Investment Banking Interview Questions & Answers (Condensed)
Landing an investment banking role is competitive. Here’s a sample of common interview questions and suggested approaches:
Technical Questions:
- Walk me through a DCF. Answer: Project free cash flows (FCF) for 5-10 years. Calculate terminal value using Gordon Growth or Exit Multiple method. Discount FCFs and TV to present value using WACC. Sum present values to arrive at enterprise value (EV). Subtract net debt to get equity value. Divide by shares outstanding for implied share price.
- What is WACC? How do you calculate it? Answer: Weighted Average Cost of Capital. It’s the average rate a company expects to pay to finance its assets. Formula: (% Equity * Cost of Equity) + (% Debt * Cost of Debt * (1 – Tax Rate)) + (% Preferred Stock * Cost of Preferred Stock). Cost of Equity is often derived from CAPM.
- How do you calculate free cash flow? Answer: FCF = EBIT * (1 – Tax Rate) + Depreciation & Amortization – Capital Expenditures – Change in Net Working Capital. Different variations exist, ensure consistency.
- What is CAPM? Answer: Capital Asset Pricing Model. Calculates expected return on investment. Formula: Re = Rf + Beta * (Rm – Rf) where Re = Cost of Equity, Rf = Risk-Free Rate, Beta = Volatility of investment relative to market, Rm = Expected Market Return.
- Explain different valuation methods. Answer: DCF (Discounted Cash Flow), Comparable Companies (Comps), Precedent Transactions, LBO (Leveraged Buyout), Liquidation Valuation. Each has advantages and disadvantages. DCF is intrinsic, Comps & Precedent Transactions are relative.
- Walk me through an LBO. Answer: Acquire company using debt. Determine appropriate debt/equity mix. Project company’s financials and cash flows under new capital structure. Assume exit (sale) after 3-5 years. Assess IRR (Internal Rate of Return) for the PE firm. The goal is to use the company’s cash flows to repay the debt and generate a return for the PE firm.
- What are common valuation multiples? Answer: EV/Revenue, EV/EBITDA, P/E, Price/Book, Price/Sales.
- How does depreciation affect the financial statements? Answer: Income Statement: Reduces Pre-tax Income. Cash Flow Statement: Added back as a non-cash expense. Balance Sheet: Reduces Net Fixed Assets.
- What are the three main financial statements? Answer: Income Statement, Balance Sheet, Statement of Cash Flows.
Behavioral Questions:
- Why investment banking? Answer: Show genuine interest. Highlight aspects that appeal to you (e.g., challenging work, intellectual stimulation, exposure to deals). Demonstrate knowledge of the industry.
- Why our firm? Answer: Research the firm. Mention specific deals, industry strengths, culture, people you’ve spoken with. Show you’ve done your homework.
- Tell me about a time you failed. Answer: Choose a meaningful failure. Focus on what you learned and how you improved. Don’t blame others.
- Tell me about a time you worked in a team. Answer: Describe your role, the team’s goal, and how you contributed to success. Highlight teamwork skills (communication, collaboration).
- What are your strengths and weaknesses? Answer: Strengths should be relevant to the role. Weakness should be genuine but framed positively (e.g., “I sometimes focus too much on details, but I’m working on delegating effectively.”)
- How do you handle stress and long hours? Answer: Mention strategies like time management, prioritization, and seeking support.
Brain Teaser Questions:
- These questions test analytical thinking and problem-solving under pressure. There’s often no single “right” answer, the process is key. Examples: estimate market size, probability problems.
Preparation is key! Practice technical questions, prepare strong behavioral stories, and research the firm thoroughly. Good luck!
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