Investment Banking Case Studies: What to Expect, and How Not to Choke
If you’ve ever interviewed in Europe, you might have lingering nightmares about case studies in interviews and at assessment centers.
But the contagion is spreading!
Over the years, more students and professionals at all levels – in all regions – have been receiving case studies and modeling tests as part of the interview process.
If you approach them incorrectly, they could sink your chances.
But if you do them correctly, they might be the difference between “Offer” and never hearing back from the bank:
Types of Case Studies
You can divide case studies according to two main categories:
- Type: Qualitative or quantitative. Do you read information and make a recommendation, or do you build a model and calculate numbers?
- Time: Do you have 5 minutes? 30 minutes? 2 hours? 1 week? Shorter case studies are “speed tests,” while longer ones are more about your thought process and presentation skills.
For investment banking, specifically, these types of case studies are most common:
- 3-Statement Models – You might receive a company’s financial statements in Excel and then get 20-30 minutes, up to 2-3 hours, depending on the complexity, to build a 3-statement projection model for the company.
- Qualitative M&A Discussions – Should Company A acquire Company B, C, or D? What are the key deal issues that might come up? Sometimes you’ll have to back up your reasoning with simple calculations, but you’ll rarely build complex merger models due to time constraints.
- Financing Discussions – Should Company A raise Debt or Equity to fund its planned acquisition or expansion? You can’t make this type of recommendation without looking at the numbers, so these case studies will be more quantitative.
LBO case studies are possible, but more likely for experienced candidates.
I haven’t seen that many examples of time-pressured valuation/DCF-based case studies. They tend to be more common in investment banking case competitions, where you work in a team and you have days or weeks to finish.
The case study I’m covering here is based on a 3-statement projection model for Illinois Tool Works [ITW], a mid-sized manufacturer.
It falls squarely in the “speed test” category since it’s a 30-minute case:
- ITW – Simple 3-Statement Case – Blank File (Excel)
- ITW – Simple 3-Statement Case – Completed File (Excel)
YouTube Tutorial and Step-by-Step Walkthrough:
What Are They Looking For?
Bankers do not expect perfection with any of these tests.
In fact, standards are quite low because most people do not even finish!
Interviewers want to verify that you understand the basics and have a strong enough foundation to learn more.
The biggest mistakes in time-pressured cases studies include:
- Over-Thinking or Over-Complicating the Assumptions – You are completing a speed test, which means you have to go against your perfectionist/OCD tendencies.
- Not Understanding the Type of Case Study – Many people attempt to turn qualitative cases into quantitative ones, or vice versa.
- Not Finishing – If you don’t finish, you won’t be able to answer follow-up questions or present your findings. So, if you get a modeling case study, you better know the most common Excel shortcuts.
Take Me to the Examples and Walkthrough, Please
This case study is a bit tricky because they’ve given us some, but not all, of the assumptions:
The perfectionist/OCD way to handle that is to over-think minor details, such as whether you should use an average for Days Sales Outstanding or make it increase gradually over time.
The correct way to handle that is to make a quick decision and move on, so you actually finish in 30 minutes.
For this case study, we recommend the following completion order:
- Fill Out All the Assumptions First – You don’t want to jump between schedules constantly if you can avoid it – each jump costs you precious time.
- Fill Out the Entire Income Statement – See above.
- Fill Out What You Can of the Balance Sheet – This approach breaks down when you get to the Balance Sheet because some BS line items depend on IS line items, but others will be linked to the CFS.
- Fill Out the Entire Cash Flow Statement – Items here are simple percentage assumptions, absolute numbers, or reflections of changes in Balance Sheet line items.
- Finish Linking the Balance Sheet – Go back and complete the items that link to CFS line items. Cash and Equity should make the Balance Sheet balance.
- Check Your Work and Answer the Questions (If You Have Time) – If the Balance Sheet doesn’t balance, you need to find the error quickly.
I’m not going to do a step-by-step walkthrough with screenshots of everything because that’s better done in video format.
But I will highlight the tips and tricks you can use to finish these tests on time:
1) Don’t Enter Unnecessary Information
In time-pressured cases, every second counts. You can’t spend time entering data or formulas that are not required, or you’ll never finish.
Here’s an example:
2) If a Scenario Won’t Come Up, Don’t Build a Formula to Handle It
The perfect example of this one is the Amortization formula for the Debt:
It’s better to use a MIN formula to ensure that we never amortize more than the total remaining Debt balance.
But it’s irrelevant here because 5 * 10% = 50%, and there are no optional repayments, so that outcome is not possible; entering a MIN formula would waste precious seconds.
