Richa Motwani

Hey everyone, I need your vote again

On what topics or concepts I should start a question series next for next 15 days?

Please drop your comments -

Should I continue with ER / IB series covering concepts like finance, accounting, valuation and modelling, industry metrics or any other topics

3 days ago | [YT] | 5

Richa Motwani

Equity Research Interview Question (30/30)

A company generates a 15% unlevered IRR. It finances the transaction using debt at 7%. What would you generally expect?

A. Levered IRR will be lower than 15%
B. Levered IRR will equal 15%
C. Levered IRR will be higher than 15%
D. Levered IRR cannot be compared to Unlevered IRR

6 days ago | [YT] | 7

Richa Motwani

Equity Research Interview Question (29/30)

What is the difference between Unlevered IRR and Levered IRR?

A. Unlevered IRR measures business return independent of capital structure; Levered IRR measures equity return after debt.

B. Levered IRR measures business return independent of capital structure; Unlevered IRR measures equity return after debt.

C. Both measure the same return but use different discount rates.

D. Levered IRR ignores interest expense; Unlevered IRR includes it.

6 days ago | [YT] | 6

Richa Motwani

Equity Research Interview Question (28/30)

Could the book equity of a company be negative for years?

Options:

A. Yes, but it’s a sign of distress and the company will eventually have to shut down.
B. No, book equity cannot be negative.
C. Yes, and for some companies it’s a sign of distress, but it is possible even for a good profitable companies.

1 week ago | [YT] | 6

Richa Motwani

Equity Research Interview Question (27/30)

You are sitting in an interview.

The interviewer asks:

Suppose you are valuing a listed company (not loaded with debt) primarily focused on staple food products such as milk, wheat, and rice.

Would you expect the company’s Beta typically to be ?

1 week ago | [YT] | 5

Richa Motwani

Equity Research Interview Question Series (26/30)

Again, this question was asked to my mentee in her latest interview.

Why did you regress Beta using 3 years of company stock data, but use the 10-year government bond yield for Rf?

A. Beta should reflect the company’s recent operating and financial risk, but at the same time the regression needs sufficient observations for statistical reliability; hence 3–5 years is common.

B. The risk-free rate should match the long-term horizon of projected cash flows, and short-term government bonds introduce reinvestment risk ; therefore a long-term bond yield is preferred.

C. CAPM assumes a 10-year investment horizon, so the risk-free rate must also be 10 years.

D. Beta must always be calculated over exactly 3 years to properly capture one full market cycle.

E. Beta must be regressed using 5 years of data

1 week ago | [YT] | 5

Richa Motwani

Equity Research Interview Question Series (25/30)

This was asked recently to one of my mentees in an interview, so thought to post here.

What is Gross Margin? Easy right!

Gross Margin = (Revenue − Cost of Goods Sold) / Revenue

But how would you define this for SaaS industry ( mind it you need to be careful for service industry)


A. Gross margin in SaaS represents revenue remaining after deducting product development and customer acquisition costs.

B. Gross margin in SaaS represents the percentage of subscription revenue remaining after deducting costs directly incurred to host, maintain, and support the software platform.

C. Gross margin in SaaS represents cash generated from subscriptions after adjusting for non-cash expenses.

1 week ago | [YT] | 6

Richa Motwani

Equity Research Interview Question Series (24/30)

A company has met quarterly EPS guidance almost exactly for 12 consecutive quarters.
Margins and revenue growth are stable, and management claims predictable and excellent execution.

What should an equity analyst consider?

A. Smooth earnings always mean strong management
B. Extremely low volatility can sometimes indicate accrual management or guidance engineering
C. It is impossible to manage earnings
D. Guidance accuracy removes the need for diligence

2 weeks ago | [YT] | 7

Richa Motwani

Equity Research Interview Question Series ( 23/30)
You are an equity research analyst covering the consumer discretionary sector, evaluating a publicly listed candy manufacturer and looking for companies that can grow faster than the broader economy’s long-term rate of 2–4 percent.

A colleague on your team has prepared a preliminary DCF valuation that you are reviewing. You notice that he assumed a 6 percent growth rate for the first two years, based on the average growth rate of the industry, and then used that same 6 percent growth rate in the terminal value as part of a growing perpetuity. The present value of the terminal value, you observe, makes up 80 percent of the total valuation of the business.

Based on these assumptions, he estimated the enterprise value of the company to be $100 million. He also included the present value of projected synergies of $20 million. The company currently has $50 million in debt and $10 million in cash on hand.

Your colleague recommends assigning an equity valuation of $120 million to the company, which he explains is the sum of the company’s standalone valuation plus projected synergies.

Which of the following is a potential mistake your colleague may have made? (Choose all that apply.)

A. Too high a growth rate in the terminal value
B. Basing his growth rate on the industry
C. Basing the valuation on the company’s value, not the equity value
D. Incorporating full synergies into the equity valuation

2 weeks ago | [YT] | 3

Richa Motwani

Detailed explanation to the last question-

FCFF represents cash flow available to all capital providers, independent of how the firm is financed.

Income-statement taxes, however, are calculated after interest expense, which already reflects a specific capital structure. If we deduct those taxes, we implicitly bake financing decisions into FCFF - which defeats its purpose.

That’s why we start from EBIT, not EBT.

Using EBIT × (1 − tax rate) gives us the operating taxes the firm would pay if it had no debt, i.e., taxes purely attributable to operations. This keeps FCFF capital-structure neutral.

If we subtract income-statement taxes instead:
• Interest tax shields get double-counted
• FCFF becomes inconsistent with WACC (which already embeds the tax shield)
• Valuation becomes sensitive to financing assumptions

In short:
FCFF = unlevered operating cash flows → discount with WACC
So taxes must also be calculated on an unlevered basis, which is exactly what EBIT × (1 − t) achieves.

2 weeks ago | [YT] | 8