Markets Interview Questions

Markets questions check whether you follow the world your models live in. Yield curves, rates and valuation, credit, IPOs, and restructuring basics come up constantly in superdays.

Related guide: Leveraged finance terms interviewers expect you to know

19 questions

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Superday-level questions with full model answers.

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Explain the difference between a normal, flat, and inverted yield curve, and what each shape typically implies about market expectations.
  • What is the Federal Reserve's dual mandate, and what are the three main tools it uses to pursue it?
  • What is the difference between CPI and PCE inflation, and why does the Fed prefer core PCE as its primary target?
  • The 2-year Treasury yields 4.80% and the 10-year yields 4.35%. Compute the 2s10s spread and explain what it signals about market expectations for future Fed policy.
  • Explain the Fisher equation relationship between nominal rates, real rates, and expected inflation, and why real rates matter more than nominal rates for real investment and borrowing decisions.
  • What is quantitative easing, how does it differ mechanically from a fed funds rate cut, and under what conditions does a central bank typically turn to it?
  • Explain what a TIPS breakeven represents, and how a rising breakeven rate would change the discount rate assumptions in a standard DCF that uses the 10-year Treasury as its risk-free rate.
  • A nominal 10-year Treasury yields 4.60% and the 10-year TIPS yields 2.05%. Compute breakeven inflation. Separately, if core PCE is running at 2.4% and headline CPI at 3.5% due to an energy spike, explain which inflation measure the breakeven is more likely tracking and why that matters for interpreting the real yield.
  • The Fed cuts the policy rate 75bps over two meetings in response to softening core PCE, but leveraged loan credit spreads widen 50bps over the same period on rising recession fears. A sponsor's term loan is priced at SOFR (which tracks the Fed's moves one-for-one) plus a spread, with the spread starting at 400bps. Compute the net change in the all-in financing rate, and explain why a Fed cutting cycle does not guarantee cheaper acquisition debt.
  • The 2s10s spread inverts to -60bps, and six months later un-inverts to +15bps as the 2-year yield falls sharply while the 10-year barely moves. Walk through what likely drove each leg of this move, and explain why un-inversion is not reliably an all-clear signal for recession risk.
Explain why higher interest rates compress valuations not just for leveraged buyers but for strategic acquirers and public equities as well.
  • Name the main channel through which a Fed rate hike directly affects an already-closed LBO's cash flow, and explain why floating-rate debt is the key mechanism.
  • A term loan B of $400M is priced at SOFR + 375bps. SOFR rises from 4.50% to 5.25%. Compute the increase in annual cash interest expense.
  • Name the three main levers a sponsor can pull in response to a higher-rate environment when underwriting a new LBO, and briefly state the trade-off of each.
  • Explain the asymmetry between how a rate hike affects a fund's existing portfolio companies versus its pipeline of new deals, and why this makes refinancing risk a live diligence topic in a rising-rate environment.
  • The Fed cuts rates 50bps but leveraged loan spreads widen 60bps over the same period. Explain why this can happen and compute the net effect on all-in financing cost for a loan originally priced at SOFR + 400bps.
  • Explain how a higher-rate environment changes the relative attractiveness of dividend recaps and add-on acquisitions for an existing portfolio company.
  • A sponsor underwrote a deal at 6.5x leverage, SOFR + 375bps, SOFR at 5.50%, targeting a 24% IRR. Before signing, SOFR rises 125bps with spreads unchanged. Compute the increase in annual cash interest on a $650M term loan, and describe, with reasoning, the combination of responses (price, leverage, operating plan) you would recommend to the investment committee to try to restore the return target.
  • A portfolio company's $500M term loan (SOFR + 400bps) must be refinanced 18 months before a planned exit. At refinancing, SOFR has fallen 100bps from entry but spreads for this credit have widened 150bps due to sector-specific concerns. Compute the net change in the all-in rate, and explain what this means for the sponsor's exit timing decision and for how the deal should have been structured at entry to reduce this risk.
