Guggenheim IB Interview Questions

A dividend recap (dividend recapitalization) is when a company, usually one owned by a private equity firm (the "sponsor"), raises new debt and pays the proceeds out to its shareholders as a special cash dividend. The sponsor gets cash back and keeps its ownership stake. That recovers part of its investment early, de-risks the deal and raises its IRR (annualized return). The cost is more debt on the company. It fits when the company has paid down debt and grown earnings since the buyout, its cash flow is stable enough to support more borrowing, credit markets are receptive, and either a sale or IPO is unattractive or the sponsor wants to return cash to its own investors sooner.

EV/NI is the mismatched multiple. Enterprise value (EV) is what the whole business is worth to everyone who funds it, lenders and shareholders together. Net income (NI) is the profit left after lenders get their interest, so it belongs to shareholders. Pair it with equity value instead, which gives the P/E ratio. EV/Revenue and EV/EBITDA (earnings before interest, taxes, depreciation and amortization) are consistent. Revenue and EBITDA are measured before interest, so they are available to all capital providers.

The deal is less dilutive if Company A trades at 15x. A higher P/E (price-to-earnings multiple: share price divided by earnings per share) means each share Company A issues is worth more relative to the earnings behind it. So Company A issues fewer new shares to pay the same purchase price, and the target's earnings get spread across a smaller share count. Dilution means the combined company's earnings per share (EPS) falls below the buyer's standalone EPS. Accretion means EPS rises.

The buyer sees value creation as a set of different levers, not one fixed pool the first owner already used up. A company that has been through one PE owner is usually de-risked: clean financials, a proven management team, and a record of carrying debt. The new sponsor then pulls different levers on it. Add-on acquisitions, new markets, a new capital structure, or a larger scale that can earn a higher exit multiple.

The bond is the better investment. You pay $80 and get an $8 coupon each year, a 10% current yield, which already matches the stock. You also get $100 at maturity, a $20 gain on top, so the bond's total annual return (its yield to maturity) is above 10% for any maturity, assuming the issuer pays in full.

Beta measures how sensitive a stock's returns are to moves in the overall market. It is systematic risk, the part of risk that diversification does not remove. A beta of 1.0 means the stock tends to move roughly in line with the market, above 1.0 means it tends to move more than the market, and below 1.0 means it tends to move less. You calculate it as the covariance of the stock's returns with the market's returns divided by the variance of the market's returns, which is the same as the slope of a regression of the stock's returns on the market's returns.

Amazon is most likely worth more together, because its businesses feed each other. Retail traffic powers the advertising business, Prime and the shared logistics network keep shoppers and sellers on the platform, and AWS profits have funded investment across the group. To test it, run a sum-of-the-parts (SOTP) valuation: value each business separately at the multiples of comparable companies and add the results. If Amazon's market value sat well below that total even after the costs of separating, AWS would be the business to consider spinning off. A spin-off gives AWS shares to Amazon's shareholders, so it trades as its own public company.

Net income rises $80 and cash is flat. On the income statement, $200 of revenue less the $100 of inventory cost gives $100 of pretax income, and a 20% tax rate leaves $80 of net income. On the cash flow statement, start with that $80, add the $100 released as inventory leaves the balance sheet, subtract the $200 the customer still owes, and add the $20 of tax accrued but not yet paid in cash. It nets to zero.

Gross revenue retention (GRR) starts with the recurring revenue you had from existing customers at the beginning of a period. Subtract the revenue lost to churn (customers who cancel) and downgrades (customers who cut their spend). Nothing gets added back, so GRR tops out at 100%. Net revenue retention (NRR) starts from the same base and also adds expansion: upsells, cross-sells and price increases from those same customers. That is why it can go above 100%.

I would advise a layered debt structure. A revolver provides liquidity. A Term Loan B is the core senior secured debt. If the sponsor wants more leverage than senior lenders will provide, high-yield bonds or mezzanine go on top. Senior debt is the cheapest, so it comes first. Each junior layer costs more but adds leverage and flexibility. The exact mix depends on deal size, how stable the cash flows are, and credit market conditions.

Nothing changes on the income statement. Buying inventory is not an expense; the cost becomes cost of goods sold (COGS) only when the inventory is sold. On the cash flow statement, the increase in inventory reduces cash flow from operations (CFO) by $100, so cash falls by $100. On the balance sheet, cash is down $100 and inventory is up $100. Total assets are unchanged and the balance sheet still balances.

The tax rate is 50%. The P/E multiple gives net income of $30, and the EV/EBITDA multiple gives EBITDA of $100. Subtract D&A ($30) and interest ($10) to get pre-tax income of $60. Taxes are then $30, and the tax rate is $30 / $60 = 50%. Capital expenditures do not affect this calculation.