Basic Investment Banking Interview Questions and Answers : S1

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After introduction and all the interviewer would hoop you into technical or mathematical questions.

Let me help you out in understanding the basics of the same so that you can understand the most difficult ones. 

Let's start !!

Question 1 

How much you will pay for a company that generates ₹ 100 Crore of cash flow every single year into eternity ?

Eternity means time that has no end 

So basically they want to know that does you know the formulas or not ? So what formula will be used here ? The Perpetuity Formula

Before answering the question keep in mind that whatever you answer or whatever you say in an interview the interviewer will use it as a content to question you against. 

SO What is Perpetuity Formula ?

Perpetuity Formula is what has been asked in the question, the question is the defination of the Formula. A Perpetuity Formula is used to calculate the present stream of cash flow that is expected to continue for indefinitely. 

Answer of the question will be :

Value = Cash Flow/Discount Rate 
Let's take the discount rate as 10%

So it will be 100/10% = ₹ 1000 Crore 

So we will pay ₹ 1000 Cr. for the company, whereas you can also take 20%, 30% or lesser discount also it doesen't matter much. 


Question 2 

What if the company generates a cash flow of ₹ 200 Crore  in the upcoming year and growth rate for the same is 4% for the long term. Your earning would be approx 10% if you invest in similar companies, how much you will pay for the company?

The question before this was simplier but was requiring the same knowledge as this now we have the cash flow, growth rate and discount rate let's calculate them. 

Company Value will be = Cash Flow / (Discount Rate - Growth Rate of Cash Flow)

=200 / (10% - 4%) that will be ~ ₹ 3,333 Crore 

How will you answer this question ?

 The right way to answer this question is : As the company has a cash flow of 200 Cr., and a growth rate of 4% whereas we also know the Discount rate of 10% we will use Perpetuity Formula and have the Company Value.

That is : 
Company Value will be = Cash Flow / (Discount Rate - Growth Rate of Cash Flow)
                                       = 200 / (10% - 4%) that will be ~ ₹ 3,333 Crore 







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