  • A sponsor entered a deal at 8.5x EBITDA five years ago. EBITDA has grown from $90M to $115M and debt has been paid down from $550M to $370M as underwritten. However, market exit multiples for comparable assets have compressed from 8.5x to 7.5x due to a structurally higher discount-rate environment. Compute the actual exit equity value and MoIC (entry equity was $215M), compare to what the MoIC would have been at the original 8.5x exit assumption, and explain which specific rate-transmission channel is responsible for the gap.
Explain the difference between maintenance and incurrence covenants, give one concrete example of each, and state which instrument each is typically found in.
  • Define credit spread. If the 7-year Treasury yields 4.10% and a single-B issuer's new notes price at par with a 7.85% coupon, what is the spread in basis points, and what risks does it compensate for?
  • Where exactly is the dividing line between investment grade and high yield on the S&P and Moody's scales, and why does crossing it matter economically for an issuer?
  • Contrast a leveraged term loan B and a senior unsecured high-yield bond across five dimensions: rate structure, security/seniority, call protection, amortization, and primary investor base.
  • High-yield spreads move from 350 bps to 550 bps over three months while Treasuries are flat. Walk through what happens to (a) outstanding HY bond prices, (b) a sponsor's maximum supportable leverage on a new LBO, and (c) banks holding committed but unsyndicated financing.
  • A borrower's credit agreement has a springing net-leverage covenant of 7.0x, tested only when revolver draws exceed 35% of commitments. Explain what 'springing' and 'cov-lite' mean here, and why lenders agreed to this structure.
  • Why does a callable high-yield bond trading above its call price exhibit 'negative convexity,' and why must investors quote yield-to-worst rather than yield-to-maturity on it?
  • A company has $1,600M debt, $100M cash, and $300M covenant EBITDA with a 6.5x maximum net leverage maintenance test. Compute current leverage and the percentage EBITDA decline that triggers a breach. Then: management wants to draw $200M on the revolver to fund an acquisition adding $25M of EBITDA. Does the pro forma pass?
  • Same issuer, three instruments: first-lien TLB at SOFR+375 (SOFR = 4.25%), senior unsecured notes at 8.9%, and a proposed second-lien tranche. First-lien debt is 4.0x EBITDA, the enterprise is worth 7.0x in a downside scenario, and the second lien would add 1.5x. Where should the second lien price relative to the notes, and why? Use attachment points in your reasoning.
  • You hold $400M face of 8.5% notes, callable today at 104.25, next year at 102.125, at par in two years; they mature in four years and trade at 104.75. New four-year paper for this issuer would price at 6.75%. Compute yield-to-worst intuition (which call dominates), the payback period of calling today, and the coupon on new debt a year from now above which calling today was the right move.
Walk me through the IPO process from mandate to first trade, naming each major milestone in order and the purpose of each.
  • Distinguish primary and secondary shares in an offering: who receives the proceeds, what happens to share count, and who is diluted in each case?
  • A company sells 40M primary shares at $12.50 with a 6.5% gross spread. Compute gross proceeds, total fees, and net proceeds to the company.
  • What is the standard IPO discount, why does it exist, and why is a 50% first-day pop a pricing failure rather than a success?
  • Explain the greenshoe end to end: the 115% allocation, the syndicate's short, and what happens in both the stock-up and stock-down scenarios. Why is the short riskless for the syndicate?
  • A company with 120M pre-IPO fully diluted shares issues 30M primary shares at $22. Compute pre-money and post-money equity value, new investors' ownership, and the implied market cap the press should quote at pricing.
  • Compare a traditional IPO, a direct listing, and a SPAC merger across: capital raised, fees/dilution, price discovery, stabilization, and disclosure. When does each make sense?
  • Your IPO book is 9x oversubscribed but 70% of demand is from hedge funds with price limits at the midpoint. The issuer wants to price $3 above the top of the range. As lead-left, what do you advise and why? Quantify the trade-offs you would present.
  • A sponsor owns 100% of a company with 200M shares. At IPO: 25M secondary shares sold at $16 (7% spread), stock rises 20% by lock-up expiry, where the sponsor sells another 60M shares in a follow-on at a 4% spread and a 3% file-to-offer discount to the then-market price. Compute total sponsor net proceeds across both sales and the sponsor's remaining ownership percentage.
