Investment Banking Interview Questions Part 1

Investment banking interviews are known for their challenging technical and behavioral questions. This comprehensive guide breaks down the most common questions you’ll face and provides detailed explanations of how to answer them effectively.

Contents

Technical Questions

Financial Statements and Accounting

1. “Walk me through the three financial statements and how they’re connected.”

Optimal Answer Structure:
Start with the Income Statement, move to the Balance Sheet, then finish with the Cash Flow Statement. Emphasize the interconnections:

“The three financial statements are fundamentally interconnected. Let me walk you through how:

First, the Income Statement shows the company’s profitability over a period. Net Income is the bottom line, which then:

Flows into the Balance Sheet through Retained Earnings
Serves as the starting point for the Cash Flow Statement

The Balance Sheet shows the company’s financial position at a specific point in time, with:

Assets = Liabilities + Shareholders’ Equity
Retained Earnings accumulating historical Net Income minus dividends
Working capital components that connect to the Cash Flow Statement

The Cash Flow Statement reconciles Net Income to actual cash movements by:

Starting with Net Income
Adding back non-cash expenses like Depreciation
Adjusting for changes in working capital accounts from the Balance Sheet
Including investing and financing activities

Key connections include:

Net Income flows through all three statements
Balance Sheet working capital changes appear in the Cash Flow Statement
PP&E additions in the Cash Flow Statement affect the Balance Sheet
Debt issuance or repayment impacts both the Cash Flow Statement and Balance Sheet”

2. “If inventory increases by $10, how does this affect the three financial statements?”

Detailed Answer:
“Let me walk through this step-by-step:

Income Statement:

No immediate impact
COGS will be affected only when the inventory is sold
This timing difference is key to understanding the cash impact

Balance Sheet:

Assets: Inventory (increases by $10)
Cash (decreases by $10)
Net effect on total assets is zero
No impact on liabilities or equity

Cash Flow Statement:

Operating Activities section
Shows up as a negative $10 in working capital changes
Demonstrates how an increase in inventory consumes cash

This example illustrates working capital’s impact on cash flow, a crucial concept in banking.”

Valuation Questions

3. “Walk me through a DCF model step by step.”

Comprehensive Answer:
“I’ll provide a detailed walkthrough of a DCF model:

Step 1: Project Free Cash Flows

Start with historical financial statements (typically 3-5 years)
Project revenue growth based on:
Historical trends
Industry analysis
Management guidance
Market conditions
Project operating margins considering:
Historical performance
Industry benchmarks
Expected operational improvements
Calculate EBIT(1-t) for each projected year
Add back Depreciation & Amortization
Subtract Capital Expenditures
Account for Working Capital changes
Result: Unlevered Free Cash Flow projections

Step 2: Calculate Terminal Value

Usually uses either:
Exit Multiple approach: Apply a forward EBITDA multiple based on comparables
Perpetuity Growth method: Using long-term growth rate (typically 2-3%)
Terminal Value formula (Perpetuity Growth):
TV = FCFF × (1 + g) / (WACC – g)
where:
FCFF = Final year free cash flow
g = Perpetuity growth rate
WACC = Weighted average cost of capital

Step 3: Calculate WACC

Cost of Equity using CAPM:
Re = Rf + β(Rm – Rf)
Consider current risk-free rate
Use relevant beta
Apply appropriate market risk premium
Cost of Debt:
Use current yield on company’s bonds
Consider tax shield benefit
Weight based on target capital structure

Step 4: Discount Cash Flows

Discount each projected FCF using WACC
Discount terminal value using same rate
Sum all present values

Step 5: Calculate Enterprise Value

Sum of:
PV of projected free cash flows
PV of terminal value

Step 6: Calculate Equity Value

Enterprise Value
Minus: Total Debt
Plus: Cash and Cash Equivalents
Plus/Minus: Other non-operating assets/liabilities
Equals: Equity Value

Step 7: Sensitivity Analysis

Test different scenarios for:
Growth rates
Margins
WACC
Terminal multiples
Present range of values rather than point estimate”

4. “What are the different valuation methods and when do you use each?”

Comprehensive Response:
“Let me break down the main valuation methods and their appropriate applications:

Comparable Company Analysis (Trading Multiples)

When to use:
Similar companies exist in the same industry
Need a market-based approach
Quick initial valuation required
Key multiples:
EV/EBITDA
P/E
EV/Revenue
EV/EBIT
Process:
Identify truly comparable companies
Calculate relevant multiples
Apply appropriate discounts/premiums
Consider median vs mean
Factor in growth rates and margins

Precedent Transactions Analysis

When to use:
M&A context
Similar transactions exist
Control premium consideration needed
Considerations:
Market conditions at time of deals
Strategic vs financial buyers
Transaction structure
Synergy expectations

Discounted Cash Flow Analysis

When to use:
Stable cash flows
Growth projections available
Detailed analysis needed
Variations:
Levered vs Unlevered
Different terminal value approaches
Scenario analysis

Leveraged Buyout Analysis

When to use:
PE transactions
High leverage potential
Strong cash flow generation
Key focuses:
IRR analysis
Debt paydown schedule
Exit multiple sensitivity

Asset-Based Valuation

When to use:
Asset-heavy industries
Liquidation scenarios
Real estate companies
Considerations:
Book value vs market value
Replacement cost
Liquidation value

Industry-Specific Methods
Examples:

Sum-of-the-parts for conglomerates
NAV for real estate
Reserves for mining
Price per subscriber for SaaS”

M&A and LBO Questions

5. “Walk me through a leveraged buyout model.”

