Investment banking interview questions are ofter hyper-technical, involving calculating specific numbers and walking through various investment banking activities. While they can seem overwhelming at first, you can nail an investment banking interview with a little study and preparation.
In this guide, we’ll go over:
- Introductory Interview Questions
- Technical Investment Banking Questions
- Theoretical Interview Questions
- Personality Interview Questions
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Introductory Interview Questions
Investment banking interviews begin the same way as any other interview: getting to know one another. The interviewer will likely give you an overview of the company and the position, and then ask you some questions about yourself.
1. Walk me through your resume.
Your answer to this question should be brief and highlight any past finance experience you have. This is your chance to mention internships, programs, or previous jobs that are highly relevant to the role. You should also give a quick overview of your education, especially if you had relevant coursework.
2. Why investment banking?
This is an important question — investment banking is a difficult industry to break into, and the job requires a lot of dedication, long hours, and hard work. Employers want applicants who are passionate about investment banking and who have the drive it takes to succeed in the industry. Preparing a response can help you hit the key points:
- Why you are passionate about investment banking
- What you see as your future within investment banking
- What about investment banking gets you excited
While more generic responses like “I enjoy fast-paced environments” or “I enjoy corporate finance” are not bad answers, they won’t make you stand out. Find your personal tie to investment banking — what makes you passionate about the job.
3. Tell me about a company you admire or a recent deal you find interesting.
Interviewers want to see that you speak the same language as them, so they may ask you about a company that you admire, a stock you personally have invested in, or a recent merger or acquisition that you find fascinating.
You can mention a recent deal the investment bank you’re applying for has facilitated, for example, but make sure it is something you are actually interested in. Genuine answers are always better received, and this question gives you an opportunity to mention some side interests.
For example, if you’re really into video games in your spare time, and a small game developer you enjoy has recently gone public, that can be a great topic to introduce!
Technical Investment Banking Questions
The technical portion of an investment banking interview involves specific questions about accounting, mergers and acquisitions (M&A), IPOs, corporate finance, and valuation. The questions can seem daunting but remember: you are not expected to be an expert already. These are common investment banking interview questions for entry-level or junior roles. The interviewer wants to see that you have some core investment banking skills and can handle a bit of a challenge.
1. Tell me about financial statements and why they are important.
The three common financial statements are balance sheets, income statements, and cash flow statements.
- Balance sheets show a company’s assets and liabilities, including shareholder equity, debt, and accounts payable.
- The income statement displays the company’s net income over a period of time and shows revenue and expenses.
- Cash flow statements show a company’s cash flow from operating, financing, and investing activities.
2. What is enterprise value versus equity value?
Enterprise value is the overall current value of the company while equity value is the value of the company’s shares and loans, which can give an idea of the company’s current and future value.
3. What is the formula for enterprise value?
Enterprise value is market capitalization plus total debt minus cash.
EV = MC + Total Debt – C
- Market capitalization (MC) is the current stock price times the number of outstanding shares.
- Total debt is the cumulative amount of short and long-term debt.
- Cash (C) is liquid assets.
4. What are the main components of WACC and how do you calculate it?
Weighted average cost of capital (WACC) is a formula used to determine the return on investment in a company, and it is comprised of the sum of a company’s proportional debt and equity multiplied by the cost of debt and cost of equity, respectively.
WACC = (E/V x Re) + (D/V x Rd x (1-T))
- Equity (E) is the market value of the company’s outstanding shares, so E/V is the percentage of the company’s value that is equity.
- Debt (D) is the market value of the company’s debt, so D/V is the percentage of the company’s value that is debt.
- Value (V) is the value of the company’s capital, or E+D.
- Re is the cost of equity
- Rd is the cost of debt
- Tax (T) is the corporate tax rate.
5. What is EBITDA?
EBITDA is an acronym that stands for earnings before interest, taxes, depreciation and amortization. It is a measure of financial performance and helps determine a company’s earning potential.
6. How do you value a company?
There are three main ways to value a company — comparable company analysis, discounted cash flow analysis, and precedent transaction analysis.
- Comparable company analysis involves finding companies that are similar to the one you are trying to value and comparing their EBITDA, stock price, and price to earnings, among other variables.
- Discounted cash flow (DCF) analysis is using how much the company is projected to make in the future discounted to present values.
- Precedent transaction analysis is similar to a comparable company analysis, except you find how much similar companies have sold to determine the worth of the company you’re valuing.
7. How do you calculate terminal value?
Terminal value (TV) is the estimated value of a company after a specific period of time, and it is a core element of DCF analysis. There are two ways to calculate terminal value: the growth in perpetuity approach or the exit multiple approach.
- The growth in perpetuity approach involves assuming that cash flows grow at a stable rate indefinitely.
- The exit multiple approach does not assume perpetual growth and instead looks at the net value of a company’s assets at a given moment in time. It is used for a company that is going to be acquired or liquidated in the future.
8. How do you do a DCF valuation?
At a high-level, DCF valuation involves determining how much a company is set to make over a 5-to-20-year period and then calculating a terminal value.
Specifically, to do a DCF analysis, you need to project unlevered future cash flows, determine a discount rate and calculate a terminal value. Then, discount the unlevered free cash flow and terminal value to present value to determine enterprise value. By subtracting net debt from the company’s enterprise value, you calculate the equity value.
9. What is the discount rate you should use in an unlevered DCF analysis?
The discount rate is the required rate of return of both debt and equity, so the rate should be the weighted average cost of capital (WACC).
