Top investment banking interview questions with answers

Do you want to start a career in investment banking? Preparing for an investment banking interview can significantly enhance the chances of getting the job. In this regard, below, we outline the most common investment banking interview questions a future investment banker or associate can expect and provide answers to them.

Common types of investment banking interview questions

Interviewers have a variety of questions to ask in an investment banking interview. Naturally, you can’t be sure which ones of the investment banking interview questions and answers will be voiced during the interview.

However, based on extensive research, we provide you with the most common questions and answers first-year students in finance go through during investment banking interviews.

We will divide them into technical and additional questions for better understanding.

Main technical questions to ask during an investment banking interview

The core of any M&A investment banking interview is to assess the candidate’s expertise in the field with a series of technical questions. Those can be split up into several subcategories.

Accounting questions

1. What are the three types of financial statements?
2. What is working capital, and how is it calculated?
3. Why is it better for a company to issue debt instead of equity?

The list of accounting questions investment banking professionals might ask freshmen during the interview is big. Below, we outline only a few of the most common ones.

1. What are the three types of financial statements?

There are three main financial statement types — income statement, balance sheet, and cash flow statement.

• The income statement displays the company’s revenues and expenses over a while and ends with net income.

• The balance sheet illustrates information about the company’s assets and liabilities — cash, inventory, property, and equipment, as well as shareholder’s debt, equity, and accounts payable.

• The cash flow statement gives the company’s net change in cash. It begins with net income and then shows the company’s cash flows from financing, investing, and operating activities.

2. What is working capital, and how is it calculated?

Working capital is the difference between a company’s current assets (cash, inventories, finished goods, customers’ unpaid bills) and current liabilities (debts and accounts payable). 

Working capital can be positive or negative. 

Positive working capital signals that a company can invest in future growth and activities. 

The company has a negative working capital when its ratio of current assets and liabilities is less than one.

The formula for calculating working capital:

Working capital = Current assets – Current liabilities

3. Why is it better for a company to issue debt instead of equity?

There are a few reasons why issuing debt instead of equity would be preferable:

• This is a cheaper and less risky way of financing.
• The company can benefit from tax shields if it has tax-deductible income.
• Issuing debt instead of equity is profitable if the company has immediately consistent cash flows and can make its interest payments.
• It often might result in a lower weighted cost of capital.

Enterprise or equity value questions

1. Why do we look at enterprise value and equity value?
2. How to calculate the cost of equity?
3. How to calculate enterprise value?
4. When considering a company’s acquisition what requires more attention from your side — enterprise value or equity value?

Usually, questions on enterprise value and equity value are straightforward. To answer those questions, it’s important to know the theory as well as all the essential formulas.

1. Why do we look at enterprise value and equity value?

Enterprise value and equity value are two common ways to evaluate the business, but each of them shows a slightly different view. 

Equity value shows a snapshot of current and potential future value, while enterprise value provides an accurate calculation of the overall current value of the business. 

Thus, equity value is the figure the public-at-large sees, while enterprise value is the true value of the company. 

It’s important to look at both enterprise value and equity value to get a broader perspective of the company’s potential after the merger or acquisition and define the selling cost more accurately.

2. How to calculate the cost of equity?

To calculate the cost of equity, investment bankers usually use the capital asset pricing model (CAPM):

CAPM = Risk-free rate + Beta * (Expected market return – Risk-free rate)

3. How to calculate enterprise value?

There’s a formula for the enterprise value calculation:

Enterprise value (EV) = Market value of equity + Debt + Minority interest + Preferred stock – Cash

4. When considering a company’s acquisition, what requires more attention from your side: Enterprise value or equity value?

Enterprise value. This is the number an acquirer needs to pay, and it often includes debt repayment.

Valuation questions

1. Name the three main valuation methodologies.
2. What are the other valuation methods?
3. Why would you use multiple valuations of a single company?

Those who want to build a career in investment banks need to demonstrate above-average knowledge in valuation. Below are only the most common investment banking internship interview questions on valuation.

1. Name the three main valuation methodologies

These include comparable companies, precedent transactions, and discounted cash flow analysis.

2. What are the other valuation methods?

The most popular are liquidation valuation, replacement value, leveraged buyout analysis, the sum of the parts, future share price analysis, and M&A premium analysis.

3. Why would you use multiple valuations of a single company?

Each valuation method is based on different assumptions and will yield different values.

Usually, the precedent transaction and discounted cash flow method demonstrate higher valuations than the comparable companies method does. 

Discounted cash flow (DCF) questions

1. What is a discounted cash flow?
2. What is a weighted average cost of capital, and how do you calculate it?
3. How to calculate unlevered free cash flows for the DCF analysis?

DCF questions during the Investment banking recruiting process usually are not limited to the basis of constructing a DCF model. Candidates should also understand the cost of equity, WACC, terminal value, and other concepts. 

