quantitative thinking.
31. How have you modeled with equations in the past?
32. Provide an example of an experience of failure or when you failed to meet expectations.
33. You do not seem very driven. How will you be able to handle this position?
34. How did you go about preparing for this interview?
Knowledge and Technical Questions
1. Explain what happened with the mortgage crisis?
a. 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. Loans were granted with teaser rates, no down payments, and no review of a borrowers income history. 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
2000 to 2005. In 2006, the bubble burst and total home equity dropped from $13 trillion to $8.8 trillion. By January 2009, 20% of US homes were
underwater since the owner owed more on their mortgage then their home was worth. 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.
b. 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.
c. Combination of these features led to a cycle which is largely the catalyst of the recession were currently in. (housing prices decline negative
equity homeowners walk away increased supply of houses) (when homeowners walk away mortgage payments decline value of mortgage backed
securities declines banks incur losses bank capital declines banks restrict lending economic activity slows and unemployment increases) Because supply
of houses increased, housing prices declined further, and cycle started over.
2. What is a mortgage backed security?
a. 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.
b. 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.
3. What is collateralized debt obligation?
a. 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.
c. Investor pays market value for CDO and then has right to interest payments in form of coupon payments over time.
4. What is a credit default swap?
a. Insurance on a companys debt and is a way to insure that an investor will not be hurt in the event of a default. Sold over the counter in an unregulated
market. The credit default swap market is estimated at $62 trillion. 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.
b. 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.
d. 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).
5. What is securitization?
a. 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.
6. What are the three main financial statements?
a. The Income Statement, Balance Sheet, and Statement of Cash Flows.
7. What is the difference between the Income Statement and Cash Flow Statement?
a. The Income Statement records revenues and expenses, while the cash flow statement has the following categories: operating cash flows, investing cash
flows, and finance cash flows. It records what cash is actually being used and where it is being spent by the company during that time period. A company
can be profitable as seen by the Income Statement, but still go bankrupt if it doesnt have enough cash flow to make interest payments.
8. Walk me through the lines on the Cash Flow Statement? Income Statement?
a. Beginning cash balance, then cash from operations, then cash from investing activities, then cash from financing activities, and the ending cash balance.
b. Revenues-COGS=Gross Margin-Operating Expenses=Operating Income-Other Expenses-Income Taxes=Net Income
9. What are the components of each of the items on the Cash Flows Statement?
a. 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. Financing is cash from changes in
liabilities and stockholders equity including any dividends paid out, issuance of any debt or equity, or the repurchase of debt or equity.
10. How are the three financial statements connected?
a. Income Statement: Net income minus dividends is added to Retained Earnings under shareholders equity on the Balance Sheet. Net income is added to
cash flows from operations on CF statement after making adjustments for non-cash items.
b. Balance Sheet: 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.
c. CF Statement: starts with beginning cash balance from Balance sheet. After making adjustments to Net income, the cash flow form operations,
investing, and financing, calculate the ending cash balance, which become current periods balance sheet cash. 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.
11. 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?
a. The Balance Sheet and Income Statement can be used to make the St of Cash Flows.
b. Not IS, because full of non-cash items. CFS because cash is king in determining a companys health. Or BS because you can back out the main
components of the cash flow statement (capex via PP&E and depreciation, net income via retained earnings, etc). The BS is helpful in distressed situations to
determine the companys liquidation values.
12. What happens to each of the three primary financial statements when you change a) gross margin, b) capital expenditures, c) depreciation expense?
a. Gross margin is gross profit/sales= total sales- cost of goods sold. 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 Balance Sheet, less cash and thus less
shareholders equity.
b. Capital expenditures decrease. 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. On the income statement, depreciation expense would be lower, so net income would be
higher, which would increase income tax, cash, and shareholders equity in the future.
c. Increase in Depreciation. 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. Balance sheet: cash increases,
PP&E decrease, overall assets fall, retained earnings fall due to drop in net income.
13. If you sold an asset and received $200 million in cash. How would it affect your three main financial statements?
a. Ask for book value of the asset. If book asset is $100 mil, then $100 gain on sale of asset is recorded, so net income increases by $60 mil if assume 40%
tax rate. On CFS, assets are recorded at book value when sold, so have $100 mil under cash from investing activities. Net cash flow is $160 mil. On the BS,
cash increases by $160, and property decreases by $100 mil. Balance by increasing shareholders equity by $60 mil.
