Investment Banking Interview Questions and Answers: The Definitive Guide
If you ever Google “investment banking interview questions and answers”, you could easily find yourself depressed.
There are endless books, articles and message board threads where people complain about unfair interviews, and horror stories about “bad cop” interviewers.
At first glance, it might seem like the interview preparation process is next to impossible.
But I’d suggest that everyone is over-complicating it.
Investment banking interviews are not rocket science. In this article I’m going to unpack every type of question you’re likely to face in banking interviews (and how to answer them).
Table Of Contents:
- Intelligent Preparation For Interview Questions
- Question Category 1: Telling Your Story
- Question Category 2: “Fit” Questions
- Question Category 3: Deals, Markets, and Companies
- Question Category 4: Technical Questions
- What NOT to Worry About: Brain Teasers and Questions to Ask
- Associate Interview Questions
- What Next?
Intelligent Preparation For Interview Questions
First, note that this article is about interview questions – not the overall process, how to win interviews, or what to do before and after the interviews.
Second, I’m going to link and refer back to our existing coverage for many of these questions since the most important ones have dedicated articles on this site.
The key preparation point is this: Rather than memorizing 541,763 questions and answers, you should focus on the main question categories and make sure that you have stories and examples prepared for them.
There are only four main question categories, and you can prepare for 3 / 4 of them in 1-2 days (or less).
The last category – technical questions – will take more time and effort, but you can save time by focusing on the right topics and ignoring the fluff.
Interview Question Category 1: Telling Your Story
There is only one question in this category, though it may be phrased in different ways:
- “Tell me about yourself.”
- “Walk me through your resume.”
- “Why are you here today?”
- “Tell me about your experience.”
Each of these phrases should trigger the “story reflex” in your brain and set your 200-300-word pitch into motion.
This question is the single most important one in any interview, so if you do nothing else to prepare, please take 30-60 minutes to outline your story!
Sample Questions and Answers:
I’ve already listed the main question variations above.
For sample answers, here are a few examples of how you can answer this question like a pro, taken from our article on how to answer the “Walk me through your resume” question:
- Engineer or Technical Major to IB (Word)
- Engineer or Technical Major to IB (PDF)
- Big 4/Accounting to IB (Word)
- Big 4/Accounting to IB (PDF)
Interview Question Category 1: “Fit” Questions
This category includes questions such as:
- “What’s your greatest strength?”
- “What’s your greatest failure?”
- “Tell me about a team activity that did not go as planned.”
- “Why is your GPA on the low side?”
All questions that are not related to your story, deal/market/company discussions, and technical concepts are in this category.
You can get a wide range of questions here, but you don’t need to memorize a wide range of answers – just come up with 2-3 examples that you can recycle for everything.
We explain how to do that in the article on investment banking fit questions, but in short:
First, you should outline 3 “short stories” – a leadership story, a “success” story, and a “failure” story. These should come from your work experience, but 1-2 can be from school if you’re an undergrad or recent grad.
Next, you should select 3 strengths and 3 weaknesses based on what bankers want to see (hard work, drive, ability to work long hours, attention to detail, financial skills, leadership, etc.).
Possible, not-completely-terrible weaknesses might include your inability to delegate tasks well, second-guessing yourself when making decisions, not managing your time well, or not always speaking up when a teammate has made a mistake.
Finally, you should prepare for the key objections that bankers will raise about your background: Did you not attend top universities? Are your grades on the low side? Do you not have much work experience? Are you too old? Did you not major in something technical? Are you a job hopper?
Compare yourself to the ideal candidate and pinpoint how you’re different.
Once you’ve done that, you can practice with these questions:
Sample Questions and Answers:
QUESTION: “What’s your greatest strength, and what’s your greatest weakness?”
ANSWER: Your greatest strength should be easy (see the list above – pick one and support it with a quick story). For your greatest weakness, pick one that’s “real,” but not too damaging for the role.
For example, don’t say you can’t delegate tasks well at the Associate level since you’ll have to do that all the time, especially as you advance.