Below are only a few most common DCF questions you should expect during an investment banking interview.

1. What is a discounted cash flow? 

Discounted cash flow, or DCF, is a valuation method used to assess the profitability of the potential investment opportunity. It is based on the present value of the company’s cash flows and the present value of its terminal value. With this approach, you discount the value of future cash flows.

2. What is a weighted average cost of capital, and how do you calculate it?

The weighted average cost of capital (WACC) demonstrates the company’s overall cost of raising capital. It also represents the risk of the potential investment in a target company.

To calculate WACC, investment banking experts use this formula:

Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 – Tax Rate) + Cost of Preferred * (% Preferred)

3. How to calculate unlevered free cash flows for the DCF analysis?

For this, investment bankers use a dedicated formula:

Free cash flows = Operating profit * (1 – tax rate) + Depreciation and Amortization – changes in the net working capital – capital expenditures

Merger model questions

1. What’s the difference between a merger and an acquisition?
2. When is the acquisition considered dilutive?
3. What are synergies and their main types?

For entering the corporate finance industry, prospective investment bankers and associates should understand the concept of mergers and acquisitions. However, you don’t need to understand it at the M&A banker level.

1. What’s the difference between a merger and an acquisition?

These two types of deals differ in the size of the buying and selling sides. 

A merger generally happens between two companies that are almost of the same size, and together they form a new joint entity. 

Acquisition usually refers to the deal where the buying company is substantially bigger than the target (selling) company, and it’s always about a takeover of one entity by another.

Note: Learn more about the key difference between merger and acquisition in our dedicated article.

2. When is the acquisition considered dilutive? 

The deal is dilutive when the acquiring company’s earnings per share (EPS) decrease after the deal’s closure. 

3. What are synergies and their main types?

Synergies in mergers and acquisitions happen when an acquiring company gets more value out of the deal than it was predicted.

There are two types of synergies:

Leveraged buyout (LBO) model questions

1. What is a leveraged buyout?
2. What variables have the most impact on an LBO model?
3. What is the tax shield in an LBO?

As with any category of investment banking interview questions, the candidate should not only demonstrate the knowledge of basic LBO concepts but also prove he understands how different variables can influence the output.

Below are the top three most commonly asked LBO questions during the investment banking interview.

1. What is a leveraged buyout?

A leveraged buyout is an acquisition of another company with the help of borrowed money to meet the deal’s cost. As a rule, LBO comes with a ratio of 90% debt to 10% equity.

2. What variables have the most impact on an LBO model?

Purchase and exit multiples affect the returns of a model the most. After this, the amount of used debt, revenue growth, and EBITDA margins have a substantial impact as well.

3. What is the tax shield in an LBO?

A tax shield in LBO takes place when the interest expense a company pays on debt is taxable, which helps this company to save money on taxes and, as a result, increase its cash flows.

Additional questions

Among the additional investment banking interview questions are usually those that are less connected to the theoretical and technical part that entails such aspects as preparing a company for an IPO. Such questions are often regarded as behavioral or fit.

Behavioral questions

1. Why investment banking?
2. What qualities should investment bankers have?

The main goal of behavioral questions is to clarify the candidate’s soft skills and personality traits.

Below are only a couple of examples of fit questions you can hear during investment banking interviews.

1. Why investment banking?

The key recommendation here is to tailor your answer to the particular company you’re interviewed for. 

The answer should include your previous professional investment banking experience (if any) and a logical connection to the position you’re applying for.

2. What qualities should investment bankers have?

Before naming a list of qualities a person should have to work in an investment bank, make sure you possess at least 80% of them:

• Strong communication skills
• Attention to detail
• Time management skills
• Analytical mindset
• Ability and willingness to multitask
• Ability to meet deadlines of multiple tasks
• Determination
• Strong work ethic

Note: To learn more about investment banking pitchbook read our dedicated article.

Outcomes

The possible investment banking interview questions a candidate can hear during investment banking interviews are numerous. They also depend on the position and the firm they are applying for. 

However, there are some basic questions almost all interviewers ask. They can be branched out into technical and additional ones.

• Technical questions aim to check the theoretical knowledge of a candidate. This category usually includes questions on accounting, enterprise/equity value, valuation, discounted cash flow, merger model, and leveraged buyout. 

• Additional questions target the candidate’s soft skills. They aim to determine how applicants would fit the team and whether they share the same values. Such questions are often regarded as behavioral or fit questions.

Guide on going public

One of the primary roles of investment bankers is to advise and intermediate Initial Public Offers (IPOs). 

With this in mind, the M&A Community, in collaboration with iDeals, produced the IPO consideration stage whitepaper, supporting professionals in better understanding the key considerations around going public.

Download the whitepaper here.