Top 40 Investment Banking Interview Questions and Answers

Table of Contents

Investment banking deals with raising money for companies, governments, and other entities. Underwriting Debt and equity securities for all types of corporations is part of investment banking activities. Investment bankers plan and manage the financial aspects of projects.

Interviews trigger nervousness, but ultimately, they decide whether the candidate is suitable for the job.

A candidate has to answer many kinds of Investment Banking Interview Questions to qualify.

I. Background as Investment Banking Interview Questions

Walk me through your Resume

I am an investment banker specializing in providing investment strategies for opportunities within the alternative energy, automotive, and utility industries. During my internship, I made a track record of maximizing portfolio growth and profitability by evaluating competitive advantages and identifying long-term market potential.

II. Career Choices as Investment Banking Interview Questions

Why Investment banking?

I chose investment banking because a career in finance isn’t about money; it is an intellectually stimulating field that is rewarding in the long term. This option allows me to grow as a professional and person.

III. Job-related interview questions as Investment Banking Interview Questions

What qualities do you need to become a successful Investment banker?

A successful Investment banker should have :

Quantitative/ Analytical Skills
Attentive towards detail
Good Work ethics
Good Communication Skills
Ability to manage multiple project deadlines
Time Management
Creative Thinking Ability

IV. Personal Suitability as Investment Banking Interview Questions

Why should we hire you?

As a fresher, I have a lot of knowledge in theoretical areas, but now I need a platform to implement my expertise in the real world and practice areas. Apart from that I have ideas which can make your company more reputed.

V. Technical Questions as Investment Banking Interview Questions

Mention the three financial Statements.

Income Statement
Balance Sheet
Cash Flow Statement

6 How can a company be valued?

There are two ways.

Intrinsic Valuations note a company’s value based on its estimated cash flows. No comparison is made with other firms. This method helps investors estimate the amount of money they might make from an investment after adjusting for the value of money.

The relative Valuation method entails identifying a comparable peer group of companies with similar operational, growth, risks, and return on capital characteristics.

Determine relevant industry multiples, find the median, and multiply it by the target company’s relevant operating statistic.

7 How can we calculate the cost of equity?

We can calculate the cost of equity (CAPM) model’s help. It associates a security’s predicted return with its sensitivity to the market basket.

Formula

Equity Cost = Risk-Free Rate + Beta * Equity Risk Premium

How can we calculate Enterprise Value?

Equity Value + Preferred Stock+ Noncontrolling Interest – subtracting Cash.

8 What is DCF?

The Discounted Cash Flow (DCF) calculates an investment’s value based on anticipated future cash flows. It evaluates the current value of an asset based on projected future earnings.

9 How can we calculate the Acquisition premium?

We can calculate by determining the difference between the amount paid per share for the firm and the current stock price and further dividing it by the current stock value to get a percentage.

Acquisition Premium= (DP-SP)/SP

DP = Deal Price per share

SP = Current Price per share

10 What is Terminal Value, and how can we calculate it?

The value of a firm, project, or asset after the period for which future cash flows can be predicted is known as its terminal value.

It assumes a company will continue to expand at a specific pace indefinitely after the projected period. A portion of the total assessed value is frequently called terminal value.

[FCF*(1+G)] / (D-G)

FCF refers to Free cash flow for the last forecast period

G refers to the Terminal growth rate

D refers to the Discount rate.

11 What is WACC? How can we calculate?

WAAC ( Weighted Average Cost of Capital) is the typical cost businesses incur while financing capital assets, which is measured by it.

Long-term liabilities and debts businesses issue to stakeholders and capital investors can be included in capital costs.

It considers the weighted average of the capital source for which a corporation is obligated.

WACC= (E/V* Re) + Rd *(1-T))

Here,

E is Equity market value

R is Equity cost

D is Debt market value

V is the sum of the equity and debt market values

Rd is debt cost

TC is the current tax rate for corporations

12 Mention the significant items in shareholders’ equity.

Common Stock
Retained Earnings
Treasury Stock
Additional Paid in Capital

13 What is Monetary Policy?

It is a method by which the government, or Central Bank, of a country, controls the supply of money.

14 What is Money Laundering?

It is the process of creating the appearance that a large chunk of money is obtained from criminal activity.

15 What % of dilution in Equity Value is too high?

Anything over 10% is not good. Double-check your numbers if the basic value is $200 million.

