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Happy Thursday, future bankers!

Hope everyone is doing well! Today we’re covering WACC, a time you were an independent thinker, and Meta’s drop despite beating earnings.

🚀 Let’s get into it.

🔢 Technical Question

What is WACC? What is the intuition behind it?

WACC, or the Weighted Average Cost of Capital, is a crucial concept in finance and valuation. Let’s break it down:

1. Definition:

   • WACC represents the blended cost of capital for a company. It takes into account the cost of different sources of capital (such as debt and equity) and weights them based on their market values.

   • In other words, WACC is the average after-tax cost of capital from all sources used by a company to finance its operations.

2. Intuition Behind WACC:

   • Imagine you lend me money today, and I promise to pay you back with interest in the future.

   • The amount you’d be willing to lend me depends on the risk you perceive:

     • Low Risk: If you believe there’s little risk of not getting paid, you’d be willing to lend more at a lower return.

     • High Risk: If you think there’s a high chance of not receiving the payment, you’d demand a higher return.

   • WACC quantifies this risk by considering both equity and debt costs:

     • The cost of equity reflects the return expected by shareholders (higher risk, higher return).

     • The cost of debt accounts for the interest paid to debt holders (lower risk, lower return).

   • The WACC formula combines these costs, adjusting for the tax shield from interest payments.

   • Ultimately, WACC is the rate used to discount future cash flows to their present value in valuation models like discounted cash flow (DCF) analysis.

WACC helps determine the appropriate discount rate for evaluating investment opportunities and assessing the value of a company.

🗣 Behavioral Question

Tell me about a time that you thought independently of a group?

Here are some best practices for responding to the question:

1. Choose a Relevant Example: Select an instance where your independent thinking led to a positive outcome. This could be a situation where you identified a problem that others overlooked, proposed a novel solution, or stood by your convictions despite opposition.

2. Structure Your Response: Use the STAR method (Situation, Task, Action, Result) to structure your response. Describe the situation, explain your task or role, detail the actions you took, and highlight the results of your actions.

3. Emphasize Your Thought Process: Clearly articulate your thought process during the situation. This helps the interviewer understand how you approach problems and make decisions.

4. Highlight the Impact: Be sure to highlight the impact of your independent thinking. Did it lead to a successful project? Did it help avoid potential issues? Quantify the impact if possible.

5. Reflect on Your Learning: Discuss what you learned from the experience and how it has influenced your approach to teamwork and problem-solving.

The goal is to demonstrate your ability to think independently and contribute effectively to a team, both of which are valuable skills in investment banking.

🗞 Industry News

📉 Facebook Stock Tumbles After Earnings

Meta recently announced its Q1 earnings, surpassing analysts’ expectations on both revenue and earnings per share. However, despite this positive performance, Meta’s shares took a nosedive, dropping as much as 14% in early trading due to a disappointing Q2 forecast. The company expects its Q2 revenue to fall between $36.5 billion and $39 billion, missing the midpoint estimate of $38.24 billion. Furthermore, Meta raised the full-year total expenses estimate due to increased infrastructure and legal costs.

On the innovation front, Meta continues to invest heavily in AI, AR, and VR through its Reality Labs division. The company has launched its Meta AI chatbot and Llama 3 large language model, although the chatbot has already stirred controversy. In terms of hardware, Meta plans to make its Horizon operating system for headsets open source, inviting third-party companies to develop their own devices using the software. This move aims to increase Meta’s reach in the AR/VR space. Interestingly, Meta could also benefit if the recently signed TikTok ban in the US withstands legal challenges, as users and creators might turn to rival platforms like Instagram.

Read more about this story below.

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