If you say that you take too long to make decisions, state it and then back it up with your “failure” story such as how it took you too long to remove a team member who wasn’t contributing because you didn’t want to start a conflict – but that slow action ended up hurting the team.
QUESTION: “What feedback did you receive from your most recent internship or job?”
ANSWER: This one is a combined strengths/weaknesses question. It will be almost impossible to describe your 3 strengths and 3 weaknesses in 30-60 seconds, so pick 1 in each category and give a quick story to support it.
For example, you worked long hours and finished a last-minute task for a pending deal in your internship, which resulted in a successful close, but you could have been more proactive when following up on assignments and asking for the next steps.
QUESTION: “Can you describe a team situation where you worked with a difficult team member?”
ANSWER: You could use any of your 3 short stories here, depending on what they’re about.
You just have to say that a person in the group didn’t want to do the work, or wanted to do something unethical, or was competent but couldn’t get along with others.
Then, you convinced the others to side with you – and you gave this difficult team member something that wouldn’t sink the project to prevent further conflicts while still finishing the task.
QUESTION: “You have no investment banking experience. Why do you think your skills are relevant to this industry?”
ANSWER: Start by stating, briefly, the skills that are required for investment banking (see the article on investment banking analyst roles), and then explain how your previous work experience has given you similar skills.
For example, you can point out how you’ve worked with clients in previous jobs, how you’ve had to work long hours and complete analytical/technical tasks, and how you’ve learned about accounting and finance in classes.
QUESTION: “You already have two years of work experience. Why couldn’t you get into banking as an undergrad? Were you a failed candidate?”
ANSWER: No! Even if it’s true, never admit this.
You can answer this one by saying that you got interested in banking very late in the process, when it was too late to get the required sequence of internships (plausible if you went to a non-target school; not believable if you went to Harvard or Wharton).
Or, you could say that you knew about banking but deliberately chose something else – but then you realized you should have done banking, so you’ve been working toward it from the start of your full-time role (it’s much tougher to make this story work).
You must be clear that you didn’t “just” get interested in IB – you’ve been interested for a long time, and you completed specific client work/jobs to move closer over time.
QUESTION: “You’ve changed jobs twice in the past two years, and now you’re trying to switch once again. How do I know you won’t just leave our firm next year?”
ANSWER: Emphasize that you changed jobs twice because it was your original, long-term plan to do so.
You won’t change jobs yet again because investment banking was your plan all along.
For example, you started out in audit, went to a boutique valuation firm to gain client and valuation experience, and now you want to move into banking to work on the entire deal process from beginning to end.
That has been your goal since you started out in audit, but you knew you couldn’t just move directly from audit to IB.
QUESTION: “The person in the room next door has perfect grades from Harvard or Oxford. You had lower grades and went to a state school. Why should I hire you over him?”
ANSWER: Because it’s the person who does the work, not the degree. Also, point out that you had to put in far more effort to get into this room than the other person did.
You’re also motivated to stay in banking for the long term because it’s your actual end goal; almost everyone from “elite schools” wants to get into private equity ASAP, which runs contrary to the long-term commitment that banks are now trying to encourage.
QUESTION: “Can you describe what a banker does in an IPO or M&A deal?”
QUESTION: “Why investment banking?”
ANSWER: This is just the last part of your story. It shouldn’t even be a question if you’ve told your story properly. But just in case, see the “Why investment banking?” article.
QUESTION: “Why our bank, specifically?”
ANSWER: See above. If you’ve mentioned something the bank is good at in your story, it shouldn’t even be a question. But just in case, see the “Why our bank?” article.
Interview Question Category 3: Deals, Markets, and Companies
This category includes questions such as:
- “Tell me about a recent deal.”
- “Tell me about a deal our bank worked on recently.”
- “Tell me about a company you’re interested in.”
- “What makes Market X interesting to you?”
These questions are not that important unless you’ve had extensive deal experience that the interviewers plan to dig into – but they do require extra research and preparation.
