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Introduction to Equity Research Interview Questions and Answers - Intermediate Level
In this guide, we will explore a set of intermediate-level equity research interview questions and provide detailed answers to help you prepare for interviews in the field of equity research. These questions are designed to test your knowledge and understanding of key concepts related to financial analysis, valuation, industry research, and investment recommendations. By familiarizing yourself with these questions and answers, you can enhance your readiness to excel in equity research interviews.
Intermediate Technical Equity Research Interview Questions and Answers
A company’s earnings per share (EPS) is $3, and it has 1 million shares outstanding. If the company issues another 200,000 shares, what will be the new EPS assuming the total earnings remain unchanged?
Suggested Answer:
Okay, so the key here is that total earnings remain unchanged. EPS is calculated by dividing total earnings by the number of shares outstanding. Initially, we have $3 EPS with 1 million shares, meaning total earnings are $3 million.
If we issue 200,000 more shares, the total shares become 1.2 million. With total earnings still at $3 million, the new EPS would be $3 million divided by 1.2 million shares, which equals $2.50 per share.
A stock is currently priced at $50. If it has a P/E ratio of 25, what is the company's earnings per share (EPS)?
Suggested Answer:
Alright, let's break this down. We know the stock price is $50 and the P/E ratio is 25. The P/E ratio is essentially the price of a stock divided by its earnings per share.
So, to find the EPS, we can rearrange the formula:
EPS = Stock Price / P/E Ratio
Plugging in the numbers, we get EPS = $50 / 25 = $2.
Therefore, the company's earnings per share is $2.
If a company’s stock price increases by 20% and then decreases by 15%, what is the net percentage change in the stock price?
Suggested Answer:
If the stock price increases by 20%, it's essentially 120% of its original value.
Now, it decreases by 15%. This means we're taking 85% of the increased value.
To find the net change, we can multiply these percentages together: 1.2 * 0.85 = 1.02.
So, the final value is 102% of the original price. This means there's a net increase of 2% in the stock price.
A company has a debt-to-equity ratio of 1.5. If its total debt is $300 million, what is its equity?
Suggested Answer:
Alright, so we know the debt-to-equity ratio is 1.5 and total debt is $300 million. This means for every $1.50 of debt, there's $1 of equity.
We can set up a simple equation:
Debt/Equity = 1.5
$300 million / Equity = 1.5
To find equity, we rearrange the equation:
Equity = $300 million / 1.5
Equity = $200 million.
Therefore, the company's equity is $200 million.
A stock’s price increased from $80 to $100 in one year. What is the annual return in percentage terms?
Suggested Answer:
The annual return would be 25%. We calculate it by taking the difference in price, which is $20, dividing it by the original price of $80, and then multiplying by 100 to get the percentage.
A company's dividend yield is 4%, and its stock price is $25. What is the annual dividend per share?
Suggested Answer:
The annual dividend per share would be $1.00.
Dividend yield is calculated as the annual dividend per share divided by the stock price. So, if the yield is 4% and the stock price is $25, we can set up the equation:
0.04 = Dividend / $25
Solving for the dividend, we get $1.00.
If a stock has a beta of 1.2 and the market return is expected to be 10%, what is the expected return of the stock using the Capital Asset Pricing Model (CAPM) assuming the risk-free rate is 3%?
Suggested Answer:
Let's break it down. CAPM tells us that the expected return of a stock is equal to the risk-free rate plus the stock's beta multiplied by the market risk premium.
So, we've got:
Risk-free rate: 3%
Beta: 1.2
Market return: 10%
First, we calculate the market risk premium, which is the market return minus the risk-free rate. That's 10% minus 3%, giving us a market risk premium of 7%.
Now, we multiply the beta (1.2) by the market risk premium (7%), which equals 8.4%.
Finally, we add the risk-free rate (3%) to the product we just calculated (8.4%).
Therefore, the expected return of the stock according to CAPM is 11.4%.
A company’s market capitalization is $2 billion, and it has 50 million shares outstanding. What is the stock price?
Suggested Answer:
This is a pretty straightforward calculation. Market capitalization is simply the total market value of a company's outstanding shares. It's calculated by multiplying the number of shares outstanding by the share price.
So, to find the share price, we need to divide the market capitalization by the number of shares outstanding.
That's $2 billion divided by 50 million shares.
A billion is a thousand million, so we can simplify that to $2,000 million divided by 50 million shares.
The millions cancel out, leaving us with $2,000 divided by 50.
Therefore, the stock price is $40 per share.
If a stock’s price is $40 and the company pays an annual dividend of $2 per share, what is the dividend yield?
