|Author||Topic: quick ibanking technical question|
I'm just prepping for an interview, and would really appreciate your input on the following question:
Given 2 companies are in the same industry and have the same p/e ratio but one has more debt, why might this be possible?
|P/E ratio has nothing to do with debt. It is the ratio of a stock's price/ earnings. A stock might trade at a higher "multiple," for many reasons, even if it has more or less debt than peer stocks|
|can't believe you don't know the answer to this question and you are getting an interview. i'm sure you will be a world class bom. are you working at the ibanking division of harvey industries?|
|I'm not sure how you know this is the "exact question" they are going to ask. I'm guessing you found a list of common interview questions from the Schulich career center and someone typed this one in wrong. However, if that's not the case, there are many possible explanations...
Given 2 co.'s in same industry w/ same P/E multiple but different levels of debt. The leverage a co. uses is just one of the many factors that may affect a P/E multiple. Basically this question relates to understanding and analzying comps. The key is to understand that even though two companies can be in the same industry, they may have very different valuations, or alternatively very different capital structures. Just understand this and reasons you want to use debt versus using equity as financing.
1. One company may have been in the industry for years and has relatively stable cash flows so takes on more debt, while another company is relatively new and cant/wont use debt financing.
2. One company may have "higher value" products or services and thus may be less or more susceptible to an industry down turn.
3. One company may have great growth prospects and does not want to issue equity....
Too many to list...