  • An IPO comps to $2.8B fair equity value pre-money on 100M pre-IPO shares. The company needs $465M net primary proceeds (7% spread) and prices at a 12% IPO discount. Solve for the offer price, primary shares issued, post-money equity value, and the implied first-day return if the stock closes exactly at fair value.
Why would a company issue investment-grade bonds instead of (a) drawing a bank term loan or (b) issuing equity? Give the key tradeoffs for each comparison.
  • What does a DCM desk actually do for an investment-grade corporate issuer, and how do its economics (fees, volume, margin) differ from a leveraged finance desk?
  • Decompose the yield on an investment-grade bond. If the 5-year Treasury yields 4.05% and a single-A issuer prints at T+80, what is the reoffer yield, and what risks is that 80 bps spread mainly compensating for?
  • Walk through the arc of a new IG bond deal from Initial Price Thoughts to the break to trade. Define oversubscription, guidance tightening, and new-issue concession as you go.
  • A deal opens at IPTs of T+140 area, builds a $4.0bn book against a $1.0bn target, and prints at T+108, upsized to $1.25bn. Compute the spread compression, the coverage ratio at launch size, and the annual interest saved versus IPT. What does this tell you about market conditions?
  • Explain new-issue concession using an issuer whose existing curve is at T+88. It prints a new 10-year at T+95 and it breaks to T+90. Was the deal priced well? What would printing at T+86 and then trading to T+98 have told you?
  • What is a make-whole call, why is it effectively investor protection rather than a cheap refinancing tool, and how does a par call window near maturity change that? Why do IG bonds also commonly include a change-of-control put at 101?
  • A BBB− issuer needs to raise $1bn but is worried about being downgraded to high yield. Explain how a hybrid security helps, quantify the leverage benefit if agencies give it 50% equity credit on a $1bn issue when the company has $6bn of existing debt and $1.2bn of EBITDA (compare leverage with a straight bond vs the hybrid), and state the risks of relying on the equity credit.
  • A US single-A issuer can print 7-year USD debt at T+115 with the 7-year Treasury at 4.20%. Alternatively it issues in euros at Bund+90 (7-year Bund 2.35%) and swaps back to dollars, where the swap converts the euro fixed liability into an all-in USD fixed cost of 4.88%. Compute both all-in USD costs, the savings in bps and dollars per year on $1bn, name the single factor the trade depends on, and explain what reverses it.
  • An acquirer signs a $3bn acquisition funded with committed bridge financing, intending to term it out with bonds. Between signing and closing, Treasuries rise 90 bps and IG spreads widen 60 bps. Walk through what the bridge protects, why it exists in the first place, how the changed market affects the permanent financing and the deal's accretion, and what step-up/duration fees on the bridge are designed to do.
Compare Chapter 7 and Chapter 11. What is the automatic stay, what is a debtor-in-possession, and why do most large corporate cases file Chapter 11 rather than Chapter 7?
  • Distinguish balance-sheet insolvency from liquidity (cash-flow) insolvency. Give an example of a company that could be one but not the other, and explain what actually triggers a bankruptcy filing.
  • Recite the priority-of-claims waterfall from top to bottom and state the absolute priority rule. Where do secured claims, DIP financing, administrative claims, unsecured bonds, subordinated debt, and equity each sit?
  • Define the fulcrum security. Explain how you locate it given a capital structure and a reorganized enterprise value, and why it matters: specifically, what happens to the fulcrum holders in a reorganization.
  • Explain the holdout problem in an out-of-court restructuring, and how Chapter 11's class-voting and cramdown mechanics solve it. What are the voting thresholds for a class to accept a plan, and what is a pre-pack?
  • A company has $250M first-lien, $200M senior unsecured, and $150M sub notes. Reorganized enterprise value is estimated at $360M. Identify the fulcrum security, compute its recovery, and state what each tranche and old equity receive.
  • What is DIP financing and why does it get superpriority? Why do distressed lenders compete to provide it, and how does a 363 sale with a stalking-horse bidder work, including credit bidding?
