Recruitment Ready General Finance Interviews

Outline General Interview Tips Interview Etiquette Common Questions Resources Most Common Mistakes Interview Etiquette Common Questions Personal Questions Culture and Bank Specific Questions Strengths and Weaknesses Understanding Banking Other Questions Basic Technical Questions Capital Structure Valuation methodologies Accounting Summer 2014 Student Recruiting Experiences

General Interview Tips

Practice, Practice, Practice! General Tips Practice, Practice, Practice!

Use the resources available to you! Career services Danielle Dagenais (Finance, Investment Banking, Investment Management) Offers help with Resume & Cover Letter Job Opportunities Preparation for interviews and mock interviews Evaluation of internship and job offers McGill Investment Club workshops Prep Documents Breaking into Wall Street Mergers & Inquisitions Vault guide Queen’s Commerce Prep Guide Use the resources available to you!

Most Common Mistakes Fail to structure answers properly Fail to use specific anecdotes to support arguments Answers too generic  every question is opportunity to differentiate yourself Lack of preparation Memorizing answers by heart

Interview Etiquette

How to Make a Good Impression Be on time! Actually, be 10 minutes early! If there are other candidates, receptionists, talk to them Keep your cell phone off at all times Offer a strong firm handshake and follow person to room with conviction This is actually the first impression they get from you Look in the eyes and sit with fully erect shoulders Makes you look more confident Smile and use your hands to emphasize the points you are making Make sure you are not doing anything annoying like foot tapping

Must Do’s in an Interview Ask for a business card at the end if not given When asked “do you have any questions”, absolutely ask some! Prepare 3-4 questions you could ask to any interviewer that are not generic Don’t ask about the salary It is ok to ask about the next steps in the process Thank them twice at the end (for the opportunity and for taking their time) Again, send a follow-up/thank you note Make sure you can easily be reached after the interview and be ready for calls at random hours

Common Questions

Personal Questions Who are you? / Walk me through your resume Be chronological Show how each experience along the way led you in the direction of finance State why you’re here interviewing today (important to land the question) Aim for 2-3 minutes max Build a good story about yourself + know it almost by heart This is a good opportunity to set the tone of the interview and show your style/personality to differentiate yourself Suggested structure: “Beginning” (CEGEP/College, not high school unless relevant to story) Finance “spark” Key Resume experience Why you are here: why your background and your interest brought you here

Personal Questions Why do you want to do Investment Banking? Are you applying for other positions? Everyone should have a personalized answer and his own reasons why they want to do it. You want to sound credible and passionate about this job Worst possible answer here is to say “I’m not sure” or “for the money” Common answers include: “I want to be pushed to my limits”, “I want to work with the smartest people” and “Investment Banking will teach me a lot” Just banking. Do not talk about your consulting interviews. Interviewers do not want to waste their time Why do you want to work in Toronto? Again, given that finance has high employee turnover rates, it is important for banks to now that you are committed to stay with the office This is especially true for regional offices like Montreal and Calgary from where a lot of people want to transfer to Toronto or New York Working in a small office has a lot of advantages: If you are good, people will give you more work and trust you with more challenging tasks earlier on Senior people are much more approachable You can work on a lot of different kinds of projects More opportunities to attend client meetings and have direct exposure to the job

Personal Questions What do you do for fun? Hobbies, Bankers will spend 80-100 hours/week with you in the office. They want to know if they can spend some time with you talking about other things than finance In this case, the worst possible answer would be “I love reading the WSJ and researching stocks” Don’t necessarily have to be very original, but show that there is more to you than good grades and a passion for finance I see that you are a member of the McGill Investment Club’s. What exactly do you there? Prepare a short, clear and interesting summary of everything that is on your resume You should be able to talk more extensively about it if you get asked more questions. If not, maybe it does not belong on your resume… Focus on your key accomplishments, give specific examples (i.e. NOT “I take part in seminars, workshops and trading simulation”, but “I participated in a live market simulation where I traded stocks and bonds. My team finished 3rd overall. I also like to learn about the industry, so I attend guest speakers series. I had the chance to meet with Brian Porter [Scotia CEO] and he gave us an inspiring speech on the importance of teamwork

