Awake but at what cost

ლ(ಠ益ಠლ) But at what cost? Meme

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ლ(ಠ益ಠლ) But at what cost?

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The phrase was first used by the (almost) famous Heroes of Newerth caster BreakyCPK (commonly known as Breaky). It’s become sort of a catchphrase for the caster from honcast, and it’s very common to hear the words uttered in competitive HoN matches these days – perhaps a little more common just a few months ago. Every time the caster uses this phrase to describe the situation, the TwitchTV chat explodes with hundreds of «ლ(ಠ益ಠლ) But at what cost?» messages being sent.

Breaky is a Heroes of Newerth caster. He’s been working with S2 Games (the creators of Heroes of Newerth) for nearly 2 years and did competitive HoN casting even before he got in touch with the game developers. He’s been casting for other games as well, but it’s almost been exclusively HoN for about 3.5 years. He’s been casting at events in Thailand, Sweden and USA.

The phrase «But at what cost?» described a comeback or turnaround, where the initial fight or struggle was initially in favor for one of the two participants, but the other participant came back on top in the end. In games like Heroes of Newerth, League of Legends and Dota 2, this would apply to situations where for example a carry hero attacks another – weaker – hero for a quick kill, but the other team counterattacks and by killing the carry ends up on top. The same applies to other games and situations, but seldom literary.

The meme on the other hand is the chat messages that comes in response to the phrase commonly used on livestreams. When a person on the livestream uses the phrase to describe the situation, the chat explodes with «ლ(ಠ益ಠლ) But at what cost?» messages being sent from users aware of the meme, and willing to spam. This meme is almost exclusive to TwitchTV, but has recently been seen on Reddit, but in a rather mocking fashion.

The meme has lately spread to outside the Heroes of Newerth community, to gaming communities for games like StarCraft 2, League of Legends and World of Warcraft. The meme can be found on livestreams for these games, to both great confusion and often anger from the people unaware of the meme. The meme spread trough viewers that watch more than just Honcast on TwitchTV, and together made it appealing for others to spam the message.

The meme can be seen in action on a livestream by sodapoppin (a popular WoW livestreamer) in this image:

Discounted Cash Flow Interview Questions & Answers (Basic)

1. Walk me through a DCF.

«A DCF values a company based on the Present Value of its Cash Flows and the Present Value of its Terminal Value.

Once you have the present value of the Cash Flows, you determine the company’s Terminal Value, using either the Multiples Method or the Gordon Growth Method, and then also discount that back to its Net Present Value using WACC.

Finally, you add the two together to determine the company’s Enterprise Value.»

2. Walk me through how you get from Revenue to Free Cash Flow in the projections.

Note: This gets you to Unlevered Free Cash Flow since you went off EBIT rather than EBT. You might want to confirm that this is what the interviewer is asking for.

3. What’s an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?

4. Why do you use 5 or 10 years for DCF projections?

That’s usually about as far as you can reasonably predict into the future. Less than 5 years would be too short to be useful, and over 10 years is too difficult to predict for most companies.

5. What do you usually use for the discount rate?

Normally you use WACC (Weighted Average Cost of Capital), though you might also use Cost of Equity depending on how you’ve set up the DCF.

6. How do you calculate WACC?

In all cases, the percentages refer to how much of the company’s capital structure is taken up by each component.

7. How do you calculate the Cost of Equity?

Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium

The risk-free rate represents how much a 10-year or 20-year US Treasury should yield; Beta is calculated based on the «riskiness» of Comparable Companies and the Equity Risk Premium is the % by which stocks are expected to out-perform «risk-less» assets.

Normally you pull the Equity Risk Premium from a publication called Ibbotson’s.

Note: This formula does not tell the whole story. Depending on the bank and how precise you want to be, you could also add in a «size premium» and «industry premium» to account for how much a company is expected to out-perform its peers is according to its market cap or industry.

Small company stocks are expected to out-perform large company stocks and certain industries are expected to out-perform others, and these premiums reflect these expectations.

8. How do you get to Beta in the Cost of Equity calculation?

You look up the Beta for each Comparable Company (usually on Bloomberg), un-lever each one, take the median of the set and then lever it based on your company’s capital structure. Then you use this Levered Beta in the Cost of Equity calculation.

For your reference, the formulas for un-levering and re-levering Beta are below:

9. Why do you have to un-lever and re-lever Beta?

Again, keep in mind our «apples-to-apples» theme. When you look up the Betas on Bloomberg (or from whatever source you’re using) they will be levered to reflect the debt already assumed by each company.

But each company’s capital structure is different and we want to look at how «risky» a company is regardless of what % debt or equity it has.

To get that, we need to un-lever Beta each time.

But at the end of the calculation, we need to re-lever it because we want the Beta used in the Cost of Equity calculation to reflect the true risk of our company, taking into account its capital structure this time.