  • Two bonds sit pari passu in a capital structure yet recover very differently in bankruptcy. Explain how liability management transactions (specifically a drop-down and an uptier) can cause this, using J.Crew and Serta as reference points, and explain how this changes the way you diligence a distressed bond.
  • A company reorganizes with EV of $600M. Above the equity: $350M first-lien secured, $200M senior unsecured, $150M sub notes. Two creditor groups hire bankers who dispute the valuation: one argues EV is really $480M, the other $760M. Identify who argues which number and why, compute the fulcrum and recoveries under both valuations, and explain how the outcome (who owns the reorganized company) changes across the two cases.
  • A company files with reorg EV of $700M and an $80M superpriority DIP. Pre-petition claims: $400M first-lien term loan secured by collateral appraised at $520M, at an 8% all-in rate; $250M senior unsecured; $120M sub notes. The case runs 18 months and the oversecured first-lien accrues post-petition interest plus an assumed $25M make-whole. Compute the naive fulcrum ignoring the DIP and accruals, then re-run the waterfall accounting for the DIP superpriority and the grown first-lien claim, and identify the true fulcrum and its recovery.
Why do valuation conventions differ by sector? Match the right multiple to each of: a pre-profit SaaS company, a mature industrial, a commercial bank, an airline, and an E&P energy company. Explain why EV/EBITDA is wrong for the bank.
  • Give the universal five-question framework you'd apply to reason about an industry you've never studied. Walk through each question and why it matters.
  • What makes a great software business? Name the three or four KPIs that matter most and explain what net revenue retention above 100% means and why it's so valuable.
  • You're asked to value an airline. Which multiple do you use and why does rent matter? Name the core operating KPIs (RASM, CASM, load factor) and explain why airlines have such violent operating leverage.
  • A SaaS company has ARR of $250M growing 28%, FCF margin 15%, and its existing $200M customer base now generates $234M. Compute net revenue retention, the Rule of 40 score, and state whether each passes its threshold. What does the combination tell you about business quality?
  • Two banks: Bank A at 1.6x book with 18% ROE, Bank B at 1.0x book with 8% ROE. Cost of equity is 10% and long-run growth 3% for both. Using justified P/B = (ROE − g)/(COE − g), compute each bank's justified P/B and determine which is actually the cheaper stock. Explain the intuition.
  • A commodity chemicals company trades at 5x trailing P/E while the broad market is at 18x. Explain why this is likely a value trap, why cyclical multiples invert across the cycle, and how you'd normalize the earnings to value it properly.
  • Airline X: revenue $10,000M, EBITDA $1,500M, aircraft rent $500M, net debt $3,500M, market cap $5,000M. Compute EV/EBITDA and EV/EBITDAR (capitalize leases at 7x rent). Then, if load factor rises 3 points and incremental margin is 70%, compute the new EBITDA and the percentage change, and explain what this reveals about the sector's risk and valuation.
  • Two banks look identical on ROE (both 7%) but one has a much higher CET1 ratio. Explain how excess capital mechanically depresses ROE, why ROTCE and a normalized ROE matter, and how returning surplus capital could re-rate the over-capitalized bank. Quantify: if returning excess CET1 lifts ROE from 7% to 11% against a 10% COE and 3% growth, what does justified P/B move to?
  • You must choose between a cyclical chemicals stock at 5x trailing P/E (current margin 18%, mid-cycle margin ~9%) and a pre-profit software stock at 10x EV/Revenue (ARR $300M growing 35%, NRR 122%, 82% gross margin, implying ~25% FCF margin at maturity). Rebuild each valuation in its own sector framework (normalize the cyclical's earnings and imply the software company's mature FCF multiple) and argue which is the better risk-adjusted value and why the generic screen misleads.
Explain why a short thesis is harder to pitch well than a long. Address the payoff asymmetry, borrow costs, and why a short needs a dated catalyst even more than a long does.
  • Lay out the six-part structure of a two-minute stock pitch in order, with roughly how long each part should take and what it must accomplish. Why does the recommendation go first?
  • What is a 'variant perception' and why is it the heart of any pitch? Give three distinct sources of variant perception and explain why 'it's a great company in a growing industry' is not a thesis.