We recommend the following steps:
- Look Up 1 Deal the Bank Has Worked on Recently – Find something from the past ~6 months on the bank’s website or via Google searches. Outline the background, deal rationale, 1-2 financial stats, and your opinion of it. This can be very short because you just need to show that you know something about the bank.
- Prepare for 1 In-Depth Deal/Market/Company Discussion – You should also prepare for a more in-depth discussion of a deal, and this deal does not have to be one that this bank advised on. For this, you’ll need the background information, deal rationale, a few financial stats, and your opinion of it. If they ask you to discuss a market, pick the market from this deal and make sure you know the approximate market size, key trends/drivers, major competitors, and your opinion of its prospects.
- (If Applicable) Prepare for 2 Discussions of Your Own Deals – This one is applicable only if you’ve had previous IB, PE, corporate law, or Big 4 experience where you worked on deals or with clients. You should gather the background information, deal motivation, your personal contributions, and the current status for each one you use.
Sample Questions and Answers:
There isn’t much to say here because the most common questions are listed at the top of this section.
Interview Question Category 4: Technical Questions and Answers
For this last category, I do not have any magical tips that will get you results in hours instead of weeks or months.
Put simply, you need to put in the time to study accounting, finance, valuation, and M&A and LBO modeling.
If you do not, you will not have a great chance against candidates who have spent months preparing.
We cover all these topics comprehensively in our Investment Banking Interview Guide, but you can also get good introductions to them in our YouTube channel and the articles on this site:
- Accounting Concepts
- Equity Value and Enterprise Value
- Equity Value and Enterprise Value – In Text and with a 94-Page Guide
- Valuation Metrics and Multiples
- Discounted Cash Flow (DCF) Analysis
- M&A and Merger Models
- Leveraged Buyouts and LBO Models
With limited time, focus on accounting, equity value and enterprise value, and valuation and DCF analysis. They are the most common topics, especially in entry-level interviews.
There are thousands of possible technical questions, so I will list a few representative examples in each of the main categories.
I will focus on questions and answers that you probably haven’t seen on other sites and other resources, so most of these are in the “more challenging” range:
Finance Interview Questions
“Finance” means concepts such as the Time Value of Money, the Discount Rate, Present Value, and the Internal Rate of Return (IRR).
QUESTION: “How much would you pay for a company that generates $100 of cash flow every single year into eternity?”
ANSWER: It depends on your Discount Rate, or “targeted yield.”
If your Discount Rate is 10%, meaning you could earn 10% per year in companies with similar risk/potential return profiles, you would pay $100 / 10% = $1,000.
But if your Discount Rate is 20%, you would pay $100 / 20% = $500.
QUESTION: “A company generates $200 of cash flow next year, and its cash flow is expected to grow at 4% per year for the long term.
You could earn 10% per year by investing in other, similar companies. How much would you pay for this company?”
ANSWER: Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate), where Cash Flow Growth Rate < Discount Rate.
So, this one becomes: $200 / (10% – 4%) = $3,333.
QUESTION: “What might cause a company’s Present Value (PV) to increase or decrease?”
ANSWER: A company’s PV might increase if its expected future cash flows increase, its expected future cash flows start to grow at a faster rate, or the Discount Rate decreases (e.g., because the expected returns of similar companies decrease).
The PV might decrease if the opposite happens.
QUESTION: “What does the internal rate of return (IRR) mean?”
ANSWER: The IRR is the Discount Rate at which the Net Present Value of an investment, i.e., Present Value of Cash Flows – Upfront Price, equals 0.
You can also think of it as the “effective compounded interest rate on an investment” – so, if you invest $1,000 today, end up with $2,000 in 5 years, and contribute and earn nothing in between, the IRR is the interest rate you’d have to earn on that $1,000, compounded each year, to reach $2,000 in 5 years.
Accounting Interview Questions
You don’t need to know accounting in terms of debits and credits, but you do need to know the 3 main financial statements and how they link together very well.
QUESTION: “How do the 3 financial statements link together? Assume the Indirect Method for the Cash Flow Statement.”
ANSWER: To link the statements, make Net Income at the bottom of the Income Statement the top line of the Cash Flow Statement.