14. An item cost $10 to buy, and has a life of ten years. How would you put it on the balance sheet?
a. On the left side, $10 as an asset. Assuming straight line depreciation for book and no salvage value at the end of its useful life, it would be worth $9 at
the end of the first year. Net income will be lowered every year by the tax-affected depreciation, so shareholders equity will be reduced by 60 cents
assuming a 40% tax rate.
15. If you later discover the item is a valuable collectors item, how much would it be on the balance sheet now?
a. Still $8, since you continue to depreciate it and assets are recorded at historical values. Some traded financial instruments qualify for mark to market
i. In retail, look for strategy of product 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 drugs in its pipeline.
99. What is the difference between technical analysis and fundamental analysis?
i. Technical analysis is the process of picking stocks based on historical trends and stock movements mainly based on charts. Fundamental analysis is
examining a companys fundaments, financial statements, industry, etc. and picking stocks that are undervalued.
100. What are the drivers of growth?
i. Growth can be operationally organic (from inside), acquisition based, or financial (recapitalizing).
101. Would I be able to purchase a company at its current stock price?
i. Due to the fact that purchasing a stake in a company will require paying a control premium, most of the time a 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. Premiums usually range
from 10-30%.
102. What is correlation?
i. 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.
103. What is diversification?
i. Process of creating a portfolio made up of a 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. it also means investing across different industries, picking
investments that have a low correlation so they balance each other out during economic conditions. 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.
104. If you add a risky stock into a risky portfolio, how is the overall risk of the portfolio affected?
a. It depends on the stock relative to that of the portfolio, or the correlation of the new investment to the portfolio. A portfolios overall risk is determined
not just by the riskiness of its individual positions, but by how these positions are correlated with each other. 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.
105. Put the following portfolios consisting of 2 stocks in order from the least risky to the most risky and explain why.
a. A Portfolio of a shoe store stock and an oil company stock?
b. A portfolio of a SUV car company stock and an oil company stock?
c. A portfolio of a shoe store stock and a high-end clothing store stock?
i. 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. A is the middle because shoes and oil have a weak correlation around 0, so the securities generally dont move in the
same direction under the same circumstances.
106. What kind of stocks would you issue for a startup? For a well-established firm?
i. 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).
107. When should a company buy back stock? What signals does this send to the market?
i. 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. Example: if a company has suffered decreased earnings because of an
inherently cyclical industry and believes its stock price is too low, it will buy back, or if investors are driving down the price precipitously.
108. What does it mean to short a stock?
i. 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. When short selling,
the investor sells a stock they dont actually own under the belief they will be able to purchase it for a lower 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.
109. What is liquidity?
i. 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.
ii. How quickly an asset can be converted into cash. Cash is the most liquid asset.
iii. A more liquid investment is relatively safer since the investor can sell it at any time.
110. When should a company issue stock rather than debt to fund its operations?
i. If it believes its stock price is inflated, it can raise money on good terms by 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. Example: startup company- issue stock because
venture will probably not generate predictable cash flows needed to make regular debt payments and so the risk of venture is diffused among shareholders.
111. When should a company issue debt instead of issuing equity?
i. 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 should 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.
ii. If the expected return on equity is higher than the expected return on debt, a company will generally issue debt. Example: a company believes that
projects completed with $1 mil raised will increase its market value from $4 mil to $10 mil. If raised by issuing equity, it will sell 20% (1 mil/5 mil) of the
company after the capital infusion. This would then grow to 20% of 10 million (2 million), so it will cost the company $1 million (2-1). If raised by issuing a
$1 mil bond that requires $300,000 in interest payments over its life, and thus will only cost $300,000. Thus, it will choose debt, since it is cheaper than
equity.
112. Is the dividend paid on common stock taxable to shareholders? Preferred stock?
i. 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 as interest expense and is tax-free at corporate level.
113. When would an investor buy preferred stock?
i. 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 stock. Get superior right to companys assets in event of bankruptcy.
ii. Corporation would invest in preferred stock because dividends on preferred are taxed at a lower rate than interest rates on bonds.
114. Why would a company distribute earnings through dividends to common stockholders?
i. 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.
