A Guide To Top Investment Banking Interview Questions & Answers

Pooja Talapatra

GGU
22 March 2023

Investment Banking interview questions generally tend to be quite technical by nature, seeking a length of calculations and analytical skills, which might seem overwhelming at first glance. Nonetheless, if you go well-prepared and are confident in all your answers, there is no way to stop you from succeeding in the interview. To help you with the same, we have prepared some of the most commonly asked interview questions for experienced and freshers in investment banking.

Before delving into the following list, it is essential to note that these are only some of the technical questions asked in an investment banking interview. Therefore, you must prepare accordingly to avoid surprises at the last moment.

Basic Investment Banking Interview Questions For Freshers

Here are some of the most common investment banking interview questions and answers for freshers.

Q1: What are the different types of financial statements, and why are they important?

Ans: There are four types of financial statements that every business requires. They are,

Balance sheets
Income statements
Cash Flow statements and
Statement of Owner’s Equity

Balance Sheet – It highlights all of a company’s assets and liabilities, including its debt, shareholder equity, and account payable.

Income Statement – It contains a detailed report of the company’s net income, over a particular period, including all its revenues and expenses.

Cash Flow Statement – All kinds of activities within an organization related to operating, investing, and financing that generates cash flow are displayed in the cash flow statement.

Statement of Owner’s Equity- Also known as a statement of shareholders’ equity, it provides information about the financial health of an organization and whether it is capable enough to meet all the required financial and operating obligations without the need for more capital.

Q2: Can you state the formula for enterprise value?

Ans: The formula used to calculate enterprise value is

EV= MC + Total Debt – C

Here, MC, or market capitalization, refers to the total amount you get when you multiply the latest stock price by the total number of outstanding shares.

Total Debt is the total amount of short-term and long-term Debt.

And C refers to the liquid assets.

Q3: What do you mean by monetary policy?

Ans: Monetary policy can be defined as a method used by a country’s government or central bank to control the money supply. It refers to the availability of money as well as the rate of interest contributing towards the growth and stability of the economy.

Q4: What is EBITDA?

Ans: EBITDA is primarily used to measure the financial performance of a company and also to evaluate the said company’s earning potential. It stands for earning before interest, taxes, depreciation, and amortization.

Q5: Can you state the definition of deferred tax asset?

Ans: Deferred tax asset is created when a business pays more tax to the IRS than what is already reported on its income statement. It is usually done by calculating the net operating losses and differences in revenue recognition.

Q6: What are some of the possible reasons for the merging of two companies?

Ans: Some of the important reasons behind the merger of the two companies include

To gain a competitive advantage over the larger market share
To diversify their products and services
To enhance the cost-cutting of the merged entity
To increase their capabilities.

Q7: What are the three main ways to value a company?

Ans: The valuation of a company is typically done using three methods, namely, discounted cash flow analysis, comparable company analysis, and precedent transaction analysis

Compatible company analysis refers to the process of identifying organizations that are similar to the company whose value you wish to determine and then comparing its important variables, such as price to earnings, and EBITDA, among others.

Slightly similar to comparable company analysis, precedent transaction analysis refers to the process of finding how much similar enterprises have sold to accurately estimate the worth of the company you wish to value.

Lastly, discounted cash flow analysis is the estimation of how much the said company is projected to make in future years, discounted to its present values.

Q8: What do we mean by Beta? Why is it considered the best to use Unlevered Beta?

Ans: Beta can be described as a volatility estimate of security as compared to the overall market. The baseline for the same is 1.0, meaning that anything exceeding 1.0 is considered highly volatile and thus can hold inherent risk.

Unlevered Beta is usually preferred for comparing a company’s overall market performance, since no Debt is considered under Unlevered Beta, thus allowing individuals to check the volatility of a company’s equity alone.

Investment Banking Questions For Experienced

The following list contains some of the most commonly asked investment banking interview questions and answers for experienced candidates.