Personal Questions Do you do any activities with teams? How do you go about solving tensions in your group? Focus on how the team helps you. “I row with 3 others guys in a quad boat. It was difficult at first, but we learned to work hard together to improve our performance. These guys are basically my family now.” You will be spending 100+ hours with other analysts you need to show that you can be friends with them and somewhat fun

Personal Questions Tell me about the thing you are most proud of that is not listed on your resume It’s a difficult question that can be surprising given that we usually put most of what is interesting about us on our resumes. Stay calm and smile. Here, it is important to be somewhat original and show that there is something unique about you It doesn’t have to be an interest, it can be a special story or event Nothing illegal!

Bank Questions

Bank Questions Why do you want to work for Bank XXX? Extremely important to be able to back up arguments! Everybody will say “Your bank has an amazing culture”, but how do you show that this is true? Typically, you need to talk to professionals or fellow students who have worked there to get a sense of what it’s like. Use your networking efforts. Be able to talk about the bank’s strengths and recent important deals Where else are you interviewing? If you’re interviewing for an IB position, say that you are interviewing only for IB at other banks too. This shows that you are convinced this career is right for you Often times, banks will feel more rushed to give you an offer if they know you have attracted attention from competitors, but don’t be too cocky about it! Don’t lie about it, they can check very easily Why do you want to work in metals and mining? There is hardly any activity these days Highlight your long-term view and cyclical nature of this industry and capital markets Once activity picks up, there will be a vacuum for human capital and more opportunities

Bank Questions What do you think is our bank’s biggest weakness / which of our competitors do you admire most? Important to do your research on the bank beforehand! Saying something like being “weaker in some geographic region” or “lacking experience in a given industry” is acceptable to say, but indicate how it doesn’t really matter because they are really strong in something else Always talk with respect about competitors! Who is our CEO? Absolutely crucial to know and makes you look very bad if you can’t answer Also important to know the Managing Directors of the industry you are applying too (if this is the case) Try to know the structure of the office and most important directors

Strengths and Weaknesses

Strengths and Weaknesses Give me 3 strengths and a weakness Do not simply state a weakness. “I can be shy”. “I am a perfectionist” You want to answer by briefly talking about a situation where you had a difficulty/weakness and how you overcame it. Switch focus on what you learned from that moment. Have 2-3 examples of situations ready Tell me about a time you failed to honor a commitment Do not simply state a weakness. “I can be shy”. “I am a perfectionist” You want to answer by briefly talking about a situation where you had a difficulty/weakness and how you overcame it. Switch focus on what you learned from that moment. Have 2-3 examples of situations ready

Strengths and Weaknesses Other variants of strengths and weaknesses question: What kind of feedback did you receive in your internship last summer? If your friends could describe you in 3 words, which ones would they choose? If I talk to somebody who doesn’t like you, what would they say about you? Why would we NOT hire you today? In 3 sentences why would we hire you? 1st sentence: School 2nd sentence: Previous relevant experience 3rd sentence: Something that makes you unique

Understanding Banking

Understanding Banking What will you actually be doing as an intern? As an investment banker summer analyst, you cannot expect to be making models and other fancy stuff It is important to recognize that you will spend most of your time working on pitch books and researching companies/industries However, even if the tasks appear simple, you should also recognize that you will actually be exposed to a ton of very smart people and that you will learn a great amount about the industry What is a pitch book? Sales tool of the investment bank. There are three main types: Market Overview / Bank Introduction Deal Pitches (M&A, IPO, debt issuance, etc.) Management Presentations