115. Why would the stock price of a company decrease when it announced increased quarterly earnings?
i. The entire market was down (or the sector of the company), which had more impact than the companys positive earnings, or the Street was expecting
earnings to increase more than they did
116. How can a company raise its stock price?
i. 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 lowers 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.
117. If a companys stock has gone up 20% in the last 12 months, is the companys stock actually doing well?
i. It depends on the Beta and the performance of the market. If Beta is 1 and the market went up 30%, the company did not do well compared to the
broader market.
118. What is an Initial Public Offering?
i. 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 profits with public investors, los of confidentiality and control, IPO expenses to investment banks, legal liabilities,
etc.
119. Talk about a recent IPO that you have followed? Why did you choose it?
120. Why do some stocks rise so much on the first day of trading their IPO and others dont? How is that money left on the table?
i. Money left on the table means the company could have completed the offering at a higher price (could have sold the same stock in its IPO at a higher
price), and 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.
ii. 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.
121. What is insider trading and why is it illegal?
i. The illegal activity of buying or selling stock based on information that is not public information. The law against insider trading exists to prevent those
with privileged information from using this information to make a tremendous amount of money unfairly.
122. If you have two companies that are exactly the same in terms of revenue, growth, risk, etc. but one is private and one is public, which companys
shares would be higher priced?
i. 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.
123. Which has a higher growth potential: a stock currently trading at $5 or a stock at $50?
i. It depends. 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. Thus, if the $5 stock has 1 billion shares outstanding and the $50 stock has 10,000 shares outstanding, the $50
stock has a smaller market cap and would most likely have higher growth potential.
124. If you bought a stock a year ago for $20, sold it today for $25, and received $5 in dividends over the year, what would your overall return be?
i. Return on Stock= Sales Price + Dividends-Purch Price/ Purchase Price
ii. 25+5-20/20=10/20=50%. Made 50% return on investment.
125. What is the primary market and what is a secondary market?
i. 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.
ii. The second market is the market that the security, stock or bond, will trade on after the initial offering (NYSE, Nasdaq).
126. What are some reasons why a company might tap the high-yield market?
i. 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.
127. If you read that a certain mutual fund achieved 50% returns last year, would you invest in it?
i. Past performance is not necessarily an indicator of future results. A mutual fund full of Mortgage Backed Securities could have been up and then been
down 90% last year due to the MBS market collapsing. To make an investment decision, need to research more in depth the firms holdings. How has the
overall market done? How did it do in the years before? Why did it give 50% returns last year? Can that strategy be expected to work continuously over the
next five to ten years?
128. How do you calculate a companys Days Sales Outstanding?
i. Average Accounts Receivable/Sales x 365 Days
ii. Average Accounts receivable= (Ending AR + Beginning AR)/2
129. If the days sales outstanding of company increased from 53 to 71 days, would you be more or less likely to issue a Buy rating on the stock and why?
i. 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 53 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.
130. How do you calculate a companys Current Ratio?
i. Current assets/Current liabilities. A high current ratio indicates that a company has enough cash or assets that can quickly turn into cash to cover its
immediate payment requirements on liabilities.
131. If the Current Ratio of a company went down from 2.1 to 1.6, would you be more or less likely to buy the stock and why?
i. Less likely, since the company is less able to cover its immediate liabilities with cash and other current assets than it was last quarter.
132. If a Company A has assets of $100 million versus another company B with assets of $20 million, but both have the same dollar earnings, which
company would you invest in?
i. Company B has a higher ROA, since it is able to generate the same earnings with less assets 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.
133. What is the market risk premium?
i. The required return that investors require for investing in stocks over investing in risk-free securities. Calculated as the average return on the market-risk
free rate
134. What is default risk?
i. Risk of a given company going bankrupt
135. What is default premium?
i. 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.
136. What is face value?
i. Par value of a bond is the amount the bond issuer must pay back at time of maturity. Bonds are usually issued with $1,000 face value.
137. What is the coupon payment?
i. 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.
138. What determines the premium you place on growth stocks relative to their peers?
i. All the criteria that goes towards a good investment determines the premium you place on a growth stock. P/E versus PEG ratio: P/E/EPS growth. The
PEG ratio is a trading valuation metric for evaluating the relationship between the price of a stock, EPS and the companys expected growth. In general, a
P/E ratio is higher for companies with higher growth rates, so dividing P/E by the expected growth rate is a convenient metric to compare companies with
different growth rate. 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.
