- “There are three ways to account for oil exploration costs: The FIRST is to write-off all exploration costs as incurred, the SECOND is to capitalize successful explorations and write off the rest, and the THIRD is to capitalize all exploration costs. Which one results in the lowest Net Income, the highest Book Value, and the highest Cash Flow?”
- Pitch me a stock. Multitude of follow-up questions about the stock including how the company makes money, did they hit their last quarter, what is management’s guidance going forward, who are their primary competitors, what is their competitive advantage, what are the stock’s relevant valuation metrics (P/E, P/Cash flow, P/B, etc.), etc. Just know a lot about the company.
- You are a research associate: you get into the office at 9AM, a stock (XYZ) you have a “strong buy” rating on has gone down 30% in the last 30 minutes, the analyst you work for is currently on an airplane and not reachable, you have four calls on hold: 1) the CFO of the XYZ, 2) one of your biggest institutional clients, 3) the head trader at your firm, and 4) the director of research. In what order do you answer the calls and why?
- You get into the office in the morning and there is a note from the analyst you work for. She will be in the office in 5 hours and would like to see an analysis of a particular stock. What do you do to analyze the stock and what do you present to the analyst.
- A company has $10MM in negative net debt. What does this mean? (Follow-on question): If you were an oil and gas company, what would you do with this excess cash? Projects or dividends? What will shareholders prefer? How should the stock price react?
- Your company’s weighted-average cost of capital is 12 percent. You believe the company should make a particular investment, but its internal rate of return is only 10 percent. What logical arguments would you use to convince your boss to make the investment despite its low return? Is it possible that making investments with returns below capital costs will create value? If so, how?
Food For Though
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