16 What is a deferred tax asset?

These are resources that can be utilized for future tax reduction. It indicates that the company has overpaid taxes or paid in advance. It may anticipate recovering those funds in the future.

17 What are the main components of WACC (Weighted Average Cost of Capital)?

There are three main components.

1. Debt, Equity, Tax, Beta

2. Debt or Equity- Which one is cheaper?

3. Debt.

18 Why is Debt cheaper?

It is paid before equity.

19 Mention the average Price/Earnings PE ratio for the S &P 500 index.

About 15-20 times. It varies by industry and period in the cycle.

20 Enterprise value vs Equity value?

Enterprise Value is the current value of the company. On the other hand, equity value refers to the value of the company’s shares and loans.

21 Explain EBITDA.

EBITDA is Earnings before interest, taxes, depreciation, and amortization. It measures financial performance, and it determines a company’s earning potential.

22 What is the discount rate in an unleveled DCF analysis?

It is the required rate of return of both Debt and equity. It should be the weighted average cost of capital (WACC).

23 What is Beta?

It is a measurement of the volatility of a security or portfolio against its benchmark. This value signifies how much a stock price jumps around.

24 What is net working capital?

Net working capital is how much money a company has if it pays off all short-term debts.

NWC= Current Assets – Current Liabilities

25 What is an IPO?

It is an initial public offering. It helps companies raise capital and allows investors, original owners, and employees to cash out some of their investments.

26 Mention the factors that cause a need for mergers and acquisitions.

Saving money
Improves the financial health and overall metrics
Eliminates competition from the market
Gains extra power over pricing by buying out a distributor or supplier
Diversifies or specializes
Expansion of technological abilities

27 Differentiate between Cash-based and accrual accounting.

The Cash-based is revenue and expenses when Cash is received or paid out.

Accrual accounting identifies revenue when collection is reasonably specific and expenses when incurred instead of paid out in Cash.

28 What are Mergers and Acquisitions?

Mergers and Acquisitions are the consolidation of companies or assets.

29 Explain SWAP

The difference in interest rates on loans between 2 currencies is a SWAP.

30 What is Fixed-interest investment?

It is a long-term debt security. It promises a return on all investments at their maturity rate.

31 Explain Leveraged Buyout.

The borrowed money is used to buy or invest the money in another firm.

32 What affects the health of a stock portfolio?

Health depends upon its constituents and the correlation between them.

33 Mention the three primary valuation methodologies.

Comparable company analysis
Precedent transaction analysis
Discounted cash flow analysis.

34 What is Goodwill?

It is an intangible asset. It reflects the value of a company from its other assets and obligations.

35 How can we calculate Goodwill?

We can calculate by subtracting book value from the equity purchase price paid for the company’s share.

36 What is a good financial model?

It identifies all the essential drivers of the business. It is accurate and precise.

37 What happens when the two companies merge?

Capabilities increase
Gains a competitive advantage over a larger market share
Diversifies products or services
Cost cutting

38 What is the reason for subtracting Cash from the enterprise value formula?

It is considered a non-operating asset. Equity value includes it.

39 How can we calculate the cost of equity?

The cost of equity can be calculated with the help of the Capital Asset Pricing Model (CAPM). It associates a security’s predicted return with its sensitivity to the market basket.

Formula

Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium

40 How can we calculate Enterprise Value?

Equity Value + Preferred Stock+ Noncontrolling Interest – subtracting Cash.

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Conclusion

Investment Banking Interview Questions provide insight into the candidate’s skills. It is essential as it helps determine the suitable candidate for a position for the company’s growth. Not just an employer, it is an excellent opportunity for a candidate to gain insight into the company, its values, and its work environment. A candidate also knows whether the company aligns with his professional growth.

FAQs

Q.1 What are Investment Banking Interview Questions?

Ans. These are a wide range of questions to face in an interview.

Q. 2 How many types of Investment Banking Interview Questions are there?

Ans. There are five types.

Q. 3 Name the types of Investment Banking Interview Questions.

Ans. Background, Suitability, Career choice, Job-related and technical

Q. 4 Which section of Investment Banking Interview Questions needs the most preparation?

Ans. Technical

Q. 5 Are interviews beneficial for a candidate?

Ans. Yes. A candidate can evaluate whether the company can cater to his professional growth by studying the company’s vision and mission.