  • Why does a stock pitch need a catalyst, and what makes something a catalyst? Give three concrete examples and explain what happens to a thesis that is cheap but has no catalyst.
  • A stock trades at $60 on consensus NTM EPS of $4.00 (15x). Your thesis is that an unrecognized margin program adds 200 bps to a 10% operating margin on $2,000M of revenue, with 100M shares. Compute the extra EPS, your NTM EPS, and the target price if the multiple stays 15x versus if it re-rates to 16x. Explain how this 'quantifies the thesis.'
  • A sophisticated interviewer accepts your variant view and asks 'why hasn't the market figured this out, and why won't it be arbitraged away before your catalyst?' Give a complete answer that names structural reasons a mispricing can persist.
  • Build a base/bull/bear framework for a stock at $50: bull 25% probability EPS $4.50 at 17x, base 50% EPS $4.00 at 15x, bear 25% EPS $3.30 at 12x. Compute each target, the probability-weighted expected value and return, and the upside/downside skew. Explain why framing a pitch this way is superior to a single target.
  • You're long a $5bn mid-cap. Your variant view is a revenue mix shift toward a software segment (30 points higher margin, growing double the legacy hardware) that will lift blended margin ~250 bps and add ~$0.80 of EPS not in consensus. Walk through (a) the full thesis, (b) exactly why the market is missing it and why the gap persists, (c) the catalyst and timeframe, and (d) how you'd get to a target price using two independent levers (earnings and re-rating) without double-counting.
  • Turn the long from the prior question into a short thesis for the opposite scenario. Explain what would make it a *good* short specifically (not just overvalued), why the borrow and a dated catalyst matter, and how you'd size and structure it given unlimited downside and squeeze risk. Include how you'd use a pair trade or options.
  • ConglomerateCo trades at $100 (200M shares, $20bn market cap, $4bn net debt, $24bn EV). Segments: Industrial EBITDA $1,800M (peers 8x), Software revenue $900M growing 30% (peers 6x sales) but only ~$150M EBITDA today, Financing arm book value $2,000M (worth ~1x book). Run the sum-of-the-parts, determine how much software value the blended 8x multiple hides, compute the true SOTP equity value versus the $20bn market cap, and state whether this is actually a long. Explain what the arithmetic teaches about pitching a SOTP idea.
Walk me through the five components of a strong two-minute deal discussion, in order, and explain what each one is demonstrating to the interviewer.
  • For a public-company acquisition, list the five numbers you must know cold before discussing the deal, and state in one sentence why each matters.
  • A buyer pays $54.00 per share for a target that traded at $40.00 unaffected, with 250M diluted shares, $3.0B of debt and $1.0B of cash. LTM EBITDA is $1.1B. Compute the premium, equity value, enterprise value, and EV/EBITDA.
  • Why does an all-cash deal shift more risk to the buyer than an all-stock deal? What does each consideration choice signal about how management views its own share price?
  • A deal has $200M of run-rate cost synergies and the buyer paid a $2.6B premium. Using both the deal-multiple shorthand (12x) and an after-tax perpetuity at 10% (25% tax rate), evaluate whether the synergies justify the premium, and explain why the two shorthands differ.
  • The acquirer's stock rose 4% on announcement of an acquisition. What are the possible interpretations, and which follow-up facts would you check to distinguish them?
  • You're asked about a deal your interviewing bank advised on, and you privately believe the buyer, their client, overpaid. How do you handle the 'what's your view?' portion without either lying or insulting their work?
  • Elite: A live cash deal has an offer of $80.00; the target trades at $73.60; the estimated downside on a break is $58.00; expected close is 6 months out. Compute the market-implied probability of close and the annualized return to an arb who buys today if the deal closes on schedule. Then explain what a widening of this spread over the next month would tell you.
  • Elite: An acquirer with $1,800M net income and 500M shares buys a target with $300M net income for $6,000M of equity value, funded half with debt at 8% and half with new shares issued at the acquirer's $45.00 share price. Synergies are $120M pre-tax; tax rate 25%. Compute pro forma EPS and state whether the deal is accretive, then compute the breakeven pre-tax synergy number at which the deal is exactly neutral.