139. What is the difference between an investment grade bond and a junk bond?
i. An 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.
217. The current one year interest spot rate is 6% and the six-month interest spot rate is 6.2%. What is the implied forward rate for the second half of the
year?
i. The rate of the first six months and second half of the year must average out to give 6% for the full year. So 6%=(6.2%+unknown forward rate)/2, which
solves to 5.8%. 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.
Buying a forward means youre locking in a price now for future settlement, through the true spot rate that settles then may be different.
218. What is a derivative?
i. 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.
219. What are options? A call option and put option?
i. 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.
ii. 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.
220. What is hedging?
i. 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.
221. What are the main difference between futures and forward contracts?
i. 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.
ii. 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.
222. What factors influence the price of an option?
i. Current stock price, exercise price, stock volatility, time to expiration, interest rate, and the dividend rate of the stock.
ii. For example: when the current stock price or interest rate increase, the call option price increases and the put option price decreases. 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.
223. If an option is in the money what does that mean?
i. 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.
224. What are swaps? Explain how a swap works.
i. 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.
225. When would you write a call option on a companys stock?
i. When you expect the companys stock to fall or stay the same. A call option on a stock in a bet that the value of the stock will increase, you would be
willing to write or sell a call option on the companys stock to an investor if you believed the companys stock would not rise. The profit made would be
equal to the option premium you received when you sold the option.
226. When would you buy a put option on a companys stock?
i. 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.
227. 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?
i. 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.
228. 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?
i. A call option gives the holder the right to buy a security, the holder is in the money (making money).
229. If I hold a put option on a companys stock with an exercise price of $40, the expiration date is today, and the company is trading at $30. About how
much is my put worth, and why?
i. $10, because you can sell a share of stock for $40 and buy it for $30. If the expiration date were in the future, the option would be more valuable,
because the stock could conceivably drop more.
230. What is the Black-Sholes model?
i. The industry standard model for pricing option. The formula has 6 inputs that effect the price including the current price of the asset, the exercise price of
the option, the time until expiration, the current risk free rate, the assets variance and the dividend yield.
231. When would a trader seeking profit from a long-term possession of a future be in the long position?
i. 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.
232. All else being equal, which would be less valuable: a December put option on eBay stock or a December put option on Home Depot stock? How
about a more volatile stock or less volatile stock?
i. The put option on Home Depot stock should be less valuable, since eBay is a more volatile stock and the more volatile the underlying assets, the more
valuable the option.
233. All else being equal, which would be more valuable: A December call option or a January call option?
i. The January option: the later the expiration date, the more valuable the option.
234. Why do interest rates matter when figuring the price of options?
i. Due to net present value: higher interest rates lower the value of options since the PV of that option will be lower.
235. Describe a recent M&A transaction that youve read about.
i. Ex: Sears/Kmart 2004 merger: That cash and stock transaction was worth an estimated $11 billion. 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. Sears shareholders were offered choice between $50 in cash or half of 1
share of Sears Holdings, the new parent company, which was valued at $50.61. Kmart shareholders received 1 share of Sears Holdings for each of their
shares, which closed the day before the deal was announced at $101.22. To purchase the larger Sears, Kmart used the strong gains in its stock during the
previous year before the deal and its $3 billion in excess cash. At the time of the announcement, Sears and Kmart expected cost savings and increased sales
of $500 mil a year, after the merger is completed.
236. What were the reasons behind an M&A transaction youve read about? Does that transaction make sense?
i. Ex: Sears/Kmart- brought together two giant, struggling companies in hopes that combined they would be better able to compete with other leading
retailers (Wal-Mart, Target, Home Depot). The deal created the 3rd largest retailer in the country behind Wal-Mart and Home Deport. The combined firm
hopes to blend both of the firms strong suits, offering quality appliances and tools and a reputation for good service to Kmart shoppers, and discount
clothing and low prices to Sears customers. Increased shopping convenience is expected to allow the combined firm to formidably battle against competitors.
Target lost its No. 3 retailer standing as a result of the deal.
