10 Case Interview Formulas You Should Definitely Know

Summary

In this video, a former Bain manager shares ten essential formulas for excelling in case interviews. Key concepts include Contribution Margin, ROI, Market Share, and more, each defined with clear calculations and real-world examples. These formulas help candidates analyze business scenarios effectively, allowing them to approach interview math with confidence. By mastering these concepts, viewers can enhance their problem-solving skills and prepare thoroughly for consulting roles. The video encourages further learning through comprehensive courses and resources, ensuring candidates are well-equipped for success in their interviews.

Takeaways

• 😀 Case interviews don't require extensive math or finance knowledge, but knowing basic formulas is essential.
• 📊 Contribution Margin is crucial for understanding the profit each product generates after variable costs are accounted for.
• 💰 Return on Investment (ROI) measures the profitability of an investment relative to its cost, helping assess investment decisions.
• 🌍 Market Share indicates the percentage of total market sales held by a company, reflecting its competitive position.
• 📈 Relative Market Share compares a company's market share to its largest competitor, providing insight into market dominance.
• 📉 Gross Profit shows the revenue remaining after accounting for the cost of goods sold, essential for evaluating product profitability.
• 🏢 Operating Profit reflects a company's profitability after deducting all operating expenses, a key indicator of business performance.
• 📈 The Compounded Annual Growth Rate (CAGR) measures growth over time, offering a clear view of revenue progression.
• ⏳ The Rule of 72 provides a quick estimate of how long it will take for an investment to double based on its growth rate.
• 💵 The Perpetuity Formula calculates the present value of a series of cash flows that continue indefinitely, useful for valuing investments.
• 🔄 Price Elasticity of Demand quantifies how demand changes with price adjustments, essential for pricing strategies.

Q & A

What is the contribution margin, and how is it calculated?

The contribution margin represents how much money each product sold brings into the company after accounting for the cost of raw materials. It is calculated as Price minus Variable Cost.

How is Return on Investment (ROI) defined, and what is its formula?

ROI measures how much additional money a company generates relative to the size of its initial investment. The formula is ROI = (Profit from Investment) / (Investment Cost).

What does market share represent?

Market share measures the percentage of total market sales that a particular company has. It is calculated by taking the company’s revenue and dividing it by the total market revenue.

How does relative market share differ from market share?

Relative market share compares a company's market share to that of its largest competitor. It indicates how strong a presence a company has relative to the market leader.

What is gross profit and how is it determined?

Gross profit is the money a company makes from selling its products after deducting the costs associated with making and selling those products. It is determined by subtracting the cost of goods sold from total sales revenue.

What expenses are included when calculating operating profit?

Operating profit is calculated by subtracting operating expenses and depreciation from gross profit. Operating expenses may include rent, utilities, salaries, and advertising costs.

What does CAGR stand for, and how is it used?

CAGR stands for Compounded Annual Growth Rate. It measures the mean annual growth rate of an investment over a specified time period, assuming the profits are reinvested at the end of each period.

How is the Rule of 72 used in finance?

The Rule of 72 is a shortcut used to estimate the number of years required to double the value of an investment at a fixed annual rate of return. It is calculated by dividing 72 by the annual growth rate.

What is a perpetuity, and how do you calculate its present value?

A perpetuity is a type of annuity that lasts forever. The present value of a perpetuity is calculated by dividing the cash flow of each payment by the discount rate.

What does price elasticity of demand measure?

Price elasticity of demand measures how much customer demand for a product changes in response to a change in the product's price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.