Module II· Interview Essentials — ValuationIntermediate
Question
How do you answer 'If D&A goes up by 10, what happens to the 3 statements?'
Answer
Assumption
a 30% tax rate. Answer step by step:
- P&L: D&A +10 → EBIT −10 → pretax income −10 → tax −3 (30% × 10) → net income −7.
- Cash flow statement: net income −7, but D&A is non-cash and is added back (+10) → operating cash flow +3 (net). Investing/financing unchanged → net change in cash +3.
- Balance sheet: assets side: cash +3, PP&E −10 (D&A reduces the book value) → total assets −7. Liabilities + equity side: retained earnings −7 (from the drop in net income), liabilities unchanged → total L&E −7. The balance sheet balances: assets −7 = L&E −7. Key logic: higher D&A = a higher tax shield (cash stays in the company) → +3 cash. But net income falls → equity falls → it has to be consistent.
Deep diveShow more details
Pitch tip
This question varies constantly (D&A +10, capex +10, inventory +10, accounts receivable +10) — the mechanics: what happens on the P&L, then the CF, then the BS. Practice with all 5–6 standard items.