JP Morgan Technical JP Morgan Interview

Question Answer
What is the point of a balance sheet? It is a snapshot of the company's economic resources and funding for those resources at any given point in time. It is governed by the fundamental accounting equation: assets = liabilities + stockholder's equity
What are assets? Assets are the resources a company uses to operate its business and include cash, accounts receivable, property plant and equipment
What are liabilities? Liabilities represent the company's contractual obligations and include accounts payable, debt, accrued expenses
What is stockholder's equity? Stockholder's equity is the value of the business available to the shareholders after debts/liabilities have been paid off.
What is the purpose of the income statement? The income statement illustrates the profitability of the company over a specific period of time. It shows how net income = revenues – expenses. Revenue is the "top line", it is recorded when earned not when cash is received.
What is the purpose of the cash flow statement? Net income from the income statement reflects cash and non-cash sales because it uses accrual accounting, so we want a clear understanding of the cash position of a company. It reconciles the income statement to cash inflows and outflows.
What are the three subsections of the cash flow statement? Cash flow from operating activities, cash flow from investing activities, adn cash from financing activities.
Why do capital expenditures increase assets (PP&E) while other cash outflows like paying salary/taxes do not create any asset and instead instantly create an expense on the income statement? Capital expenditures are capitalized because of the timing of their estimated benefits. They are things that will benefit the company for many years. These are usually then depreciated on an annual basis and are then turned into depreciation expense.
Walk me through a cash flow statement You start out with net income and then add the cash flows from operating, investing, and financing activities. Consider things such as depreciation for operating, capital expenditures for investing, and issuance of debt and equity for financing.
What is working capital? It is current assets – current liabilities. It shows how well the company can cover its liabilities.
I buy a piece of equipment, walk me through the impact on the 3 financial statements. no impact on IS bc capital expenditures aren't expensed. Cash goes down on balance sheet, PP&E goes up, purchase is cash outflow on CF statement. later it's expensed, PPE down by depreciation expense, RE goes down, depreciation added back into operations
What is goodwill? Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business.
When should you value a company using revenue multiple vs EBITDA? Companies with negative profits will have meaningless EBITDA multiples and should use revenue multiples because they would be more insightful.
What is prop trading? Prop trading used to be allowed before the financial crisis and is when traders would use the bank's own money to trade. They would take on this 'proprietary risk' and if they though security A was going to rise in price they could buy with bank's own $
What is market making? Market making is when traders in banks buy securities in anticipation of selling it on to clients later. They make a judgment on how much clients will want to buy and at what price. If they get it right they make $ for the bank, if wrong they lose $
Explain the two different types of markets. There are two types- primary and secondary markets. Primary markets are where new issues are first sold through initial public offerings (IPOs). Secondary markets are where all subsequent trading happens.
What are derivatives? Derivatives are tradeable contracts which relate to an underlying product and are used to reduce risk.
How will Donald Trump's policies affect M&A climate? President Trump made it clear he wanted to loosen regulations on US corporates such as reducing the tax burden. This would cause US firms to enjoy an influx of cash which in turn could give them the means they need to invest in growth via M&A
What is a central bank? A central bank is a nationalized institution given privileged control over the production and distribution of money and credit.
What is quantitative easing? Quantitative easing is a monetary policy used by Fed to buy or sell gov securities in order to lower the interest rates and increase the money supply. It floods financial institutions with capital bc companies will borrow more when interest rates low
What is a downside of quantitative easing? It increases the money supply and if this happens to quickly it can cause inflation. It also can weaken the dollar which is good for exports but bad for imports.
Talk about oil prices and quantitative easing. Oil prices are set in the world market therefore if US dollar weakens against other currencies this will push up price in US. If US dollar strengthens then will push down oil prices. Quantitative easing weakens the dollar which raises the oil price
Why is the dollar so strong right now? Fed ended expansive monetary policy so stopped increasing money supply which increased value of dollar, dollar automatically strengthens when euro weakens- there's political instability in European Union, whatever makes euro weaker makes dollar stronger
What is Forex trading? Forex trading, or foreign exchange trading, is an international market for buying and selling currencies. It is a way to profit from the changing values of these currencies based on their exchange rates.
Define Beta Beta is a variable that measures risk. It tells you how much the price of a given security moves relative to movements in the overall market. 1 means that it will move the exact amount the market moves, <1 means will move less than 1, >1 means more
Define CAPM CAPM is the capital asset pricing model which is designed to find the required rate of return given the riskiness of the asset.
What is the WACC? It is the weighted average cost of capital and shows the average rate of return a company needs to compensate all of its different investors.
What is accretion? Accretion is asset growth through addition or expansion, can occur through internal development or M&A.
What is dilution? Dilution is a reduction in earnings per share of stock that occurs when additional shares are issued or the stock changes into convertible securities.
How are the financial statements linked together Net income flows into stockholders equity via retained earnings on BS, net income is first line in CF statement, any BC items that are cash impacted are linked to CF statement
Which is higher, the cost of equity or the cost of debt and why? Cost of equity almost always higher than cost of debt bc debt holders have less risk of not getting their money back and are willing to accept lower returns
Why should a company prefer equity finance to debt finance? Equity finance is less risky in terms of having to pay it back bc carries no repayment obligation. It also provides extra working capital that can be used to grow a company's business since there are no required monthly payments
Name 2 companies that you think should consider merging and why Apple and Netflix. Netflix's share prices have been increasing due to their global expansion and ability to create original series that appeal to the masses, which makes appealing takeover target for tech firms. Apple obv enough cash to do this
What is options pricing Options derive their prices from the value of other assets and are contingent upon specific events
how do currencies affect a business? If US dollar weakened against other $ like euro, then US based companies that generate majority of revenue in US but source raw materials from Europe would take a hit on higher costs, or if US comps have to pay in euros would lower profits/stock prices
If Trump and republicans in congress succeed in cutting corporate tax rates, how could it affect JP Morgan? cutting tax rates could in theory improve any taxpaying American company's net profit, also a lower corporate tax means US firms will enjoy influx of cash which could in turn could give them means to invest in growth via M&A
Who are our biggest competitors? Bank of America, US Bank, and Huntington
Who is our CEO James Dimon
Would you invest in UK real estate right now No they are in middle of housing crisis
Explain the concept of present value Money has different value at different points in time. You can value a future contract/opportunity by looking at the future cash flows and risk involved and bringing it back to its PV in today's dollars and determining what that future flow is worth today
What do you know about the DCF (discounted cash flows) technique It is a technique used to value a financial contract/opportunity and involves assessing its future cash flows and risk, and then processing this data to collapse it back into a current price/value. uses a competitive discount rate
What does the risk free rate of return compensate for? it removes the impact of inflation and gives additional return as a reward for postponing the enjoyment of goods they could have bought with the money. investors will want additional reward in risk premium if risk involved in the transaction
What does capitalizing something mean? It means finding today's cash value of a contract or opportunity. it is the same as discounting or valuing the future stream or opportunity
What is refinancing? It is when you obtain a new loan and then use the proceeds to buy out the hold loan. This is common with mortgage loans.
What is value? Value is any present value of cash gained above and beyond what is considered fair or competitive.

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