Understanding Banking How much do you expect to work in a typical work week? As an investment banking summer analyst, you will probably spend anywhere between 80 and 100 hours per week in the office This is true for the analyst level, but the hours do get better as you progress towards associate and VP How do companies select the bankers they want to work with? Everything in finance has to do with relationships, and this is especially true in investment banking Typically, all the banks will pitch to the company in what is called a “beauty pageant contest” You are asked to summarize a company on one slide with four quadrants This question tests your ability to summarize the most important facts about a company in a restricted space. Typically, you would probably include some valuation metrics, a company description, share performance chart and summary of management

Recruitment Ready Technicals - Basics

Outline Corporate Structure Valuation Accounting DCF Comparable Company Analysis Precedent Transactions Accounting

Capital Structure

Corporate Structure Secured Debt Underfunded Pension Operating Leases Unsecured Debt Convertible Debt Preferred Shares Equity Seniority

Optimal Capital Structure The advantage of debt is that it gives tax shields to the company through the interest paid It would NOT be optimal for the firm to add on 100% debt as bankruptcy costs eventually become more important than the benefits derived from tax shields

Enterprise Value Enterprise Value = Market Capitalization + Debt + Minority Interest + Preferred Equity - Cash + Underfunded Pension + Capital and Operating Leases + Contingent Liabilities + Long-term Provisions + Tax Liabilities - Short-term Investments

Capital Structure Questions Why do you subtract cash from EV? Is it always accurate? Why do you add Minority Interest to EV? Should you use the book value or market value of each item when calculating EV? Why do we look at both Enterprise Value and Equity Value? What’s the difference between Equity Value and Shareholder’s Equity? Should cost of equity be higher for a $1M or $100M company? Same question for WACC? 1, The “official” reason: Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it. The way I think about it: In an acquisition, the buyer would “get” the cash of the seller, so it effectively pays less for the company based on how large its cash balance is. Remember, Enterprise Value tells us how much you’d really have to “pay” to acquire another company. It’s not always accurate because technically you should be subtracting only excess cash – the amount of cash a company has above the minimum cash it requires to operate. 2. Whenever a company owns over 50% of another company, it is required to report the financial performance of the other company as part of its own performance. So even though it doesn’t own 100%, it reports 100% of the majority-owned subsidiary’s financial performance. In keeping with the “apples-to-apples” theme, you must add Minority Interest to get to Enterprise Value so that your numerator and denominator both reflect 100% of the majority-owned subsidiary. 3. Technically, we should use Market Value of everything. But realistically, we most often use Book Value as it would be almost impossible to establish the book value of the other items in the formula. 4. Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value. 6. $1B. All else being equal smaller companies are expected to outperform larger ones and are therefore seen as more “risky”. The highe Cost of Equity would include a size premium 7. Same reasoning if capital structure is the same. But if the capital structure is not the same, then it could go either way depending on how much debt/preferred stock each one has and what the interest rates are.

Valuation

Traditional Valuation Methodologies Value based on net present value of future cash flows (enterprise or equity cash flows) Discounted Cash Flow Value based upon applying observed financial metrics from comparable past transactions Precedent Transaction Analysis Value based upon applying observed current trading metrics of comparable, public companies Comparable Trading Analysis

Discounted Cash Flow

Discounted Cash Flow - Principles “Value determined by calculating the present value of a stream of projected cash flows over a certain period and a terminal value” Projected after-tax unlevered free cash flows Forecast period should be long enough so that business reaches a steady state by the end of period and incorporates a cycle (if a cyclical industry) Typically 5 to 10 years Terminal value Value of perpetual cash flows following end of forecast Terminal year should best mirror company's normalized future steady state Discount rate Weighted average cost of capital (“WACC”) Depends on capital structure (typically weighted average cost of equity and debt) WACC should reflect optimal and sustainable capital structure and underlying estimate of business risk Enterprise Value PV of cumulative cash flows to all claim holders Unlevered Free Cash Flow “UFCF” + EBIT*(1-tax) + Depreciation & Amortization - Capital Expenditure - ∆ in Working Capital Discounted Rate Weighted Average Cost of Capital “WACC”

