Investment Banking Interview Questions (with Answers)

Top Investment Banking Interview Questions (and Answers)

The purpose of this Investment Banking Interview Questions and Answers is simply to help you learn about the investment bankingAbout The Investment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more interview topics. As a fresher in this field, I am sure you may have had jitters as to what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics and since it is difficult to cover all of them here, we would be discussing a few of them which are important.

While reading through this write-up, I would suggest you actively keep answering the questions yourself before checking the correct answer. This will help you develop the habit of brainstorming and answering these questions in a structured way. Please consider this as a first draft of the article. I will keep on regularly updating this with more questions and answers based on your feedback.

The interview nowadays does not have the typical questions being asked which include the basics on financial concepts. The interviewers want the candidates to think and avoid theories which everyone usually knows. Also since these questions are technical ones there would always be a correct answer, so in case you find yourself not knowing a particular answer, don’t try and fake one. It is always better to confess that you don’t know.

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Source: Investment Banking Interview Questions (with Answers) (wallstreetmojo.com)

Investment Banking Interview Questions have been divided into the following 6 topics

  1. Accounting
  2. Corporate Finance
  3. Valuation
  4. Merger and Acquisitions (M&A)
  5. Initial Public Offering (IPO)
  6. Miscellaneous

#1 – Accounting

Question #1

Tell me about the three most important financial statements and what is their significance

This is one of the most commonly asked investment banking interview questions.

Question #2

In case you have the chance to evaluate the financial viability of the company which statement would you choose and why?

  • It would be the cash flow statement. The reason being that it provides a true picture of how much cash the business is generating in actual terms.
  • The cash flows are hence the main thing you actually pay attention to while you are analyzing the overall financial health of the business.
Question #3

Let’s say that the depreciation expense goes up by $100. How would this affect the financial statements?

Question #4

Imagine a situation where a customer pays for a mobile phone with a credit card. What would this look like under cash-based vs. accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more?

Also, have a look at this detailed explanation on Cash vs Accrual AccountingCash Vs Accrual AccountingCash accounting is the practice of perceiving the income and expenses only after the monetary receipt or payment. In contrast, Accrual accounting recognizes the income or expenses immediately after the services are provided or acquired, irrespective of the financial exchange.read more.

#2 – Corporate Finance 

Corporate Finance

Question #5

What is the formula for calculating WACC? 

Do expect this investment banking interview question.

Question #6

There are two companies P and Q which are exactly the same, but one P has debt whereas Q doesn’t have any. In this case, which of the two companies would have a higher WACC?

  • In this scenario company, Q would have a higher WACC, because debt is less expensive than equity.
Question #7

The interviewer at this juncture might ask you the reasons why debt is considered to be less expensive?

#3 – Valuations

Valuation

Question #8 

Describe the ways in which a company is valued

This is another very common investment banking interview question.

Precedent transaction analysis

Comparable Company Analysis

  • Comparable company analysis is similar to Precedent Transactions Analysis except you are using the whole company as an assessment unit, not the purchase of a company.
  • So to use this method you would also look for out similar companies to the one you are valuing and look at their price to earnings, EBITDA, stock price and any other variables you think would be a pointer of the health of a company.

Discounted Cash Flow Analysis

Question #9

Which are the situations in which we do not use a DCF in the valuation?

  • We would not use a DCF in the valuation if the company has unstable or unpredictable cash flow or when debt and working capital serve a fundamentally different role.
  • For example, financial institutions like banks do not re-invest debt and working capital forms a major part of their balance sheets- so here we do not use a DCF for such companies.
Question #10

List the most common multiples used in a valuation

Valuation questions are very common in investment banking interviews.

These are relative valuation techniques given below-

Question #11

Briefly explain leveraged buyout?

One of the technical questions.

Question #12 

Explain the PEG ratio?

Question #13

What is the formula for Enterprise Value?

  • The formula for enterprise value is: the market value of equity (MVE) + debt + preferred stock + minority interest – cash.
Question #14

Why do you think the cash is subtracted in the formula for enterprise valueFormula For Enterprise ValueThe Enterprise Value Formula is an economic measure that reflects the entire value of the organization, including secured and unsecured creditors, equity and preference shareholders, and is more commonly employed in acquiring other businesses or merging two or more businesses to achieve synergy. Enterprise value Formula = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalentsread more?

  • The reason why cash is subtracted is that it is regarded as a non-operating asset and because Equity Value indirectly accounts for it.
Question #15

Why do we consider both enterprise value and equity value?

  • Enterprise value signifies the value of the company that is attributable to all investors, whereas equity value represents the portion available to equity shareholders.
  • We consider both because equity value is the number the public at large sees, while enterprise value represents its true value.
Question #16

What does it signify, if a company has a negative enterprise value?

  • The company could have negative enterprise value when the company has extremely large cash balances or an extremely low market capitalization or both.
  • This could occur in companies that are on the brink of bankruptcy or Financial institutions such as the banks, which have large cash balances.