Suggested Answer:
Dividend yield is essentially the return an investor gets from the dividends paid out relative to the stock price. It's calculated by dividing the annual dividend per share by the current market price per share.
So, in this case, we've got $2 in dividends divided by a $40 stock price.
That gives us 0.05. To express this as a percentage, we multiply by 100.
Therefore, the dividend yield is 5%.
A company reports a return on equity (ROE) of 15% and retains 40% of its earnings. What is the sustainable growth rate?
Suggested Answer:
Sustainable growth rate is essentially the maximum rate a company can grow without external financing. It's calculated by multiplying the ROE by the retention ratio.
Retention ratio is simply the portion of earnings that's retained by the company, which in this case is 40%.
So, we've got an ROE of 15% multiplied by a retention ratio of 40%.
That's 0.15 multiplied by 0.40, which equals 0.06.
To express this as a percentage, we multiply by 100.
Therefore, the sustainable growth rate is 6%.
A stock is trading at $120 with a P/E ratio of 30. What is the company's net income if there are 10 million shares outstanding?
Suggested Answer:
First, let's understand what P/E ratio means. It's the price of a stock divided by its earnings per share (EPS). So, we can rearrange this formula to find the EPS:
EPS = Stock Price / P/E Ratio
Plugging in the numbers, we get:
EPS = $120 / 30 = $4
Now, we know the earnings per share, but we need to find the total net income.
Net Income = EPS * Number of Shares Outstanding
So,
Net Income = $4/share * 10 million shares = $40 million
Therefore, the company's net income is $40 million.
A company has a gross margin of 30% and total sales of $500 million. What is the gross profit?
Suggested Answer:
Gross margin is the percentage of revenue that remains after deducting the cost of goods sold (COGS). It's calculated as (Revenue - COGS) / Revenue. But we're looking for the gross profit, which is simply Revenue - COGS.
We know the gross margin is 30%, which means that 30% of the revenue is gross profit. So, we can calculate the gross profit directly:
Gross Profit = Gross Margin * Total Sales
Plugging in the numbers:
Gross Profit = 30% $500 million = 0.3 $500 million = $150 million
Therefore, the gross profit is $150 million.
If a company’s total assets are $600 million and its equity is $250 million, what is its debt ratio?
Suggested Answer:
Debt ratio is a measure of a company's financial leverage, showing the proportion of assets financed by debt. It's calculated by dividing total debt by total assets.
We know that:
Total Assets = Equity + Debt
So, we can find the total debt:
Total Debt = Total Assets - Equity = $600 million - $250 million = $350 million
Now, we can calculate the debt ratio:
Debt Ratio = Total Debt / Total Assets = $350 million / $600 million = 0.5833
To express this as a percentage, we multiply by 100.
Therefore, the debt ratio is 58.33%.
A company’s free cash flow is $50 million, and it has 10 million shares outstanding. What is the free cash flow per share?
Suggested Answer:
Free cash flow per share is simply the amount of free cash flow available to each outstanding share. It's calculated by dividing the total free cash flow by the number of shares outstanding.
So,
Free Cash Flow Per Share = Total Free Cash Flow / Number of Shares Outstanding
Plugging in the numbers:
Free Cash Flow Per Share = $50 million / 10 million shares = $5/share
Therefore, the free cash flow per share is $5.
If the current ratio of a company is 2.5 and its current liabilities are $100 million, what are its current assets?
Suggested Answer:
The current ratio is a liquidity ratio that measures a company's ability to pay off its short-term liabilities with its current assets. It's calculated as:
Current Ratio = Current Assets / Current Liabilities
We know the current ratio is 2.5 and current liabilities are $100 million. So, we can rearrange the formula to find current assets:
Current Assets = Current Ratio * Current Liabilities
Plugging in the numbers:
Current Assets = 2.5 * $100 million = $250 million
Therefore, the current assets are $250 million.
A company's stock price is $75, and it has a book value per share of $25. What is its price-to-book (P/B) ratio?
Suggested Answer:
The P/B ratio, or price-to-book ratio, compares a company's market value to its book value. It's calculated as:
P/B Ratio = Stock Price per Share / Book Value per Share
Plugging in the numbers:
P/B Ratio = $75 / $25 = 3
Therefore, the P/B ratio is 3.
A company's net income is $80 million, and its interest expense is $20 million. If its tax rate is 30%, what is its earnings before interest and taxes (EBIT)?
Suggested Answer:
To find EBIT, we need to work our way back from net income. We know that net income is calculated after deducting taxes and interest. So, we need to reverse these deductions.