237. Name two companies that you think should merge.
i. Identify synergies between two companies, will not raise antitrust issues with FTC
238. What are the three types of mergers and what are the benefits of each?
i. 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.
239. What are some reasons that two companies would want to merge?
i. The target company is seen as undervalued. Synergies can be obtained by combining their operations, gaining a new market presence, an effort to
consolidate operations, grain brand recognition, grow in size, potentially gain the rights to some property (physical or intellectual) that they couldnt gain as
quickly by creating or building it on their own. 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 stalled), and can be a use for excess cash. Also, management ego in the desire to run a
larger company and increase their own compensation.
240. What are some reasons that two companies would not want to merge?
i. 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.
241. What are synergies?
i. 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.
242. Why could you use options outstanding over options exercisable to calculate transaction price in an M&A Transaction?
i. 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. During a potential transaction, all of the targets outstanding options will vest immediately and thus the acquirer must buy out all option holders.
243. What is the difference between a strategic buyer and a financial buyer?
i. 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.
244. Which will normally pay a higher price for a company, a strategic or financial buyer?
i. 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.
245. You are advising a client in the potential sale of the company. Who would pay more for the company: a competitor or an LBO fund?
i. A competitor. 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.
246. What is a stock swap?
i. 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.
247. Are most mergers stock swaps or cash transactions and why?
i. 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.
248. Why pay in stock versus cash?
i. 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. Current market performance may also affect the stock/cash decision. If the market is performing poorly, or
is highly volatile, the company being acquired may prefer cash.
249. What is a dilutive merger?
i. A merger in which the acquiring companys EPS decreases as a result of the merger. A dilutive merger happens when a company with a lower P/E ratio
acquires a company with a higher P/E ratio.
250. What is an accretive merger?
i. A merger in which the acquiring companys earnings per share increase. This happens when a company with a higher P/E ratio acquires a company with
a lower P/E ratio. The acquiring companys EPS should rise following the merger.
251. Company A, who has a P/E ratio that is 40 times earnings, is acquiring Company B, who has a P/E ratio that is 20 times earning. After A acquires B,
will As earnings per share rise, fall, or stay the same?
i. Its EPS will rise, since P/E of the acquirer is higher than the firm its purchasing, the new companys EPS rises. The deal is accretive to the acquirers
earnings.
252. If Company A buys Company B, what will the combined companys balance sheet look like?
i. The new balance sheet will be the sum of the two companys balance sheets (add each line on the balance sheet) plus the addition of goodwill for any
premium paid on top of the acquired companys actual assets.
253. If you merge two companies, what does the pro-forma income statement look like?
i. Revenues and operational expenses can be added together, plus any synergies. Fixed costs tend to have more potential synergies than variable costs. S,
G, & A expenses are another source of synergy, since only need one management to lead merged two companies. D&A will increase more than the sum due
to financing fees and assets being written up. 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.
254. What is the difference between shares outstanding and fully diluted shares?
i. Shares outstanding represent the actual number of shares of common stock that have been issued as of the current date. Fully diluted shares are the
number of shares that would be outstanding if all in the money options were exercised.
255. How do you calculate the number of fully dilated shares?
i. 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.
256. What is the treasury stock method?
i. Assumes that acquirers will use option proceeds to buy back exercised options at the offered share price. New shares = common shares + in the money
options-(options x strike/offered price)
257. What is a cash offer?
i. A payment for the ownership of a corporation in cash.
258. What are some defensive tactics that a target firm may employ to block a hostile takeover?
i. 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.
ii. 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.
259. What is a tender offer?
i. Usually a hostile takeover technique that occurs when the acquiring company offers to purchase the stock of the target company for a price over the
current market price in an attempt to take control of the company, or get 50% of the stock that way so it can run and make management decisions including
firing top management, without management approval. There are SEC regulations governing this.
260. What is a leveraged buyout? How is it different than a merger? Why do private equity firms use leverage when buying a company?
i. A leveraged buyout occurs when a group wants to buy a company now with the intention of exiting the investment usually within 3 to 7 years and
potentially changing management to increase the companys profitability. 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. They are typically accomplished by financial groups or company management,
whereas M&A deals are led by companies in the industry.
