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The main components of WACC are the cost of debt and the cost of equity.

We can calculate the WACC as given below

WACC = [ Ve / Ve + Vd ] ke + [ Vd/ Ve + Vd ] kd ( 1- T)

Where,
Ve = market VALUE of the equity that is the value of share price ex-div X number of shares
Vd = market value of debt which is the market value of debentures + loan amount
ke = cost of equity
kd = cost of debt
T = company profit tax rate

NOTE: This is ONE of the most important investment BANKING technical questions.

Dept is cheaper than equity because it is less expensive in terms of interest. Interest on debt is a tax-deductible expense making it an even more cost-effective form of FINANCING. Both RISK and potential return of debt and lower.

Enterprise VALUE is described as the entire cost or market value of the company. Below is the formula USED to CALCULATE Enterprise Value

Enterprise Value = Market Capitalization + Debt + Minority shareholdings + Preference Shares - cash and cash EQUIVALENTS.

The COST of equity is typically much higher than the cost of debt. As it MAKES you lose a part of the business to the equity investors. Debt is less EXPENSIVE because its INTEREST payment is considered as the EXPENSE.

Investing in a company with a negative HISTORICAL CASH flow is GENERALLY a HIGH risk. Cash expenditure on the equipment could be greater than the revenue coming in. By profit, and loss company you could value the company with its net profit.

A company that PROVIDES factors like a QUALITY product, good services, and uniqueness and these factors helps to create good names and good REPUTATION of the company in the MINDS of customers, bankers, and suppliers, etc when we try to value the good name and reputation of the business in terms of money then it is known as Goodwill.

Goodwill = P − (A+L)

Where,
A = Fair MARKET value of assets
L = Fair market value of liabilities
P = Purchase rate for the targeted company

The appropriate numerator for a revenue MULTIPLE is ENTERPRISE VALUE.

This is the formula to CALCULATE beta for a company.

ΔSi=α+βi×ΔM+e

where:
ΔSi =CHANGE in the price of stock i.
α=intercept value of the regression.
βi=beta of the I stock return.
ΔM=change in the market price.
e=residual ERROR term.

The cost of equity is calculated by CAPM. CAPM stands for Capital Asset Pricing Model. Below is the FORMULA used to calculate the cost of equity.

E(Ri) = R(F) + β[E(m) - R(f)]

where,
β = Beta of the stock.
E(m) = Market Rate of Return
[E(m)-R(f)] = equity RISK premium.
R(f) = Risk -FREE Rate of Return.

NOTE: These are the most important questions to ask investment bankers during an interview.

Some of the features that MAKE a GOOD financial model are:

• It DESCRIBES all the functionality.
• Having clear inputs, working, output and results.
• The model is versatile.
• The model is well structured and easy to audit.
• The FORMULA used in the model is most EFFICIENT.

A company should issue DEBT when the rate of taxation is HIGH or there is a huge market and the company does not have enough CAPITAL to MEET the DEMAND.

To answers this question, you have to tell all the essential QUALITIES that are required to BECOME an investment banker.

• Having good COMMUNICATION ability
• Able to think out of the box
• Able to MANAGE multiple project deadlines
• Strong quantitative and analytical skills
• Positive and never GIVE up attitude