Discounted Cash Flow – Terminal Value “Determining the terminal value involves the application of one of the following going concern approaches” Practice Considerations Based upon current trading multiples ~ multiples of EBITDA Based upon multiples paid in comparable company transactions Industry or company considerations may make the current environment not comparable to the terminal year Implies a perpetual growth rate from the terminal point onward Comparable Trading / Transaction Multiple Perpetual Growth Single stage – constant growth perpetuity Unlevered Free Cash Flow * (1+ Perpetual Growth Rate) / (WACC – Perpetual Growth Rate) 2 stage – growth rate 1 for n years followed by growth rate 2 Ideal when company is in steady state Very sensitive to changes in inputs, especially perpetual growth rate assumptions Implies multiples as if the business was transacted in the terminal year

Discount Cash Flow Strengths Limitations Based on well accepted corporate finance theory Flexibility to handle different patterns of cash inflows and outflows Recognizes time value of money Allows explicit consideration of project risks Focuses on future operations False perception attributed to sophisticated technique due to inherent subjectivity in forecast, terminal value and WACC Demands extensive set of forecast data and related due diligence Sensitive to long term growth assumptions Lacks external reference to reconcile valuation differences

Comparable Company Analysis

Comparable Company Analysis (‘’Comps’’) What is comparable company analysis? Provides a market-based valuation perspective on comparable publicly traded companies It is based on publicly available information; reflects what the many independent investors that comprise the market think Implied valuation does not reflect premium for control or any synergy potential Effectiveness of this valuation method depends on the comparability of the companies selected and metrics used to compare the companies Comparable trading analysis: Key Valuation Metrics / Multiples Enterprise Value Equity Value Revenues EBITDA Unlevered Cash Flow Earnings Levered Cash Flow Book Value Multiples based on economics that all stakeholders are entitled to (debtholders and shareholders) Multiples based on economics that only shareholders are entitled to

Comparable Trading Analysis Less affected and easier to interpret when there are capital structure differences Permits the use of statistics less affected by accounting policy variations General Preference for Enterprise Value / EBITDA Multiples… More comprehensive – focuses on the business and not just the equity investor’s stake More flexible – can be modified to exclude non-core assets

Making a comps table Value Drivers Illustrative Considerations Select the right peer group Focus on the appropriate financial metric and ratios: each sector utilizes a standard set of ratios/metrics Make the necessary adjustments to ensure comparability (non-recurring items, accounting policies, M&A activity) Value Drivers Illustrative Considerations Relative Risk Profile Strategic Positioning Market / Product leadership Client-base & supply chain Technology & patent Market presence, operating “leverage” Good proxy for risk Cost structure Margin analysis Consistency Financial leverage Quality of management Non-recurring items Different accounting practices Sales, EBITDA, earnings Consistency of growth / volatility Growth potential Size Profitability Capital Structure Others Relative Growth Growth Profile

Comparable Trading Analysis Strengths Limitations Objective comparison reflecting all publicly available information on the overall sector and the individual companies Growth / profitability expectations Sector trends Risk factors Often provides a reliable, useful first order approximation of value May be forward looking, and can also be backward looking Ease of understanding and application Requires fewer assumptions (e.g. Discount rates) Standard practice when valuing emerging companies, as forecasting cash flows is difficult Challenge of finding true “comparability” within peer groups Very difficult to adjust for differences in underlying business of comps Company specific issues may limit analysis and effectiveness (e.g. limited liquidity) Other external factors may impact share price performance Market sentiment, M&A activity in the sector and regulatory issues Analysis is focused on trailing date and on next 1-2 years, thus ignoring future performance and long-term issues Assumes market prices of comparable companies correctly reflect all available information

