Finance interview technical questions list – IBD

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Investment banking interviews can generally be categorised in the following three groups:
1) “Who”: Tell me about yourself, Walk me through your resume
2) “Why”: Fit and motivation questions. “Why investment banking”, “Why our bank”
3) “How”: Technical questions

Among the three, candidates might be most concerned about the “How” section, and sometimes do not even understand what the interviewer is asking

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Below is a list of technical questions compiled by our blog contributors to help us prepare for the interviews. We are updating the list and adding more questions whenever available.

I. Valuation General Questions

1) Give me an overview of five valuation methodologies for a company
2) Which of the valuation methods will tend to lead to the highest valuation?
3) Which method of valuation is most robust?
4) What are the pluses/minuses of each method?
5) How does comparable company analysis work?
6) How does precedent transaction analysis work?
7) Walk me through a discounted cash flow model
8) What proportion did the Terminal Value contribute to the Enterprise Value? Why? What concerns are there?
9) Explain the difference between WACC and IRR
10) What is typically higher – the cost of debt or the cost of equity?
11) How do you treat deferred taxes in a DCF?
12) How do you calculate the cost of equity?
13) What is beta?
14) How would you calculate beta for a company?
15) What is the appropriate discount rate to use in an unlevered DCF analysis?
16) How do you calculate unlevered free cash flows for DCF analysis?
17) What is CAPM?
18) Why would two companies with identical earnings in the same industry have different P/E multiples?
19) Would you use Enterprise Value/Net Income as a multiple?
20) What is the appropriate numerator for a revenue multiple?
21) How would you value a company with negative historical cash flow?
22) When should you value a company using a revenue multiple vs. EBITDA?
23) In a perfect (tax-free) world, if you have a company with an enterprise value of £6 million and you take out £2 million in debt, what is the new enterprise value? What is the enterprise value if you subsequently use the £2 million to pay out a dividend? What is the enterprise value if instead of paying out the dividend, you invest the £2 million in a new project with an NPV of £4 billion?
24) What are the formulas for unlevering and levering Beta?
25) Which is less expensive capital, debt or equity?
26) When using the CAPM for purposes of calculating WACC, why do you have to unlever and then relever Beta?
27) What is WACC and how do you calculate it?
28) Two companies are identical in earnings, growth prospects, leverage, returns on capital, and risk. Company A is trading at a 15 P/E multiple, while the other trades at 10 P/E. which would you prefer as an investment?
29) What is accretion and dilution?
30) If 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?
31) Why might a company be trading at a lower EV/EBITDA multiple than its competitors of the same size in the same industry?
32) Why can’t you use EV/Earnings or Price/EBITDA as valuation metrics?
33) What is the formula for Enterprise Value?
34) What are the three main valuation methodologies?
35) How do you calculate fully diluted shares?
36) What is the difference between basic shares and fully diluted shares?
37) Why do you subtract cash in the enterprise value formula?
38) What is Minority Interest?
39) When would you not use a DCF in a valuation?
40) How can we calculate Cost of Equity without using CAPM?
41) Two companies are exactly the same, but one has debt and one does not – which one will have the higher WACC?
42) If you use levered free cash flow, what should you use as the Discount Rate?
43) Why do we look at both Enterprise Value and Equity Value?
44) Why do we add Preferred Stock to get to Enterprise Value?
45) How do you count for convertible bonds in the Enterprise Value formula?
46) What’s the difference between Equity Value and Shareholders’ Equity?
47) How do we use the Treasury Stock Method to calculate diluted shares?
48) How do you select Comparable Companies/Precedent Transactions?
49) What are the flaws with public company comparables?
50) What are some flaws with precedent transactions?
51) How do you use the three main valuation methodologies to conclude value?
52) What are some common valuation metrics?
53) The EV/EBIT, EV/EBITDA, and P/E multiples all measure a company’s profitability. What’s the difference between them, and when do you use each one?
54) How would you judge a company’s credit worthiness?