Then, adjust this Net Income number for any non-cash items such as Depreciation & Amortization.
Next, reflect changes to operational Balance Sheet items such as Accounts Receivable, which may increase or decrease the company’s cash flow depending on how they’ve changed.
That gets you to Cash Flow from Operations.
Next, reflect investing and financing activities, which may increase or decrease cash flow, and sum up Cash Flow from Operations, Investing, and Financing to get the net change in cash at the bottom.
Link Cash on the Balance Sheet to the ending Cash number on the CFS, and add Net Income to Retained Earnings within Equity on the Balance Sheet.
Then, link each non-cash adjustment to the appropriate Asset or Liability; SUBTRACT links on the Assets side and ADD links on the L&E side.
Link each CFI and CFF item to the matching item on the Balance Sheet, using the same rule as above.
Check that Assets equals Liabilities + Equity at the end; if this is not true, you did something wrong and need to re-check your work.
QUESTION: “A company runs into financial distress and needs cash immediately. It sells a factory that’s listed at $100 on its Balance Sheet for $80. What happens on the 3 statements, assuming a 40% tax rate?”
ANSWER: Income Statement: Record a Loss of $20 on the Income Statement, which reduces Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate.
Cash Flow Statement: Net Income is down by $12, but you add back the $20 Loss since it’s non-cash. You also show the full proceeds, $80, in Cash Flow from Investing, so cash at the bottom is up by $88.
Balance Sheet: Cash is up by $88, but PP&E is down by $100, so the Assets side is down by $12. The L&E side is also down by $12 because Retained Earnings fell by $12 due to the Net Income decrease, so both sides balance.
QUESTION: “A company buys a factory using $100 of debt. A year passes, and the company pays 10% interest on the debt as it depreciates $10 of the factory. It repays $20 of the loan as well. Walk me through the statements from beginning to end, and assume a 40% tax rate.”
ANSWER: Initially, nothing changes on the IS. The $100 factory purchase shows up as CapEx on the CFS, and the $100 debt issuance shows up on the CFS as well, offsetting it, so Cash does not change at the bottom.
On the Balance Sheet, PP&E is up by $100, and Debt is up by $100, so both sides balance.
Then in the first year, you record $10 of interest and $10 of depreciation on the IS, reducing Pre-Tax Income by $20 and Net Income by $12 at a 40% tax rate.
On the CFS, Net Income is down by $12, but you add back the $10 of depreciation since it is non-cash, and the $20 loan repayment is a cash outflow, so Cash is down by $22.
On the BS, Cash is down by $22, and PP&E is down by $10, so the Assets side is down by $32. On the L&E side, Debt is down by $20 and Retained Earnings is down by $12, so the L&E side is down by $32 and both sides balance.
QUESTION: “What does the Change in Working Capital mean, intuitively?”
ANSWER: The Change in Working Capital tells you if the company needs to spend in advance of its growth, or if it generates more money as a result of its growth.
For example, the Change in Working Capital is usually negative for retailers because they must spend money on Inventory before being able to sell their products.
But the Change in Working Capital is often positive for subscription-based companies that collect cash in advance because Deferred Revenue increases when they do that.
The Change in Working Capital increases or decreases Free Cash Flow, which, in turn, directly affects the company’s valuation.
QUESTION: “What does it mean if a company’s Free Cash Flow is growing, but its Change in Working Capital is increasingly negative each year?”
ANSWER: It means that the company’s Net Income or non-cash charges are growing by more than its Change in WC is declining, or that its CapEx is becoming less negative (i.e., shrinking) by more than the Change in WC is declining.
If a company’s Net Income is growing for legitimate reasons, this is a positive sign. But if higher non-cash charges or artificially low CapEx are boosting FCF, both of those are negative.
Valuation Interview Questions
You need to understand the “big picture” behind valuation, how Equity Value and Enterprise Value differ, and the trade-offs of different multiples and methodologies.
Questions like “How do you value a company?” or “Tell me the 3 basic valuation methodologies” are so basic that banks almost assume you already know them.