Precedent Transaction Analysis

Precedent Transactions Analysis Valuation based upon applying observed financial and operating metrics from comparable transactions Provides useful information on valuation multiples that acq Provides indication of private market value Value of consideration that willing buyers and sellers are prepared to exchange in current economic environment Many considerations discussed in Comparable Trading Analysis section apply, however three specific nuances to this methodology must be addressed Considerations Relevance Comparability of precedent deals and the acquired companies Was the deal completed under comparable economic conditions Is the other consideration comparable (cash vs. stock)? Eliminate all deals that are too small or too large compared to the potential transaction Look at relative size of acquirer versus target Only include deals where sufficient / reliable information is available Private deals: if no public data is available, do not use in deal comparison Timing: the more recent the data, the more relevant the benchmark Auction / Interlopers: competition for the assets drives valuation up Size Information Type of Deal

Precedent Transactions Analysis Strengths Limitations Based on public information Reflects different premium at which transactions have been completed in the past (important to isolate impact of economic cycles) Overview of potential interlopers based on historical behaviour and their strategic approach to M&A Ease of understanding and calculation Commonly used yardstick / rule of thumb Relevance deteriorates over time Important not to miss context for the premium paid in different transactions to avoid drawing misleading conclusions. Financial versus strategic investor; Governance issues, commercial agreements, etc.; Asset competition driving up prices; and Distressed sales. Important to distinguish what kind of assets were traded in order to achieve like-for-like comparisons. Market conditions at the time of a transaction can have substantial influence on valuation (ie. Sector consolidation) Challenge of true “comparability”

Outputs

DCF What is the purpose of a Discounted Cash Flow analysis? Obtain intrinsic value of company by forecasting free cash flows 5 to 10 years into the future, discounting them and the terminal value to today

Free Cash Flow

Sensitivity Analyses WACC / Capital Expenditures WACC / Operating Margins WACC / Intermodal Growth WACC / Long-Term Growth

Best way to understand the mechanics of a DCF is to do one yourself! DCF Questions Why do we use 5 to 10 years for DCF projections? What are the two ways to calculate Terminal Value? Terminal EV / EBITDA multiple (try to think where the company will be in 5-10 years) Long-term growth (be careful with aggressive figures) How do you know if your DCF is too dependent on future assumptions? What are some other weaknesses of doing DCF’s? Does it make sense to value an oil and gas or mining company with a DCF? 1. That’s usually about as far as you can reasonably predict into the future. Less than 5 years would be too short to be useful, and over 10 years is too difficult to predict for most companies. 3. If Terminal Value > PV of Future cash flows 4. No use NAV model since we want to forecast based on Reserves. Best way to understand the mechanics of a DCF is to do one yourself!

Comparables Questions How to select comparables? Which multiples to use? LTM vs. NTM? What if a company has negative EBITDA? Why do we sometimes use the median as opposed to the mean? What are the cons of this valuation method? Challenge of finding true “comparability” within peer groups Very difficult to adjust for differences in underlying business of comps Company specific issues may limit analysis and effectiveness (e.g. limited liquidity) Other external factors may impact share price performance Market sentiment, M&A activity in the sector and regulatory issues Analysis is focused on trailing date and on next 1-2 years, thus ignoring future performance and long-term issues Assumes market prices of comparable companies correctly reflect all available information

Precedent Transactions Questions Precedent transactions can only be useful if the firm is considering being bought out Useful when firm is considering to sell a division Also relevant for undervalued firms Incorporates acquisition premium (usually 20-30%)