II. Accounting Questions

55) Walk me through the impact of an asset write-down on the financial statements
56) If a company changes from a LIFO to FIFO, how would that impact its financial statements?
57) Walk me through the financial statements
58) How are the financial statements linked together?
59) If you had to pick one statement to look at (balance sheet, cash flow, income statement), which one would it be and why?
60) Company A has £10m of assets while company B has £20m of assets. Which company should have a higher value?
61) Where would you put a convertible bond on the balance sheet?
62) Walk me through a cash flow statement
63) Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?
64) What is working capital?
65) I buy a piece of equipment, walk me through the impact on the 3 financial statements
66) How is it possible for a company to show positive net income but go bankrupt?
67) Why are increases in accounts receivable a cash reduction on the cash flow statement?
68) What is goodwill?
69) What is a deferred tax liability and why might one be created?
70) What is a deferred tax asset and why might one be created?
71) Suppose you reviewed the financial statements of a firm for two consecutive years. Every line item on the income statement showed the same value for both years, but the numbers on the lines in the cash flow statement are different for the two years. Speculate on a few things that may have happened to cause this outcome
72) If convertible debt gets converted, what is the impact on the balance sheet?
73) Why is the Income Statement not affected by changes in Inventory?
74) If a company incurs £10 (pre-tax) of depreciation, how does this affect the three financial statements?
75) If depreciation is a non-cash expense, why does it affect the cash balance?
76) Where does depreciation usually show up on the Income Statement?
77) A company makes £10 cash purchase of equipment on Dec. 31. How does this impact the three financial statements this year and next year?
78) A company makes £10 debt purchase of equipment on Dec. 31. How does this impact the three financial statements this year and next year?
79) If cash collected is not recorded as revenue, what happens to it?
80) What is the difference between cash-based and accrual accounting?
81) How do you decide when to capitalize rather than expense a purchase?
82) A company has had a positive EBITDA for the past 5 years, but it recently went bankrupt. How could this happen?

III. Capital Structure and Financing Questions

83) If you were pitching to be an underwriter for an IPO, what would the table of contents of the pitch book look like?
84) What implications are there for cash dividend versus stock repurchase? Why and when would you use one versus the other?
85) How can a company reduce its Debt/EBITDA ratio without increasing EBITDA or paying down debt?
86) What are the benefits and negatives to raising equity vs. debt?
87) What is the difference between the yield and rate of return on a bond?
88) Which method would a company prefer to use when acquiring another company – cash, stock, or debt?
89) How much debt could a company issue in a merger or acquisition?

IV. M&A and LBO Questions

90) What are the pros/cons on a stock vs. cash acquisition?
91) Who would pay more to acquire a company – a financial buyer or a strategic buyer? Why?
92) Why do accretive mergers still sometimes see a falling stock price?
93) Explain the concept of synergies and provide some examples
94) Why might one company want to acquire another company?
95) What factors can lead to the dilution of EPS in an acquisition?
96) Talk to me about some hostile deals that have been initiated lately
97) When does a hostile deal make sense?
98) What is the IRR with an equity investment of £10m and exit equity value of £50m after five years? Give me the calculation formula
99) Walk me through an LBO analysis
100) Give an example of Circular Reference in an LBO model
101) Let’s say you run an LBO analysis and the private equity firm’s return is too low. What drivers to the model will increase the return?
102) Why do private equity firms use leverage when buying a company?
103) What makes a good LBO candidate?
104) What drivers to the LBO model will increase the return for the private equity firm?
105) What variables impact an LBO model the most?
106) Can you explain how the Balance Sheet is adjusted in an LBO model?
107) How do you use an LBO model to value a company, and why do we sometimes say that it sets the “floor valuation” for the company?
108) What is a dividend recapitalization (“dividend recap”)
109) Walk me through a basic merger model
110) Is there a rule of thumb for calculating whether an acquisition will be accretive or dilutive?
111) Walk me through an accretion/dilution analysis
112) What are the complete effects of an acquisition?
113) What facts can lead to the dilution of EPS in an acquisition?

Questions compiled by blog contributor for City Sail. All rights reserved.

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