QUESTION: “What do Equity Value and Enterprise Value mean, intuitively?”
ANSWER: Equity Value is the value of ALL the company’s Assets, but only to EQUITY INVESTORS (common shareholders).
Enterprise Value is the value of only the company’s core-business Assets, but to ALL INVESTORS (Equity, Debt, Preferred, and possibly others).
For more, please see our tutorial on how to calculate Enterprise Value.
QUESTION: “A company issues $200 million in new shares, and then it uses $100 million from the proceeds to issue Dividends to shareholders. How do Equity value and Enterprise Value change in each step?”
ANSWER: Initially, Equity Value increases by $200 million because Total Assets increases by $200 million and the change is attributable to common shareholders.
Enterprise Value stays the same because Cash is a non-core-business Asset; you can also say that the increases in Cash and Equity Value offset each other in the Enterprise Value formula.
In the next step, Equity Value decreases by $100 million because Cash, and therefore Total Assets, falls by $100 million and this change is attributable to common shareholders.
Enterprise Value stays the same because Cash is a non-core-business Asset, or because the reduced Cash and reduced Equity Value offset each other.
QUESTION: “What are the advantages and disadvantages of EV / EBITDA vs. EV / EBIT vs. P / E as valuation multiples?”
ANSWER: With EV / EBITDA vs. EV / EBIT, EV / EBITDA is better in cases when you want to completely exclude the company’s CapEx, Depreciation, and capital structure.
EV / EBIT is better when you want to exclude capital structure but partially factor in CapEx and Depreciation. It is common in industries where those items are key value drivers for companies (e.g., manufacturing).
The P / E multiple is not terribly useful in most cases because it’s affected by different tax rates, capital structures, non-core-business activities, and more – so, you often use it in the interest of “completeness” or because you want a multiple that reflects a company’s true bottom line.
Also, it’s important in industries such as commercial banking and insurance where you do need to factor in the interest income and expense.
QUESTION: “Which of the main 3 valuation methodologies will produce the highest valuations?”
ANSWER: Any methodology could produce the highest valuations depending on the industry, period, and assumptions.
But you can say that Precedent Transactions often produce higher values than the Public Comps because of the control premium – the extra amount that acquirers must pay to acquire sellers.
It’s tough to say how a DCF stacks up because it’s far more dependent on the assumptions and far-in-the-future projections.
So: “A DCF tends to produce the most variable output since it’s so dependent on the assumptions, and Precedent Transactions tend to produce higher values than the Public Comps because of the control premium.”
QUESTION: “How might you select a set of comparable public companies for use in a valuation?”
ANSWER: You screen based on geography, industry, and size. For example, your screen might be “U.S.-based steel manufacturing companies with over $500 million in revenue” or “European legacy airlines with over €1 billion in EBITDA.”
Get more on Comparable Company Analysis in our YouTube channel.
DCF Interview Questions
The DCF is “real valuation”; multiples are just abbreviated ways to express it.
So, you can expect questions on everything from the basic idea to a walk-through to the Discount Rate and Terminal Value calculations.
QUESTION: “Explain the big idea behind a DCF analysis and how it is used to value a company.”
ANSWER: A DCF is an expansion of this formula:
Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate), where Cash Flow Growth Rate < Discount Rate
The problem is that that formula assumes the company’s Discount Rate and Cash Flow Growth Rate never change – but in real life, they keep changing until the company reaches maturity.
So, in a Discounted Cash Flow analysis, you divide the valuation into two periods: One where those assumptions change (the explicit forecast period) and one where they stay the same (the Terminal Period).
You then project the company’s cash flows in both periods and discount them to their Present Values based on the appropriate Discount Rate(s).
Then, you compare this sum – the company’s Implied Value – to the company’s Current Value or “Asking Price” to see if it’s valued appropriately.
QUESTION: “Walk me through an Unlevered DCF.”
ANSWER: You start by projecting the company’s Unlevered Free Cash Flows over the next 5-10 years by making assumptions for revenue growth, margins, Working Capital, and CapEx.