Detailed Response:
“I’ll provide a comprehensive walkthrough of an LBO model:

Step 1: Sources and Uses of Funds
Sources:

Equity contribution (typically 20-40%)
Various debt tranches:
Senior secured debt
Subordinated debt
Mezzanine financing
PIK notes if needed
Uses:
Purchase price
Refinancing existing debt
Transaction fees
Working capital needs

Step 2: Develop Operating Projections

Revenue growth assumptions
Margin expansion opportunities
Working capital management
Capital expenditure requirements
Key focus on cash flow generation for debt service

Step 3: Design Capital Structure

Determine optimal leverage based on:
Company’s cash flow stability
Asset base
Industry norms
Market conditions
Structure debt tranches:
Amortization schedules
Interest rates
Covenants
Optional prepayment terms

Step 4: Model Debt Schedule

Track each debt tranche separately
Calculate interest expense
Model mandatory amortization
Include optional prepayments from excess cash flow
Consider PIK toggle options if included

Step 5: Create Financial Statements

Project full P&L, Balance Sheet, and Cash Flow
Focus on debt paydown capability
Track credit metrics:
Leverage ratios
Interest coverage
Fixed charge coverage
DSCR

Step 6: Exit Analysis

Model various exit scenarios:
Strategic sale
IPO
Secondary LBO
Apply different exit multiples
Consider timing options (typically 3-7 years)

Step 7: Returns Analysis

Calculate IRR under different scenarios
Compute cash-on-cash multiple
Analyze sensitivity to:
Entry multiple
Exit multiple
Leverage levels
Operating performance
Hold period

Step 8: Investment Considerations

Review key investment thesis elements
Identify primary value creation levers:
Operational improvement
Multiple expansion
Debt paydown
Assess key risks and mitigants”

Market and Industry Questions

6. “Tell me about a recent deal you’ve followed and what you thought about it.”

Strong Answer Framework:
“I’ll use Microsoft’s acquisition of Activision Blizzard as an example:

Deal Overview:

Announced: January 2022
Value: $69 billion all-cash transaction
Price: $95 per share
Premium: 45% to pre-announcement price

Strategic Rationale:

Gaming Industry Consolidation:

Positions Microsoft as third-largest gaming company
Expands Xbox Game Pass portfolio
Strengthens mobile gaming presence

Metaverse Strategy:

Acquires valuable IP and content
Enhances cloud gaming capabilities
Builds gaming community

Financial Analysis:

Multiple: 18x forward EBITDA
Financing: All-cash using balance sheet
Expected synergies:
Content development
Distribution efficiency
Technology integration

Regulatory Considerations:

Extended regulatory review
Competition concerns
Market concentration issues

My Analysis:

Strategic fit is strong
Premium appears justified given:
Strategic value
Growth potential
Synergy opportunities
Regulatory hurdles were significant but manageable
Long-term value creation potential through:
Content monetization
Platform integration
Mobile gaming expansion”

Behavioral Questions

7. “Walk me through your resume.”

Optimal Structure:
“Here’s how to craft a compelling 2-3 minute response:

Education (15-20 seconds):

University, degree, relevant coursework
Notable achievements
Leadership roles

Work Experience (1-1.5 minutes):

Start with most recent
For each role:
Company/role overview
Key responsibilities
Specific achievements
Skills developed
Focus on relevant experiences

Technical Skills (15-20 seconds):

Financial modeling
Software proficiency
Languages if relevant

Leadership/Activities (15-20 seconds):

Investment club activities
Relevant competitions
Professional certifications

Closing Statement (15 seconds):

Connect past experiences to banking
Express enthusiasm for role

Sample Answer:
‘I’m currently a senior at [University] studying Finance and Economics, where I maintain a 3.8 GPA and serve as President of the Investment Club. Last summer, I interned at [PE Firm], where I worked on three deals in the technology sector, including a $500M buyout of a software company. I built the initial financial model and helped conduct due diligence, which strengthened my analytical skills and confirmed my interest in banking…'”

8. “Why investment banking?”

Detailed Response Framework:
“Structure your answer around these key elements:

Intellectual Challenge (30 seconds):

Interest in complex financial analysis
Desire to work on significant transactions
Appreciation for strategic thinking

Learning Opportunity (30 seconds):

Exposure to various industries
Understanding of different transaction types
Mentorship from experienced professionals

Impact (30 seconds):

Role in major strategic decisions
Contribution to economic growth
Helping companies achieve objectives

Personal Fit (30 seconds):

Strong analytical skills
Work ethic
Team player mentality

Sample Answer:
‘I’m drawn to investment banking for several reasons. First, I’m excited by the intellectual challenge of analyzing complex transactions and developing strategic solutions for clients. During my internship at [Firm], I worked on a merger analysis that showed me how bankers combine quantitative skills with strategic thinking to solve complex problems.

Second, I value the unparalleled learning opportunity banking provides. The chance to work across various industries and deal types, while learning from experienced professionals, is exactly what I’m looking for at this stage of my career.

Finally, I’m motivated by the impact banking has on the business world. The opportunity to work on transactions that shape industries and help companies achieve their strategic goals is incredibly appealing to me.

These elements, combined with my strong analytical background and work ethic, make me confident that investment banking is the right path for me.'”