Investment Banking Interview Questions of the Week #02

Thanks to all who sent in responses to our last question.

Here are two questions for this week. Feel free to reTweet the questions out or forward it on to anyone who may be of interest. And of course, feel free to send in your own answers below in the comment section – we’d love to hear from you!

1 – If I were stranded on a desert island, only had 1 financial statement and I wanted to review the overall of a company – which statement would I use and why?

2 – If depreciation is a non-cash expense, why does it affect the cash balance?

ANSWERS

1 – You would want the cash flow statement as it offers the truest picture of how much cash a company is actually generating, independent of all non-cash expenses. This is core in analyzing the overall financial health of any business – it’s cash flow.

2 – While depreciation is a non-cash expense, it’s tax-deductible. Since taxes are a cash expense, depreciation therefore affects cash by reducing the amount of taxes to be paid.

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3 thoughts on “Investment Banking Interview Questions of the Week #02

  1. Stranded on an island I would want the balance sheet. To me that would provide some insight into the expected longevity of the company. You could see their asset position and their liquidity as compared to their liabilities. I would also hope it was printed on beef jerkey or something since I’m stranded on an island.

    I’m not entirely sure on #2. The best guess I have is that you is the depreciation is deducted from the cash balance to account for the necessity to replace the item or upgrade(in the case of a building) in the future. It can also be used as an accounting method to help offset income.

    Liked by 1 person

  2. David, Nice responses! I’ll leave it open for discussion from others as to whether they’re correct and see what others say as well before posting the answers. And, yes, hopefully the BS would be printed on beef jerky for sure (perhaps even teriyaki flavored)! – Drew

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  3. These responses were sent in by Phil Baratelli (Thanks for sending them in!):

    1. Cash flow statement. That gives you the ability to calculate Free Cash Flow and EBITDA, which are the backbone of any LBO, recapitalization or M&A activity. Furthermore, the financing section shows you dividends paid, debt borrowings and repayments and repurchase of stock.

    2. For calculation of Free Cash flow. Operating cash flow less capex, which is free cash flow. Also, Depreciation is real. It may be non-cash, but you have to replace aging equipment. Amortization is phony, as identifiable intangibles actually go up in value over time.

    Liked by 1 person

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