Unlevered FCF excludes all financing and non-core-business activities and equals EBIT * (1 – Tax Rate) + D&A +/- Change in Working Capital – CapEx.
Then, you discount the UFCFs to Present Value using the Weighted Average Cost of Capital and sum up everything.
Next, you estimate the company’s Terminal Value using the Multiples Method or the Gordon Growth Method; it represents the company’s value after those first 5-10 years into perpetuity.
You then discount the Terminal Value to Present Value using WACC and add it to the sum of the company’s discounted UFCFs.
Finally, you compare this Implied Enterprise Value to the company’s Current Enterprise Value; you’ll often calculate the company’s Implied Share Price so you can compare that to the Current Share Price as well.
Get more on Unlevered Free Cash Flow in our YouTube channel.
QUESTION: “Explain what WACC means intuitively and how you might calculate each component of it.”
ANSWER: WACC is the expected annualized return over the long term if you invest proportionately in all parts of the company’s capital structure – Debt, Equity, Preferred Stock, and anything else it has.
To a company, WACC represents the cost of funding its operations by using all its sources of capital and keeping its capital structure percentages the same over time. The formula is simple:
WACC = Cost of Equity * % Equity + Cost of Debt * (1 – Tax Rate) * % Debt + Cost of Preferred Stock * % Preferred Stock
You usually estimate the Cost of Equity with Risk-Free Rate + Equity Risk Premium * Levered Beta.
The Cost of Debt and Cost of Preferred can be based on the Yield to Maturity (YTM) of the current issuances, the median rates or YTMs on the issuances of peer companies, or you can take the Risk-Free Rate and add a default spread based on the company’s credit rating after it issues more Debt or Preferred.
QUESTION: “A company goes from 20% Debt / Total Capital to 30% Debt / Total Capital. How do its Cost of Equity, Cost of Debt, and WACC change? Assume it only has Debt and Equity.”
ANSWER: As a company uses more Debt, the Cost of Debt and Cost of Equity always increase because more Debt increases the risk of bankruptcy, which affects all investors.
As the company goes from no Debt to some Debt, WACC decreases at first because Debt is cheaper than Equity, but it starts to increase at higher levels of Debt as the risk of bankruptcy starts to outweigh the lower Cost of Debt.
In this case, we can’t tell how WACC will change because we don’t know where we are on this “curve” – but we guess that WACC will likely decrease because 30% Debt / Total Capital is still in a fairly low/normal range for most industries.
QUESTION: “How do you calculate and sanity check Terminal Value in a DCF?”
ANSWER: You apply a Terminal Multiple, such as an EV / EBITDA figure based on the comparable companies, to EBITDA in the final year of the forecast period, or you pick a Terminal FCF Growth Rate and use a variation of the “Company Value” formula:
Terminal Value = Final Year FCF * (1 + Terminal FCF Growth Rate) / (Discount Rate – Terminal FCF Growth Rate)
To check yourself, back into the Terminal FCF Growth Rate implied by the first method and the Terminal Multiple implied by the second method.
If you get, say, a 10% Implied Terminal FCF Growth Rate for a company in a developed country, you’re way off and need to pick a lower multiple that results in a growth rate below the long-term GDP growth rate.
M&A and Merger Model Interview Questions
These questions are less important than those in the other technical categories above, but you should still know the basic concepts. We have a full YouTube video tutorial on these questions:
- Merger Model Interview Questions – Slide Format
- Merger Model Interview Questions – Sample Excel File
But if you prefer the text version, here’s a sample:
QUESTION: “Walk me through a merger model.”
ANSWER: Start by projecting the financial statements of the Buyer and Seller. Then, you estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the deal. You create a Sources & Uses schedule and Purchase Price Allocation schedule to estimate the true cost of the acquisition and its effects.
Then, you combine the Balance Sheets of the Buyer and Seller, reflecting the Cash, Debt, and Stock used, new Goodwill created, and any write-ups. You then combine the Income Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and synergies. If Debt or Cash changes over time, the Interest figures should also change.