  • Elite: Construct the strongest possible one-minute bear case AND one-minute bull case for the same hypothetical deal: 14x EBITDA paid vs. 11x precedents, 35% premium, $400M synergies on an $8B EV, all-debt financing taking leverage to 4.5x in a rising-rate environment. Conclude with which side you'd take and the single number your view hinges on.
Why does the equity of a deeply distressed company still trade above zero even when the firm's debt clearly exceeds the value of its assets?
  • Can a company's equity value be negative? Answer for both market equity value and book equity, and explain the economic reason for each.
  • A company has a $900M market cap, $200M of debt, and $1,400M of cash. Compute its enterprise value and explain in one sentence what the market is saying about the operating business.
  • Name two very different reasons a company's book equity could be negative, and explain how you'd tell from the balance sheet which one you're looking at.
  • If negative enterprise value means you can buy the company for less than its net cash, why don't investors immediately arbitrage every negative-EV company? Give at least four distinct frictions.
  • Your associate screens comps and includes a company at 4.2x EV/EBITDA, but its EBITDA is negative and its EV is negative. Explain precisely why the multiple is meaningless and what you would use instead.
  • Why is enterprise value generally not used to value commercial banks, and what would you use instead?
  • Elite: Target has market cap $2,500M; debt $800M; cash $600M of which $150M is restricted and $200M sits offshore repatriable at a 25% tax cost; a $350M unfunded pension; and a 40% equity-method stake worth $450M whose income is excluded from its $520M EBITDA. Compute the clean EV and EV/EBITDA, and identify which two adjustments a careless analyst most commonly misses.
  • Elite: A biotech trades at $2.50 with 100M shares, no debt, and $480M of cash, burning $35M per quarter. An acquirer would pay a 30% premium, the process takes two quarters, wind-down costs are $25M, and there is a 40% chance of a $120M contingent liability. Compute the headline negative EV, then the expected profit from an acquire-and-liquidate strategy, and state whether the trade works.
  • Elite: Using the equity-as-a-call-option framework, explain why shareholders of a distressed company might rationally prefer that management take on higher-volatility projects, why creditors oppose this, and how debt covenants respond. Then connect this to why distressed equity never trades at zero.
Walk me through EBITDA mechanically from net income, then explain why 'Adjusted EBITDA' exists and why it's a non-GAAP number with no fixed rulebook.
  • List the main legitimate categories of EBITDA add-backs (non-recurring, non-cash, normalizations) with an example of each, and name the two categories a buy-side diligence team is most skeptical of and why.
  • A company reports net income $30M, interest $10M, taxes $9M, D&A $22M, plus a $5M one-time restructuring charge and $7M of stock comp. Compute reported EBITDA and management's Adjusted EBITDA, then state which add-back a QofE team would likely disallow and why.
  • Explain why EBITDA is not cash flow. For two businesses with identical $100M EBITDA (one software, one heavy manufacturing), describe how their cash conversion differs and what number you'd look at instead.
  • Argue both sides of adding back stock-based compensation to EBITDA, then state where a sophisticated diligence team lands and why. What does it signal about a business if it only looks profitable after adding SBC back?
  • A seller markets a business at 8.0x Adjusted EBITDA of $95M. Diligence disallows $6M of serial 'non-recurring' charges and $9M of unrealized synergies. Compute the corrected enterprise value, the price swing, and the change in debt capacity at 5.0x maximum leverage.
  • What is a Quality of Earnings analysis, who runs it and for whom, and why do its adjustments to seller EBITDA frequently run downward? Give three specific findings a QofE process commonly surfaces.
  • Elite: A target's EBITDA grew from $60M to $84M over three years (+40%), but cumulative operating cash flow was roughly flat at ~$26M/year. Cumulative working-capital change was -$45M and cumulative capex was -$42M over the period. Compute cumulative cash conversion, explain what's driving the gap between EBITDA growth and flat cash, and state your verdict on earnings quality.