3) Use Beginning Balances to Avoid Circular References
Note that in this model, circular references could come up with Interest Income, but not Interest Expense, since the change in Debt is not linked to Net Income.
Still, we avoid this potential problem altogether by using the Beginning Balances to calculate the Interest Income and Interest Expense:
Using the Average Balances would be more accurate, but, at least for Interest Income, it would introduce a circular reference and make the model more unstable.
You do NOT want that in a time-pressured case because one small mistake or modification could cause a cascading series of #REF! errors throughout the model.
4) Fill Out the Entire Column First, and THEN Copy It Over
ITW’s Income Statement has 17 rows.
You could fill in the projection for each line item (Revenue, COGS, etc.), copy it across with Ctrl + R, and then move to the next row and do the same thing.
But it’s much faster if you finish the entire projected column first and then copy over that entire column:
This point might seem minor, but 5 vs. 85 keystrokes could represent 1-2 minutes of lost time, which is a lot for a 30-minute test.
5) Look at the Color Coding of Cells for Hints
If you don’t know if something should be an average or a hard-coded number, you can often look at the color coding of cells to figure it out: Black for formulas, blue for hard-coded numbers, and green for links to other worksheets.
You can enter dummy values into cells and see what font color comes up:
6) Remember the Rules for BS/CFS Links
I’ve seen a lot of mistakes with signs on the Balance Sheet.
Students often try to “figure out” if they should add or subtract when a Balance Sheet item depends on the same item in a previous year and a line item on the Cash Flow Statement.
But that’s unnecessary: If you’re linking to a Cash Flow Statement line item, and you’re on the Assets side of the BS, you subtract the CFS line item; on the L&E side, you add it.
If you know this simple rule, you can avoid headaches by minimizing the number of decisions you have to make.
7) Make Equity Your “Catch-All” If You Don’t Know Where Something Goes
You may not know what an item on the Cash Flow Statement flows into on the Balance Sheet: Where do “Other Non-Cash Items” and “Other Financing Items” go, for example?
The truth is, those items probably flow into multiple different Balance Sheet line items.
But doing that in a time-pressured test is a recipe for disaster.
If you don’t know where something goes, and especially if it’s small, non-recurring, or 0, make it flow into Equity:
There are some limits to this strategy: For example, you can’t take items that obviously flow into something else (like CapEx and Depreciation for PP&E) and link them to Equity.
But for small, non-recurring, or zeroed-out line items, this trick works well.
How Do You Improve Your Ability to Complete Case Studies?
A lot of people say, “Practice,” and I partially agree with that.
But you need deliberate practice as well.
It’s best to get actual case study examples rather than picking random companies and building models for them because:
- The focus is different. If you build models for random companies, you’ll spend a lot of time searching for data and adjusting the financial statements. But time-pressured case studies rarely, if ever, ask you to do that.
- It’s hard to “come up with” the right scenario to analyze. If you don’t pick the right company, the answers to questions such as the best acquisition candidate or Debt vs. Equity will be too easy or too difficult.
Putting It All Together: What You Need for IB Interviews
Over the past few weeks, we’ve covered topics related to the qualitative and quantitative side of interviews.
Here are the most important tasks to complete, even with extremely limited time:
- Draft Your “Story” – You need a 100-150-word outline and a 200-300-word full version.
- Outline Your 3 “Short Stories” – You can use these to answer questions about your leadership skills, work experience, challenges, failures, etc.
- Select 3 Strengths and 3 Weaknesses – These are what you say in an interview, not your real weaknesses.
- Prepare for the Top 3 Objections Bankers Will Raise About Your Background – Compare yourself to the “Ideal Candidate” that bankers are seeking, and see where you come up short.
- Look Up 1 Deal the Bank Has Worked on Recently – You need to walk in knowing something about the bank and group, or the interview is over.
- Prepare for 1 In-Depth Deal/Market/Company Discussion – We didn’t cover this topic in this series, but previous articles on deal discussions apply.
- (If Applicable) Prepare for 2 Discussions of Your Own Deals – If you’ve had previous IB, PE, or Big 4 experience, you must to be prepared to discuss a few deals you have worked on.
- Learn as Much as You Can of the Technical Side – It’s not possible to “learn” everything in a day or a week. But you can focus on the most important concepts (accounting and valuation/DCF analysis) and get decent results even if you have limited time.
You can finish almost everything on this list, except for the last item, in 1-2 days.
None of it requires advanced math, an Ivy League degree, or connections to rich and powerful people.
So, get started – no excuses.
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