First, let's calculate the taxes paid:
Taxes = Net Income Tax Rate = $80 million 30% = $24 million
Now, we can calculate earnings before taxes (EBT):
EBT = Net Income + Taxes = $80 million + $24 million = $104 million
Finally, we can calculate EBIT by adding back the interest expense:
EBIT = EBT + Interest Expense = $104 million + $20 million = $124 million
Therefore, the EBIT is $124 million.
If a company’s EBITDA is $200 million and its revenue is $1 billion, what is the EBITDA margin?
Suggested Answer:
EBITDA margin is a profitability ratio that shows how much of a company's revenue is left as earnings before interest, taxes, depreciation, and amortization. It's calculated as:
EBITDA Margin = EBITDA / Revenue
Plugging in the numbers:
EBITDA Margin = $200 million / $1 billion = 0.2
To express this as a percentage, we multiply by 100.
Therefore, the EBITDA margin is 20%.
A stock has a market price of $150 and a dividend yield of 3%. What is the annual dividend payment?
Suggested Answer:
Dividend yield is the annual dividend per share divided by the stock price. We can rearrange this formula to find the annual dividend:
Annual Dividend = Dividend Yield * Stock Price
Plugging in the numbers:
Annual Dividend = 3% $150 = 0.03 $150 = $4.50
Therefore, the annual dividend payment is $4.50 per share.
A company's revenue grew from $200 million to $250 million over one year. What is the percentage growth rate?
Suggested Answer:
Percentage growth rate is the percentage increase from the initial value to the final value. It's calculated as:
Percentage Growth Rate = [(New Value - Old Value) / Old Value] * 100
Plugging in the numbers:
Percentage Growth Rate = [($250 million - $200 million) / $200 million] * 100
Percentage Growth Rate = ($50 million / $200 million) * 100
Percentage Growth Rate = 0.25 * 100
Therefore, the percentage growth rate is 25%.
If a stock’s price-to-earnings (P/E) ratio is 20 and the earnings per share (EPS) is expected to grow at 10% annually, what is the PEG ratio?
Suggested Answer:
The PEG ratio is a valuation metric that tries to account for a company's growth rate. It's calculated by dividing the P/E ratio by the expected earnings growth rate.
So,
PEG Ratio = P/E Ratio / Expected EPS Growth Rate
Plugging in the numbers:
PEG Ratio = 20 / 10% = 20 / 0.1 = 2
Therefore, the PEG ratio is 2.
A company’s operating margin is 25%, and its operating income is $75 million. What are its total revenues?
Suggested Answer:
Operating margin is a profitability ratio that shows how much of a company's revenue is left as operating income after paying for variable costs of production. It's calculated as:
Operating Margin = Operating Income / Total Revenue
We know the operating margin is 25% and operating income is $75 million. We can rearrange the formula to find total revenue:
Total Revenue = Operating Income / Operating Margin
Plugging in the numbers:
Total Revenue = $75 million / 25% = $75 million / 0.25 = $300 million
Therefore, the total revenues are $300 million.
If a company’s net profit margin is 8% and its net income is $40 million, what are its total sales?
Suggested Answer:
Net profit margin is calculated as net income divided by total sales. We can rearrange this formula to find total sales:
Total Sales = Net Income / Net Profit Margin
We know the net income is $40 million and the net profit margin is 8%, or 0.08 as a decimal.
Plugging in the numbers:
Total Sales = $40 million / 0.08 = $500 million
Therefore, the total sales are $500 million.
A company has total equity of $500 million and retained earnings of $200 million. What is its common equity?
Suggested Answer:
Total equity is essentially the sum of all equity components in a company, including common equity, preferred equity, and retained earnings.
To find common equity, we simply subtract retained earnings from total equity:
Common Equity = Total Equity - Retained Earnings
Plugging in the numbers:
Common Equity = $500 million - $200 million = $300 million
Therefore, the common equity is $300 million.
If a stock's price is expected to grow by 5% per year and it currently pays a dividend of $4 per share, what will be the expected dividend yield after one year if the stock price increases as expected?
Suggested Answer:
Understanding the problem:
The dividend yield is the annual dividend per share divided by the stock price.
The stock price is expected to increase by 5%.
We're assuming the dividend remains constant at $4 per share.
Calculations:
Calculate the new stock price:
New Stock Price = Current Stock Price * (1 + Growth Rate)
New Stock Price = $150 * (1 + 0.05) = $157.50
Calculate the expected dividend yield:
Dividend Yield = Annual Dividend / New Stock Price
Dividend Yield = $4 / $157.50 = 0.0254
To express this as a percentage:
Dividend Yield = 0.0254 * 100 = 2.54%
Therefore, the expected dividend yield after one year is 2.54%.
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