261. How could a firm increase the returns on an LBO acquisition?
i. A PE fund can increase potential returns on an investment by changing a number of drivers: increase the sale price at the time of monetization through
either an increase in operating profits or multiple expansion, in modeling returns they could increase projections for the acquired companies earnings and
cash flows, could negotiate a lower purchase price which would have the same effect of raising the selling price, or increase the amount of leverage or debt
they use in purchasing the company which would imply a smaller equity check with a higher internal rate of return on the capital deployed. 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.
262. What makes a company an attractive target for a leveraged buy out?
i. 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.
263. What are the potential investment exit strategies for an LBO fund?
i. 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).
264. Why use EBITDA multiples instead of PE multiples?
i. It can be used for firms reporting losses, it allows you to compare firms regardless of leverage, and because it represents operational cash flow.
265. Advantages of LBO Financing?
i. As the debt ratio increases, equity portion shrinks to a level where on can acquire a company by only putting up 20-40% of the total purchase price.
ii. Interest payments on debt are tax deductible
iii. By having management investing, the firm guarantees the management teams incentives will be aligned with their own.
266. What are some characteristics of a company that is a good LBO candidate?
i. Steady cash flows, strong management, opportunities for earnings growth or cost reductions, high asset base (for collateral to raise more debt), low
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.
267. Walk me through S&U?
i. 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. Then is
purchase of the targets options, refinancing debt and transaction costs.
268. In an LBO, if cost of debt is 10%, what is the minimum required to break even?
i. Since interest is tax deductible, the break-even return is the after-tax cost of debt. Assuming tax rate of 40%, the break even return is 6%.
269. In a leveraged buyout, what would be the ideal amount to put on a company?
i. 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.
Brainteasers
270. How many gallons of white house paint are sold in the U.S. every year?
a. Start Big: Assume 300 million people in US, and half, 150 mil, live in houses. Average family size is 3, so 50 mil houses in the US. Add 10% for houses
used for other purposes beside residential, so 55 mil. If houses painted every 10 years on average, then 5.5 mil houses painted annually. 1 gallon of paint
covers 100 square feet, and average house has 2,000 square feet of surface to be painted, so each needs 20 gallons. So 205.5 mil houses painted each year=
110 gallons of paint. Assume 70% of houses are white, so 77 gallons of white house paint sold each year.
b. Start small: A town of 30,000 (1/10,000 of population). Half town lives in houses in groups of three: 5,000 houses plus 10% for other types of houses is
5,500 houses. Painted every 10 years, so 550 houses painted annually. Each house has 2,000 square feet of wall, so need 20 gallons since each gallon covers
100 square feet per house. Thus, 11,000 gallons of house paint each year. 70% white, so 7,700 white. Multiply by 10,000 and have 77 mil gallons of house
paint.
271. How many square feet of loaves of bread is consumed in the United States each month?
i. 300 mil people in America, 200 mil eat pizza. Average person eats it twice a month, two slices at a time so four slices per month. Average slice of pizza
is 6 inches wide and 10 inches long, so 30 square inches (Area of triangle=1/2 base x height). 4 slicesx30 square inches=120 square inches. One square
foot=12*12=144 square inches, so assume each person eats 1 square foot instead. 200 mil people eat pizza, so 200 mil square feet of pizza consumed
monthly in US.
272. How would you estimate the weight of a Building?
i. Dimensions of building (height, weight, depth) to determine volume. Does it taper at top? Estimate the composition. Mostly steel, concrete? How much
these components weigh per square inch? Considering building empty or with furniture and people- add 20% to weight if so?
273. 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?
i. 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.
274. Why are manhole covers round?
i. If other shape, it would make it harder to fit with a cover, so would have to rotate it exactly the right way. Many are round because they dont need to be
rotated, since no corners to deal with and wont fall into hole because rotated wrong way so safer. Concerning corners, cannot cut self on round cover with
no corner and easier to transport since can roll it.
275. If the time on a clock is 4:20, what is the angle between the hour and the minute hands?
i. Hour hand moves quarter of way between 4 and 5, so it moves of 1/12 so 1/48 of 360 degrees. Answer is 7.5 degrees.
276. Two boats are going towards each other at 10 miles per hour. They are 10 miles apart. How long until they hit?
i. Since both boats are moving at 10 mph, they will crash in of an hour or 15 minutes.