#4 – Mergers and Acquisitions M&A

Question #17

Briefly explain the process of a buy-side M&A deal

Question #18 
Briefly explain accretion and dilution analysis

This one is another technical question.

Question #19

Given a situation where a company with a low P/E acquires a company with a high P/E in an all-stock deal, will the deal likely be accretive or dilutive?

  • Other things being equal, in a situation where a company with a low P/E acquires a company with a high P/E, the transaction would be dilutive to the acquirer’s Earnings per Share (EPS).
  • The reason for this is that the acquirer will have to shell out more for each rupee of earnings than the market values its own earnings.
  • Therefore in such a situation the acquirer would have to issue proportionally more shares in the transaction.
Question #20

What are the synergies and its types?

  • Synergies are where the buyer gets more value than out of an acquisition than what the financials would predict. There are basically two types of synergies –
  • Revenue synergy: the combined company can cross-sell products to new customers or up-sell new products to existing customers. Because of the deal, it could be possible to expand in new geographies.
  • Cost synergies: the combined company could amalgamate buildings and administrative staff and can lay off redundant employees. It could also be in a position to close down redundant stores or locations.
Question #21 

How does Goodwill get created in an acquisition?

#5 – Initial Public Offerings (IPO) 

IPO

Question #22 

Briefly describe what would you do if you are working on an IPO for a client?

  • First of all, we would meet the client and gather all the necessary information such as their financial details, customers and learn about the sector they belong to.
  • After this, you would meet other bankers and lawyers the registration statement which would describe the company’s business and market to its investors.
  • Next, you would receive comments from the SEC and keep revising the document until it is acceptable.
  • Now you would spend the coming weeks in organizing roadshows where you would present the company to the institutional clients and also convince them to invest in them.
  • After raising capital for the clients the company would start trading on the exchange.
Question #23

What are the benefits of a company getting listed on an exchange?

  • It is an important step for a company to achieve liquidity
  • There are certain investors who would want to invest only in exchange-listed issuers
  • It helps the company establish a recognized value for their stock which in turn could also help it use stock for acquisitions rather than cash

#1 – Miscellaneous Questions

Question #24

What is in a pitch book?

Pitch book depends on the kind of deal the company is pitching for but the common structure would include:

Question #25

Tell me a company you admire/follow and pitch me a stock

You need to structure your answer for such investment banking interview questions keeping in mind the following;

  • Give the name of the stock you have been following and the reason for the same
  • Quickly summarize what the company’s business
  • Provide a quick overview of the financials to indicate its size and how profitable it is. Also if you can provide with specific details on Revenue, EBITDA multiples, or its P/E multiple
  • Provide reasons as to how the stock or their business is more attractive than its rivals.
  • You should speak about the trend the stock has had at least in the past 3-5 years.
  • You could also talk about the future outlook for the company.
Question #26

When buying a company why do private equity firms use leverage?

  • The private equity firm reduces the amount of equity to the deal by using significant amounts of leverage (debt) to help finance the purchase price.
  • By doing this, it will increase the private equity firm’s rate of return substantially when exiting the investment.
Question #27

What is convexity?

  • Convexity is a more accurate measure of the relationship between yield and price changes in bonds in relation to the change in interest rates.
  • Duration calculates this as a straight line, when in actuality it is a convex curve, hence the name.
  • This is used as a risk calculation because it can tell how a bond yield will respond to interest rate changes.
Question #28

Define the risk-adjusted rate of returns

Conclusion

The key to successfully answering these technical questions is to apply the concepts you’re learning and test yourself. Hope this has helped you learn some important question and answers on investment banking topics and brings you steps closer to crack the high profile interviews. All the best :-)

P.S. Kindly note we have only touched upon the technical questions and their types, apart from these you would also have to prepare for the personal questions, why investment banking Interview questions and brain teasers which are usually part of testing the candidates.

Investment Banking Interview Questions and Answers Video

In this guide, we list the top 28 most common asked Investment Banking Interview Questions and Answers that you must know. Here we discuss the tips to answer the questions on accounting, valuations, modeling, Pitchbook, M&A, IPO, Leveraged buyouts, and others. You may also have a look at these Q&A to learn more –

Reader Interactions

Comments

  1. Diwakar Ajjarapu says

    Awesome…you made IB look easy and crystal clear. Thanks a lot.

    • Dheeraj Vaidya says

      Thanks for your kind words!

  2. mamta says

    It’s brilliant.. Thanks for sharing this!

    • Dheeraj Vaidya says

      Thanks for your kind words!

  3. vikash dhaka says

    Very helpful.

  4. Kiran Patil says

    simply amazing

    • Dheeraj Vaidya says

      thanks Kiran!

  5. Jaspal gidwani says

    Awesome knowledge you have shared.Thanks sir.

    • Dheeraj says

      My pleasure Jaspal!

  6. Zaie says

    Hey..thanks for this question bank..It is going to prove quite helpful for my interview preparations. Also if you could prepare a similar guide for the personal questions that could be asked in the HR round of interviews it would be great:)

    • Dheeraj says

      Thanks Zaie!

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