  • Elite: A seller presents Adjusted EBITDA of $110M at 9.0x. Your findings: disallow $12M SBC add-back; disallow $8M restructuring that recurred; add back $6M of above-market owner comp a new owner won't pay; and move $15M of unproven pro forma synergies to an earn-out. Build the defensible EBITDA, the corrected upfront enterprise value versus the ask, and structure the earn-out (max value and expected value at 40% realization).
  • Elite: Explain how 'EBITDA add-back creep' in a credit agreement can make reported leverage look healthy while the underlying credit deteriorates. Then, for a borrower reporting 4.0x leverage on Adjusted EBITDA of $200M that includes $40M of capped synergy and one-time add-backs you don't believe, compute the 'true' leverage if those add-backs are stripped, and explain the covenant implication.
What is an earn-out and why do buyers and sellers use them? Connect the earn-out to the problem of paying for unrealized synergies or growth, and to keeping selling-shareholder management motivated.
  • What is a Net Operating Loss, and why is it an economic asset? Explain why its value is the present value of future tax savings rather than its face balance, and where it sits in the enterprise-value-to-equity-value bridge.
  • Define a convertible bond, the conversion ratio, and the conversion price. Explain the single rule for deciding whether to treat a convertible as debt or as equity in a valuation.
  • A target has a $250M NOL and the tax rate is 25%. The company can use $50M/year for 5 years; discount rate 8%. Compute the gross tax shield and the present value of the NOL, and state exactly where the PV goes in the equity bridge.
  • A company has $500M of convertibles at a $40 conversion price and a 4% coupon (25% tax). Show the EV-bridge treatment and share-count impact when the stock is at $32 versus at $52, and explain the error of counting the bond as debt while also adding the shares.
  • Explain Section 382. For a target with a $600M NOL, equity value of $250M at change of control, and a long-term tax-exempt rate of 3.5%, compute the annual NOL usage cap and explain qualitatively why this can make the NOL worth far less than its gross tax value to an acquirer.
  • Explain the 'punished for success' accounting effect of an earn-out: how is contingent consideration recorded and remeasured, and why does the buyer book a charge when the target outperforms? Then explain the most common earn-out dispute and how a seller protects against it.
  • Elite: A buyer pays $600M upfront plus a $150M earn-out contingent on the target reaching $100M EBITDA in year 3 (estimated 45% probability). Discount rate 10%. Compute the expected earn-out, its PV, total expected consideration, and total maximum consideration. Then explain which of these three numbers you'd cite as 'the deal value' and why.
  • Elite: A target has $400M of convertibles at a $50 conversion price with the stock at $70, and the issuer bought a capped call struck at $85 when it issued them. Compute the if-converted new shares, explain why the economic dilution to existing holders is smaller than the raw share count between $50 and $85, and state what happens above $85.
  • Elite: Value target equity. Core business EV (fully taxed) = $1,500M. The target has $180M straight debt, $30M cash, a $300M NOL usable at $30M/year for 6 years discounted at 9% (ignore Section 382), and $250M of convertibles at a $55 conversion price with the stock at $70. The buyer also pays selling shareholders an earn-out with $45M expected PV. Build target equity value, then total consideration to the seller, showing the convertible and NOL treatment explicitly.
Explain what beta measures and why an observed equity (levered) beta blends business risk and financial risk. Why can't you directly compare the levered betas of two companies with different capital structures?
  • Write the unlevering (Hamada) formula and explain, term by term, why the denominator has the shape 1 + (1 - Tax) x (D/E), in particular why the (1 - Tax) term is there.
  • A comp has a levered beta of 1.25, D/E of 0.50, and a 25% tax rate. Compute its unlevered beta, and use the direction sanity check to confirm your answer is sensible.
  • Walk through the complete six-step workflow for building a cost of equity for a private company with no observable beta, being explicit about which company's D/E you use at the unlever step versus the re-lever step and why.
  • Two comps: A has levered beta 1.10 at D/E 0.30; B has levered beta 1.55 at D/E 1.40; both at 25% tax. Unlever both, and explain which underlying business is actually riskier and why the levered betas were misleading.
  • You're given a target capital structure as 30% debt of total capital, tax rate 25%, and an average asset beta of 0.95. Re-lever the beta, then compute the cost of equity with a 4% risk-free rate and 5.5% equity risk premium. Show the D/(D+E)-to-D/E conversion explicitly.