10. Would you expect a manufacturing company or a technology company to have a higher Beta?

A technology company, because technology is viewed as a «riskier» industry than manufacturing.

Levered Free Cash Flow gives you Equity Value rather than Enterprise Value, since the cash flow is only available to equity investors (debt investors have already been «paid» with the interest payments).

12. If you use Levered Free Cash Flow, what should you use as the Discount Rate?

13. How do you calculate the Terminal Value?

You can either apply an exit multiple to the company’s Year 5 EBITDA, EBIT or Free Cash Flow (Multiples Method) or you can use the Gordon Growth method to estimate its value based on its growth rate into perpetuity.

14. Why would you use Gordon Growth rather than the Multiples Method to calculate the Terminal Value?

However, you might use Gordon Growth if you have no good Comparable Companies or if you have reason to believe that multiples will change significantly in the industry several years down the road. For example, if an industry is very cyclical you might be better off using long-term growth rates rather than exit multiples.

15. What’s an appropriate growth rate to use when calculating the Terminal Value?

Normally you use the country’s long-term GDP growth rate, the rate of inflation, or something similarly conservative.

For companies in mature economies, a long-term growth rate over 5% would be quite aggressive since most developed economies are growing at less than 5% per year.

16. How do you select the appropriate exit multiple when calculating Terminal Value?

Normally you look at the Comparable Companies and pick the median of the set, or something close to it.

As with almost anything else in finance, you always show a range of exit multiples and what the Terminal Value looks like over that range rather than picking one specific number.

So if the median EBITDA multiple of the set were 8x, you might show a range of values using multiples from 6x to 10x.

17. Which method of calculating Terminal Value will give you a higher valuation?

It’s hard to generalize because both are highly dependent on the assumptions you make. In general, the Multiples Method will be more variable than the Gordon Growth method because exit multiples tend to span a wider range than possible long-term growth rates.

18. What’s the flaw with basing terminal multiples on what public company comparables are trading at?

The median multiples may change greatly in the next 5-10 years so it may no longer be accurate by the end of the period you’re looking at. This is why you normally look at a wide range of multiples and do a sensitivity to see how the valuation changes over that range.

This method is particularly problematic with cyclical industries (e.g. semiconductors).

19. How do you know if your DCF is too dependent on future assumptions?

The «standard» answer: if significantly more than 50% of the company’s Enterprise Value comes from its Terminal Value, your DCF is probably too dependent on future assumptions.

But when it gets to be in the 80-90% range, you know that you may need to re-think your assumptions.

If the capital structure is not the same, then it could go either way depending on how much debt/preferred stock each one has and what the interest rates are.

22. What’s the relationship between debt and Cost of Equity?

24. How can we calculate Cost of Equity WITHOUT using CAPM?

There is an alternate formula:

Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends

This is less common than the «standard» formula but sometimes you use it for companies where dividends are more important or when you lack proper information on Beta and the other variables that go into calculating Cost of Equity with CAPM.

• Intuitively, interest rates on debt are usually lower than the Cost of Equity numbers you see (usually over 10%). As a result, the Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will.

It’s a «U-shape» curve where debt decreases WACC to a point, then starts increasing it.

You should start by saying, «it depends» but most of the time the 10% difference in revenue will have more of an impact.

That change in revenue doesn’t affect only the current year’s revenue, but also the revenue/EBITDA far into the future and even the terminal value.

27. What about a 1% change in revenue vs. a 1% change in the discount rate?

In this case the discount rate is likely to have a bigger impact on the valuation, though the correct answer should start with, «It could go either way, but most of the time. «

28. How do you calculate WACC for a private company?

This is problematic because private companies don’t have market caps or Betas. In this case you would most likely just estimate WACC based on work done by auditors or valuation specialists, or based on what WACC for comparable public companies is.

29. What should you do if you don’t believe management’s projections for a DCF model?

You can take a few different approaches:

• You can create your own projections.

• You can modify management’s projections downward to make them more conservative.

• You can show a sensitivity table based on different growth rates and margins and show the values assuming managements’ projections and assuming a more conservative set of numbers.

In reality, you’d probably do all of these if you had unrealistic projections.

30. Why would you not use a DCF for a bank or other financial institution?

For financial institutions, it’s more common to use a dividend discount model for valuation purposes.

31. What types of sensitivity analyses would we look at in a DCF?

• Revenue Growth vs. Terminal Multiple

• EBITDA Margin vs. Terminal Multiple

• Terminal Multiple vs. Discount Rate

• Long-Term Growth Rate vs. Discount Rate

And any combination of these (except Terminal Multiple vs. Long-Term Growth Rate, which would make no sense).

32. A company has a high debt load and is paying off a significant portion of its principal each year. How do you account for this in a DCF?

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