Top 10 Investment Banking Interview Questions

Investment banking is one of the most competitive fields in finance, requiring a combination of technical expertise, analytical skills, and strong communication abilities. Candidates applying for investment banking positions must be well-prepared to answer a range of technical and behavioral questions during their interviews.

This article covers the top 10 investment banking interview questions job seekers can expect, along with explanations of how to approach them effectively.

1. Walk Me Through a DCF

The Discounted Cash Flow (DCF) model is one of the most commonly used valuation techniques in investment banking. Interviewers expect candidates to outline the basic steps:

Project future free cash flows.
Determine an appropriate discount rate (usually the Weighted Average Cost of Capital – WACC).
Calculate the present value of these cash flows.
Find the terminal value and discount it to the present value.
Sum the discounted cash flows to determine the firm’s enterprise value.

2. How Do You Value a Company?

There are multiple ways to value a company, and candidates should be familiar with at least three primary methods:

Discounted Cash Flow (DCF): Projects a firm’s future cash flows and discounts them to their present value.
Precedent Transactions: Looks at past M&A deals involving similar companies to establish a valuation range.
Comparable Company Analysis (Comps): Compares financial metrics like P/E ratios and EV/EBITDA among similar publicly traded firms.

3. Why Investment Banking?

This is a personal yet critical question that assesses a candidate’s enthusiasm and motivation for the industry. A strong answer discusses:

Passion for finance and deal-making.
Desire to work in a fast-paced environment.
Interest in company valuations, M&A, and financial modeling.

4. What Happens to Enterprise Value When Debt Increases?

Enterprise Value (EV) is calculated as:

EV = Market Capitalization + Total Debt – Cash

Since EV includes total debt, an increase in debt raises enterprise value, assuming all other factors remain constant.

5. Explain the Three Financial Statements and How They Interact

Investment banking candidates should clearly describe the balance sheet, income statement, and cash flow statement:

Income Statement: Shows a company’s revenues, expenses, and profits over a period.
Balance Sheet: Displays the company’s assets, liabilities, and shareholders’ equity at a given point in time.
Cash Flow Statement: Tracks cash inflows and outflows from operations, investing, and financing activities.

Key interactions include:

Net income from the income statement flows into retained earnings on the balance sheet.
Cash from the cash flow statement reflects balance sheet changes in working capital, capital expenditures, and financing.

6. Walk Me Through an LBO Model

A Leveraged Buyout (LBO) model involves acquiring a company using significant amounts of debt and financing the purchase with a mix of equity and borrowed funds. Interviewees should cover:

Making acquisition assumptions (purchase price, financing structure).
Building a sources and uses table.
Projecting financial statements and cash flows.
Calculating debt paydown and exit assumptions.
Determining investor returns via internal rate of return (IRR) and equity multiple.

7. What Are Some Common Valuation Multiples?

Multiples help compare different companies and determine valuations. Common ones include:

EV/EBITDA: Measures a firm’s value relative to its operating earnings.
P/E Ratio: Compares a company’s stock price to its earnings per share.
EV/Revenue: Useful for high-growth companies not yet profitable.

8. What Is Working Capital and Why Is It Important?

Working capital is defined as:

Working Capital = Current Assets – Current Liabilities

This metric is crucial as it represents a company’s ability to cover short-term obligations. Positive working capital indicates liquidity, while negative working capital could signal financial distress.