Valuation Questions Which of the three methods yield the highest/lowest valuations? Why can’t you use an Equity Value / EBITDA multiple? Why do you actually use valuations? Why would someone want to use EV / EBIT multiples instead of EV / EBITDA? 1. Trick question – there is no ranking that always holds. In general, Precedent Transactions will be higher than Comparable Companies due to the Control Premium built into acquisitions. Beyond that, a DCF could go either way and it’s best to say that it’s more variable than other methodologies. Often it produces the highest value, but it can produce the lowest value as well depending on your assumptions. 2. EBITDA is available to all investors in the company – rather than just equity holders. Similarly, Enterprise Value is also available to all shareholders so it makes sense to pair them together. Equity Value / EBITDA, however, is comparing apples to oranges because Equity Value does not reflect the company’s entire capital structure – only the part available to equity investors. 4. EV / EBIT includes Depreciation & Amortization whereas EV / EBITDA excludes it – you’re more likely to use EV / EBIT in industries where D&A is large and where capital expenditures and fixed assets are important (e.g. manufacturing), and EV / EBITDA in industries where fixed assets are less important and where D&A is comparatively smaller (e.g. Internet companies).

Accounting

Classic Machine Question On January 1st, company A buys a new machine for $100, financed with $50 in cash and $50 in debt. It will be depreciated on a straight line basis for 10 years. It will also contribute to revenue in the coming fiscal year by an additional $10 and COGS of $5. How will this affect all three financial statements at year end on December 31st? Assume a tax rate of 40% and interest rate of 10%.

Other Accounting Questions If depreciation is a non-cash expense, how does it affect the cash balance? What happens to the financial statements if inventory goes up by $10 and it is financed with cash? Why is the income statement not affected by changes in inventory? When would a company collect cash from a customer and not record it as revenue? What is the difference between accounts receivable and deferred revenue? 3. Web-based subscription software, Cell phone carriers that cell annual contracts, Magazine publishers that sell subscriptions Companies that agree to services in the future often collect cash upfront to ensure stable revenue – this makes investors happy as well since they can better predict a company’s performance. Per the rules of GAAP (Generally Accepted Accounting Principles), you only record revenue when you actually perform the services – so the company would not record everything as revenue right away. 4. Accounts receivable has not yet been collected in cash from customers, whereas deferred revenue has been. Accounts receivable represents how much revenue the company is waiting on, whereas deferred revenue represents how much it is waiting to record as revenue.

Other Questions?

Other Questions Are you more of a leader or a follower? What was the most difficult situation you faced as a leader? Can you talk about a team project that went badly? What is your career goal? If I was to give you an offer right now, would you take it? Recently, some analysts left early. Would you do the same if some opportunity came up? What is your favourite (finance) book? What was your favourite class? What is your personal beta? Tell me a joke

General Lessons

General Lessons Learned Be genuine Be relaxed Be smart about what you ask for Montreal vs. Toronto vs. New York Navigating full time offers Be patient Don’t be afraid to leverage your first offer to get the one you really want Plan your networking Don’t network too early Make sure you have questions prepared Be honest about your preferences Make a checklist before each interview: CEO Name, strength, stock price, etc. Prepare 3 – 5 key experiences you can draw on to answer almost any behavioural question

MIC Executives Summer 2015 Student Experiences Sean Saggi – CPP Investment Board (Private Investments) Sean.saggi@mail.mcgill.ca Drew Allen – Goldman Sachs (Investment Banking) drew.allen@mail.mcgill.ca Philippe Rich – Morgan Stanley (Investment Banking) Philippe.rich@mail.mcgill.ca Tony Ren – Canaccord Genuity (Investment Banking) Tony.ren@mail.mcgill.ca Peter Huo – CIBC (Sales & Trading) Peter.huo@mail.mcgill.ca Kendyl Flinn – Fidelity Investments Kendyl.flinn@mail.mcgill.ca Suneil Kheterpal – Imperial Capital Group (Private Equity) Alexandre Véronneau – Ulysses Management (Investment Management) Alexandre.veronneau@mail.mcgill.ca Luohan Wei – Bain Consulting Luohan.wei@mail.mcgill.ca

Q&A

Contact Danielle Dagenais – Career Services (Finance, Investment Banking, Investment Management) Danielle.dagenais@mail.mcgill.ca Philippe Rich – Morgan Stanley (Investment Banking) Philippe.rich@mail.mcgill.ca