  • Explain the key assumptions embedded in the standard Hamada unlevering formula (debt beta, constant leverage, tax shield risk) and describe one situation where each assumption breaks and would lead you to a different formula or input.
  • Elite: A comp has levered beta 1.45, book D/E of 1.00, and trades at 2.0x book equity; tax rate 25%. Correct the D/E to market value, unlever the beta, then re-lever it for a target that will run a 0.60 market D/E at 25% tax. Compute the target's equity beta and state how much the book-vs-market error would have distorted the result.
  • Elite: A highly levered comp has an equity beta of 1.80, a market D/E of 1.50, a tax rate of 25%, and risky debt with an estimated debt beta of 0.20. Unlever using the full formula that includes debt beta, then compare to the naive zero-debt-beta unlevering, and explain the direction and economic reason for the difference.
  • Elite: Build a full WACC for a private target. Comps' unlevered betas average 0.88. Target will run D/E of 0.667 (i.e., 40% debt of total capital), tax rate 25%, pre-tax cost of debt 7.0%, risk-free rate 4.2%, equity risk premium 5.0%. Re-lever the beta, compute cost of equity, after-tax cost of debt, and WACC. Then state how WACC would change if the target instead ran zero debt, and why the beta piece moves.
Explain the difference between a normal and an inverted yield curve, what each signals about the economy, and how the Fed influences the short end versus how the long end gets set. Why has an inverted curve historically preceded recessions?
  • Walk through the priority-of-claims waterfall in a Chapter 11 restructuring, and define the 'fulcrum security.' Why does the fulcrum move up or down the capital structure as the estimated reorganization value changes?
  • State the four tricky-technical discipline rules from lessons 62-65 (EV/negative equity edge cases, EBITDA add-backs, NOLs/converts/earn-outs, beta unlevering) in one sentence each: the reflex that keeps you from the naive wrong answer on each.
  • Trace, step by step, how a 150bps rise in interest rates flows through credit spreads, LBO leverage capacity, purchase multiples, and ultimately restructuring activity. Name which Module 5 lesson governs each link in the chain.
  • A sponsor buys a company with $400M EBITDA. Lenders cap debt at 5.0x leverage OR 2.0x minimum interest coverage. Cost of debt is 8%, then rises to 12%. Compute debt capacity before and after, identify which constraint binds in each case, and explain the consequence for the sponsor's bid.
  • Explain why the IPO window, the high-yield window, and the LBO market tend to open and close together. What common market variable drives all three, and what happens to each when that variable spikes?
  • A buyer faces a seller Adjusted EBITDA of $120M that includes $20M of unproven synergies and $12M of SBC add-backs. The multiple is 8x. Explain how you'd discipline the EBITDA, and how you'd use an earn-out to bridge the synergy dispute rather than walk away.
  • Elite: A distressed company has a reorg enterprise value of $950M against $600M secured, $500M senior unsecured, $250M subordinated, and $200M preferred, plus common. Identify the fulcrum security and each class's recovery. Then recompute the fulcrum if the reorg value were instead $1,150M, and explain what drove the shift.
  • Elite: Build a WACC for a private target: comps' average unlevered beta 0.85, target D/E 0.50, tax 25%, pre-tax cost of debt 7%, risk-free 4%, ERP 5.5%. Then the Fed hikes 100bps (risk-free -> 5%, cost of debt -> 8%). Recompute WACC, and using a perpetuity with 3% growth, estimate the percentage change in DCF value from the rate shock. Show that the re-levered beta doesn't change and explain why.
  • Elite: A buyer values a target with seller EBITDA of $100M (including $15M synergies and $10M SBC you disallow) at a 9x multiple. The target has a $150M NOL usable at $25M/yr for 6 years (25% tax, 8% discount, ignore Section 382). You move the $15M synergies to an earn-out paid at 9x, 45% probability, 2-year horizon, 10% discount. Compute the defensible EBITDA, upfront EV, PV of the NOL, PV of the expected earn-out, and total expected consideration to the seller, and state which single number you'd quote as 'the price.'