10. What is Beta, and why would you unlever it?
Beta, symbolized by the Greek character β, is an estimate of how volatile a security (or tradeable asset) is compared to the overall market (often the S&P 500). The baseline for beta is 1.0, so anything above 1.0 is more volatile and holds more inherent risk.
It is best to use an unlevered beta when comparing a company that is not on the market yet. Additionally, because unlevered beta does not consider debt, it allows you to see the volatility of the company’s equity alone as if the company had not taken on any debt.
11. Which is more expensive: the cost of debt, or the cost of equity?
The cost of equity is how much shareholders are expected to make from their investment in a company, while the cost of debt is the rate of return that bondholders expect from investing. So, the cost of equity is typically higher, since shareholders are not guaranteed fixed payments and they assume a higher risk when investing.
Additionally, the cost of debt is lower because the interest expense when borrowing debt is tax-deductible.
12. What are the main factors that cause a need for mergers and acquisitions?
The major factors that lead to a merger or acquisition include:
- Saving money
- Improving financial health and overall metrics
- Eliminating competition from the market
- Gaining more power over pricing by buying out a distributor or supplier
- Diversifying or specializing — expanding the company’s product or finding ways to make it more niche for a specific market
- Expansion of technological abilities or absorbing new technologies from acquired companies
13. When should a company issue debt instead of equity?
Since the cost of debt is generally cheaper than the cost of equity, there are quite a few situations where issuing debt makes more sense than issuing equity. Issuing debt instead of equity makes sense if:
- The company can get tax shields from issuing debt.
- The company has stable cash flows and can make interest payments.
- It results in a lower WACC.
- The company can get a better return on investments with more financial leverage.
14. What is net working capital?
Net working capital (NWC) is essentially how much money a company has if it pays off all current short-term debts.
NWC = Current Assets – Current Liabilities
Current assets include items found on a balance sheet, such as accounts receivable, inventory, and prepaid expenses, while current liabilities are short-term debts like accrued expenses, deferred revenue, and accounts payable.
If a company has a positive NWC, it means the company is able to cover all short-term liabilities with its current assets. A negative NWC would mean the company cannot cover these liabilities, though, and indicates that the company either needs to increase cash reserves or seek more financing.
15. What is an IPO?
An IPO is an initial public offering. That’s when a private company wants to transition to being publicly traded and an investment bank helps sell its shares to investors for the first time. An IPO is sometimes called “going public” and it can help companies raise capital and allows investors, original owners, and employees to cash-out some of their investments in the company.
16. Explain the process of helping a company complete an M&A from the buy-side.
Helping a company find an appropriate acquisition involves:
- Researching potential companies
- Filtering the options based on feedback from your client, the buyer
- Figuring out if the potential companies are interested in being purchased
- Discussing offer price with the buyer and seller
- Negotiating the purchase agreement
- Announcing the M&A transaction
>>MORE: Learn the skills you need to ace these tough interview questions with our Investment Banking Career Path.
Theoretical Interview Questions
In an attempt to understand how your brain works and how you process difficult problems, the interviewer will likely ask some brain teasers and word problems. Investment banking requires strong analytical skills, so being able to analyze a hard question and tackle it logically is important. Some of these types of investment banking interview questions may seem outlandish, while others may be specific to investment banking.
1. Two companies are almost exactly the same in every way, except Company A is trading at 20 P/E and Company B is trading at 18 P/E. Which would you invest in?
P/E is the price-to-earnings ratio, which demonstrates the cost per $1 of earnings. In this situation, it’s best to invest in Company B because a lower price/earnings ratio is a better investment — you are paying less for each $1 of earnings.
2. Why are manhole covers round?
This question is to see your logical thinking in action. Some responses to this include the fact that round covers cannot fall into round holes and can be easily rolled if they need to be moved. Additionally, round covers are easy to fit and align.
3. How would you figure out how much an aircraft carrier weighs without using a scale?
This question displays how you break down difficult problems. There are a lot of different ways to tackle this question. For example, you could ask an engineer who is familiar with aircraft carriers or try to gauge how much individual components of the aircraft carrier weigh. The solution itself is less important than you showing how you would think this problem through.
Personality Interview Questions
Some interview questions are common to all careers, and personality questions are no different. Whether it’s an interview for investment banking or for zookeeping, interviewers want to get a sense of what type of person and worker you are.
1. Tell me about a time when you…
“Tell me about a time when you” questions are designed to see how you would react in specific scenarios. For example, the interviewer may ask you to tell them about a time when you disagreed with a manager.
Using the “STAR” (Situation, Task, Action, and Result) method can help you give clear and concise answers – describe the situation and what task or challenge you were dealing with, then say what actions you took to overcome the issue and the outcome of your actions.
2. What are your hobbies?
What you do in your free time doesn’t need to be job-related, but if you run a small business in your spare time, or spend your nights finding new companies to invest in, that could gain you some bonus points with the interviewer.
However, having interests outside of work portray you as a more well-rounded candidate. Stick to only mentioning work-appropriate hobbies, but let your personality shine through here.
3. Describe the work environment you thrive in.
It is no secret that investment bankers work long, fast-paced hours, so it is probably best to not say you work best in a slow-moving, low-intensity environment. But this is a good opportunity to talk about the type of people that inspire you to do great quality work and the type of day-to-day structure that you align with. Additionally, noting things about your preferred management styles and office culture can help the interviewer get a better sense of if you’d be a good fit for their company.
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