277. You have a 5-gallon jug and 3-gallon jug. How will you obtain exactly four gallons of water?
i. 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. (3+3-5+3=4)
278. 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?
i. 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.
279. 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?
i. Have each machine crank different number of coins (machine 1 gives 1 coin, machine 2 gives 2 coins, etc), weigh all coins together- number of grams
short of theoretical weight will indicate which machine (2 grams short, machine 2 defective)
280. What is the decimal equivalent of 3/18 and 11/18?
i. .167 and .611
281. What is 43 x 12?
i. 516
282. A stock is trading at 5 and 1/10. There are 1 million shares outstanding. What is the stocks market cap?
283. What is the sum of the numbers from 1-50? 0-100?
i. Pair up numbers into groups of 51 (1+50,2+49), so 25 groups total. 2551=1275
ii. Pair up numbers into groups of 100, so 50 groups: 50100=5000 plus the midpoint of 50= 5,050
284. An item that costs $450 is selling for 20% off. How much is the discounted price?
i. $360.
285. How many Jet Blue planes will take off in the next hour in the US?
i. Number of airports in US: Virginia has 7.5 mil approximate population and 2 major airports, so 2/7.5 mil is ratio of airports to people and then multiply
that by 300 million people in US and get number of large airports which major carrier departs in the US. If assume one Jet Blue plane departs every 10
minutes, so 6 per hour x large number of airports in US=answer.
286. 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?
i. 3. First one is one color, and second is other color, then third has to be one of the previous colors to make a pair.
287. Tell me a good joke that is not racist or sexist.
288. 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?
i. Impossible. Did lap in 1/30 of hour so 2 minutes. To average 60 miles an hour total would have to do 2/60 in an hour so in 2 minutes. 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.
289. 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?
i. The expected return is every possibility multiplied by the probability of the possibilities. The average of all the potential die rolls, which have equal
probabilities, is $3.50.
290. 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.
i. 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 3.5, the expected value, so only
if you roll a 4, 5, or 6 would you roll again. Since the expected roll is 3.5, the latter three outcomes have expected returns of 3.5. So a game of two rolls
expected return is (4+5+6+3.5+3.5+3.5)/6=$4.25
291. Same game, but now option for third roll, how much will you pay.
i. Two rolls have an expected return of 4.25 so will only roll a third time if you get above that. You have an expected return of
(4.25+4.25+4.25+4.25+5+6)/6=$4.67. As the number of rolls approaches infinity, the price you pay gets closer to $6.
292. 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?
i. To measure a half hour, burn both ends at once. When they meet, half the time has passed.
293. If you were given two ropes, how would you measure 45 minutes?
i. 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.
294. What is the probability of drawing two sevens in a card deck?
i. Multiple the individual probabilities to get the cumulative probability. There are 4 sevens in a deck of 52 cards. So the probability of drawing the first 7
is 4/52 and the second 7 is 3/51, so the answer is 1/13*1/17=1/221.
295. Youve got a 10 x 10 x 10 cube made up of 1 x 1 x 1 smaller cubes. The outside of the larger cube is completely painted. On how many of the smaller
cubes is there any paint?
i. The larger cube is made up of 1,000 cubes. 8 x 8 x 8 inner cubes are not painted, which equals 512 cubes. Thus, 1,000-512=488 cubes that have some
paint.
296. What is the square root of 6,000,000?
i. 2*2=4 and 3*3=9, so between 2,000 and 3,000. Since 2.52.5=6.25 it is around 2,400.
297. 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?
i. 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.
298. A lily in a pond doubles every minute. After an hour, the lily fills the entire pond. When is it 1/8 full?
i. At 59 minutes, it is half full. At 58 minutes, its full. At 57 minutes, it is 1/8 full.
299. What is larger 2^6 or 6^2?
i. In most combinations, the lower number ^ higher number is higher because the higher exponential has a powerful multiplier effect, except 3^2 is higher
than 2^3. Thus, 2^6 is higher.
300. What is the square root of 2?
i. Try to figure this one out in your head without the aid of the calculator. An exact answer is not necessary; 1.4 would suffice.
2.
3.
recommended says:
July 11, 2012 at 9:41 pm
I always was interested in this topic and stock still am, thank you for putting up.
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