Investment banking has been one of the most lucrative career prospects for people aspiring to make a career in finance. Naturally, this invites a lot of competition and you need to stand out from the competition to be a part of any successful investment banking firm.
Investment banking training programs and courses can help you provide an extra edge by imparting a comprehensive understanding of the Investment banking industry. It also helps to provide a practical understanding of the field and how things work in the investment banking industry.
Here is a list of top 20 investment banking interview questions and answers to help you with your interview process for investment banking placements.
Q1. What are the three most important financial statements? Briefly explain their significance.
The three most important financial statements are the balance sheet, cash flow statement, and income statement. All these three financial statements help to understand and evaluate the financial standpoint of the organization. The income statement depicts the revenue and expenses of the firm and also shows the net income for a given period.
The balance sheet helps to compare the assets and liabilities of the business which are explained and categorized in detail in a balance sheet. The cash flow statement only tracks the cash transactions and focuses on cash flow from investing, operating, and financing activities.
Q2. What is the difference between cash-based accounting and accrual accounting methods?
The main difference between the cash-based and accrual accounting method is in the timing of the transactions recorded. Accrual basis account updates books as and when revenue or expenses occurs. In the case of the cash-based accounting method, revenue and expenses are recorded only when there is a cash inflow or outflow for a given transaction.
Q3. How do you calculate the weighted average cost of capital?
The weighted average cost of capital can be calculated using the following formula.
WACC = Cost of equity*Proportion of equity + Cost of debt*Proportion of debt (1-tax free rate)
It basically measures the percentage of the company’s capital taken up by each capital component and takes out an average weighted cost.
Q4. Let there be two companies X and Y. X have only equity capital and Y has a combination of debt and equity capital. Which of the two companies will have a higher weighted average cost of capital?
In this case, company X will have a higher weighted average cost of capital as the cost of debt capital is cheaper than the cost of equity capital.
Q5. Can you mention some of the mainstream methods that are used to value a company?
Some of the most commonly used valuation methods to compute a company’s value are the Discounted cash flow analysis method, the Precedent transaction analysis method, and the Comparable company analysis method.
Q6. Can you explain the discounted cash-flow analysis method?
The discounted cash flow analysis method takes into account the future cash flows of a business and calculated the present value based on that. The future cash flow projections are determined, a discount rate is set and the present value of the company is calculated on that basis.
Q7. Name some of the common multiples or ratios that are used in the valuation process.
Some of the commonly used multiples or ratios for the valuation process are listed below.
• Price/Equity
• Price/Book Value
• EV/EBIT
• EV/Revenue
• EV/EBITDA
Q8. Explain the concept of Leveraged Buyout?
A Leveraged Buyout occurs when an investor or a Company decides to use borrowed money to acquire another firm. The asset of the company being acquired is used as collateral for these borrowed funds.
Q9. How do you calculate the enterprise value?
The enterprise value can be easily calculated using the formula mentioned below.
Enterprise Value = Market value of equity + + minority interest + debt + preferred stock – cash amount.
Q10. What does a negative enterprise value signify?
A company can have a negative enterprise value in three of the following scenarios:
• Low market capitalization
• Large cash balance
• Both
Q11. How does revenue synergy benefit companies?
Revenue synergies can benefits companies by helping them cross-sell products to a new customer base and also to sell new products to customers. It helps companies to efficiently expand across new geographies and locations.
Q12. Explain the process of goodwill creation in an acquisition?
The goodwill of any organization is a mixture of brand name, intellectual property rights, customer relationship, etc. It signifies the additional value over the fair market value of an organization. During an acquisition, the company has access to all the intangible and tangible asset of the other organization including their goodwill generate.
Q13. What are the contents of a pitch book?
The contents of a pitch book are subjective and contingent upon the type of deal the company is pitching for; some of the common content includes the following:
• Bank credentials to prove competency in the deal
• List of the firm’s options
• Appropriate financial models and valuation methods
• Financial carts and other relevant data
• Potential acquisition target companies
• Key recommendations and summary of the pitch
Q14. What do you understand by convexity in the yield context?
Convexity measures the relationship between the yield and price variations in bonds in relation to changes in interest rate. It is used as a risk calculation strategy because it shows how a bond yield will respond to changes in the interest rate.
Q15. Why do private equity firms use leverage while buying companies?
TO finance the purchase price of a company and reduce the equity amount to process the deal, leverage or debt is used by private equity firms. It will eventually lead to an increase in the firm’s rate of return.
Q16. Explain beta in context to risk.
Beta helps to assess the degree of an asset’s non-diversifiable (systematic) risk. For example, if a company’s beta value is equal to 1 then it is considered as risky as the overall stock market and will reflect the same level of loss and gains.
Q17. How to value firms that have negative historical cash flow data?
An appropriate method to value firms with negative historical cash flow data is by using the Discounted Cash Flow Method.
Q18. What do you understand by Monetary Policy?
Monetary policy can be explained as a method used by the central bank of the nation to control the flow of money in the economy. The interest rate is used as a tool to control the supply of money and achieve desirable output for macroeconomic gains.
Q19. When is a deferred tax asset created?
A deferred tax asset situation arises when a company has paid more tax to the taxation authority than it has shown on the income statement.
Q20. What drives you to be an investment banker?
A subjective answer is required here.
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