Q9: Can you state some of the possible scenarios when an organization might issue debt instead of equity?

Ans: Debt is considered to be a much less risky and cheaper source of financing when compared to issuing equity. Some instances when an organization might issue debt instead of equity include

When the company’s income is taxable, issuing debt gives the advantage of tax shields.
When an enterprise has a steady cash flow and is able to reap its interest payments.

Furthermore, another reason for issuing debt instead of equity is that the former generates a much lower cost of capital than the latter.

Q10: How do you calculate WACC, and what are its main components?

Ans: The formula for calculating WACC goes as follows,

WACC= [(E/V)* Re] + [(D/V) * Rd * (1-Tc)]

Here,

E refers to the equity value

V is the sum of debt market values and equity

Re refers to the equity cost

D is the debt market value

Rd refers to the debt cost

Tc is the current tax rate for corporations.

There are four main WACC components: Debt, Tax, Equity, and Beta.

Q12: Between the cost of debt and the cost of equity, which one do you think is cheaper?

Ans: Cost of equity is the rate of return that a company pays out to shareholders, as a compensation for the various risks that they usually undertake, by investing their capital. On the other hand, the cost of debt can be described as a fixed estimated amount bondholders/debtholders are provided by the company, in return for their investment.

Q13: What are some of the characteristics of a good financial model?

Ans: Designing a financial model requires a lot of practice and hard work. The following attributes can best describe ideal financial models

Should be clearly laid out
Should be accurate and precise
Should be able to identify all the key drivers of business
Should be accompanied by an in-built sensitive analysis and error checking.

Q14: What do we mean by leveraged buyout?

Ans: In its strictest sense, leverage buyout is a term used to describe the use of money for buying or investing in another firm. In some scenarios, the ratio of Debt to equity can reach up to 90-10.

Q15: What do we mean by money laundering?

Ans: Money laundering can be described as creating the appearance that large amounts of money obtained through illegal activities such as drug trafficking have originated from a legitimate source. There are typically three main steps involved in the process of laundering money. They are namely,

Placement- When the ‘dirty money’ is secretly integrated into the legitimate financial system
Layering- When the actual source is kept hidden with the help of transactions or bookkeeping tricks
Integration- When the laundered money is withdrawn from the legitimate account by the offender, to be used for their benefits.

Conclusion

With this, we come to an end with the interview questions for investment banking. When appearing for an interview round for any job role, displaying confidence in your answers is crucial. The best way to achieve this is by thoroughly scrutinizing every possible question you can find online about that particular position. You can also look for suitable courses that will enhance your knowledge and skill set in that field. Highlighting one such degree in your resume will indeed be a great way to gain a competitive edge over the other candidates.

On that note, Golden Gate University brings you its Master Of Business Administration program. This 15 months duration program is specifically designed for working professionals and comes with numerous advantages such as high-performance career coaching, 1:1 mentorship sessions, resume and profile building tools, and the exclusive opportunity to avail of a 70% scholarship. It offers five main concentrations: Adaptive Leadership, General, Marketing, Business Analytics, and Finance, enabling learners to upskill in their field of interest.

FAQs

Q1: How do I prepare for my investment banking interview?

Ans: Here are some tips and tricks that will help you ace your investment interview round

Familiarize yourself with the interview process and timeline
Conduct thorough research on your target firm
Look for some of the most commonly asked questions
Conduct mock interviews

Q2: What are things that you should never say in an investment banking interview?

Ans: The finance sector, especially banks, is always searching for candidates who are driven or display ambitious energy. Therefore, it is advisable to frame answers to all personality-related questions to highlight both of these qualities. Never say that you are not ambitious enough since it will result in a negative impression of you in the recruiter’s mind, thus nullifying your chances of landing the job position.

Q3: What are some of the skills required to be an investment banker?

Ans: You must possess the qualities below to emerge as a successful leader, you must possess the qualities below.