5 Guesstimates Wall Street Firms Ask and How to Answer Them
Guesstimates are interview questions that involve asking candidates to come up with a figure, usually the size of a market or the number of objects in a certain area. Although guesstimates are more commonly given in interviews for consulting positions, they do pop up in finance interviews as well. The most important thing to remember about guesstimates, which are designed to be stressful and thus test your ability to deal with stress, is to let your interviewer see how your mind works—that is, you’ll want to think aloud.
It’s also important to note that there are two wrong answers for these types of questions: 1) the random guess and 2) giving up. Interviewers want to see that you are thoughtful, creative, and rational. They don’t expect you to get the right answer. More often than not, they too have no idea what the right answer is. Thus, the best approach for a guesstimate question is to think of a funnel. You begin by thinking broadly, then slowly narrow down the situation towards the answer.
Below you’ll find five common guesstimates, along with directions on how to tackle them.
1. What is the size of the market for disposable diapers in China?
Here's a good example of a market sizing. How many people live in China? A billion. (For a guesstimate, that's close enough to the actual figure of 1.3 billion.) Because the population of China is young, a full 600 million of those inhabitants might be of childbearing age. Half are women, so there are about 300 million Chinese women of childbearing age. Now, the average family size in China is restricted, so it might be 1.5 children, on average, per family. Let's say two-thirds of Chinese women have children. That means that there are about 300 million children in China. How many of those kids are under the age of two? About a tenth, or 30 million. So there are at least 30 million possible consumers of disposable diapers.
2. How many Delta Airlines planes will take off in the next hour in United States?
There are several ways to attack this question. One way is to start by figuring out the number of airports in the United States. Most states have one or two large airports from which a major carrier departs. So on average, you can assume that there are 1.2 large airports per state. Finally, if you say that one Delta plane departs every 10 minutes, you can see that six take off per hour from each airport, so you can estimate that there are 1.2 x 50 x 6, or 360 Delta planes taking off this hour.
3. If I were to fill this room with pennies, how many pennies would fit in?
A literally in-your-face guesstimate question. This one you might begin by estimating the size of the room. Say, it’s 10 feet by 10 feet. So, it’s 100 square feet. Next you will try to estimate how many pennies might fit in one square foot. Then, once you have your estimate of that, you simply multiply by 100.
4. How many gas stations are in North America?
Start small or start large. Most people like to estimate how many would be in a hometown of 10,000 people and extrapolate that to the 300 million people in the U.S., while adjusting for the fewer gas stations in New York and other large cities. However you think about this one, just be rational and sure to think out loud!
5. Estimate the annual revenue of Tropicana's orange juice division in the U.S.
Like the others, this is fairly straightforward. You might want to estimate how many glasses of orange juice you drink a week (and/or whether or not you are representative of the general U.S. population), how many people are in the U.S. (300 million), and the general cost of a glass of OJ (or how many glasses might be in a carton of OJ and how much that average carton costs). From here, don't forget that you'll also need to consider how much market-share Tropicana has of the overall orange juice market!
The above was adapted from the new Vault Guide to Finance Interviews (the 9th edition, which was published earlier this year).
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