The Combined Net Income equals the Combined Pre-Tax Income times (1 – Buyer’s Tax Rate), and you divide that by (Buyer’s Existing Share Count + New Shares Issued in the Deal) to get the Combined EPS.
You calculate the accretion/dilution by dividing the Combined EPS by the Buyer’s standalone EPS and subtracting 1.
QUESTION: “A company with a P / E multiple of 25x acquires another company for a purchase P / E multiple of 15x. Will the deal be accretive or dilutive?”
ANSWER: You can’t tell unless it’s a 100% Stock deal. If it is, it will be accretive because the Cost of Acquisition is 1 / 25, or 4%, and the Seller’s Yield is 1 / 15, or 6.7%. Since the Seller’s Yield is higher, it will be accretive.
QUESTION: “Let’s say it is a 100% Stock deal. The Buyer has 10 shares at a share price of $25.00, and its Net Income is $10. It acquires the Seller for a Purchase Equity Value of $150. The Seller has a Net Income of $10 as well. Assume the same tax rates for both companies. How accretive is this deal?”
ANSWER: The buyer’s EPS is $10 / 10 = $1.00. It must issue $150 / $25.00 = 6 additional shares to do the deal, so the Combined Share Count is 10 + 6 = 16.
Since both companies have the same tax rate and since no Cash or Debt is used, Combined Net Income = $10 + $10 = $20, and Combined EPS = $20 / 16 = $1.25, so the deal is 25% accretive.
QUESTION: “What are the Combined Equity Value and Enterprise Value in this same deal? Assume that Equity Value = Enterprise Value for both the Buyer and Seller.”
ANSWER: Combined Equity Value = Buyer’s Equity Value + Value of Stock Issued in the Deal = $250 + $150 = $400.
Combined Enterprise Value = Buyer’s Enterprise Value + Purchase Enterprise Value of Seller = $250 + $150 = $400.
QUESTION: “Without doing any math, what ranges would you expect for the Combined EV / EBITDA and P / E multiples, and why?”
ANSWER: They should be somewhere in between the Buyer’s multiples and the Seller’s purchase multiples. It’s almost never a simple average because of the relative sizes of the Buyer and Seller – and for P / E multiples, the purchase method also plays a role.
LBO Model Interview Questions and Answers
These questions are also less important than the ones in the categories above, but you’ll still be expected to know the big picture behind LBOs. We also have a full YouTube tutorial for these:
To understand the main ideas and mechanics, also check our our tutorial on how to build a simple LBO model.
And if you prefer the questions and answers in text, here’s a sample:
QUESTION: “Walk me through a leveraged buyout model.”
ANSWER: In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it. The math works because leverage amplifies returns; the PE firm earns a higher return if the deal goes well because it uses less of its own money upfront (and it earns an even lower return if the deal goes poorly!).
In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins.
In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm.
In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill (see our tutorial for more on how to calculate Goodwill).
In Step 4, you project the company’s statements, or at least its cash flow, and determine how much Debt it repays each year.
Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the IRR and cash-on-cash multiple.
QUESTION: “What’s an ideal LBO candidate?”
ANSWER: Price is the most important factor because almost any deal could work at the right price (i.e., one that’s low enough) – but if the price is too high, the chances of failure increase substantially.
Beyond that, stable and predictable cash flows are important, there shouldn’t be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion.
QUESTION: “A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt.
The company’s EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What’s the IRR?”
ANSWER: Initial Investor Equity = $100 million * 10 * 40% = $400 million.
Exit Enterprise Value = $150 million * 9 = $1,350 million.
Debt Remaining Upon Exit = $600 million – $250 million = $350 million.
Exit Equity Proceeds = $1,350 million – $350 million = $1 billion.
This represents a 2.5x multiple over 5 years, and you should know that a 2x multiple over 5 years is a ~15% IRR, while a 3x multiple is a ~25% IRR, so this IRR is approximately 20%.
QUESTION: “You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA.
You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?”
ANSWER: Initial Investor Equity = $100 * 10 * 50% = $500.
20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%).
Required Exit Equity Proceeds = $500 * 2.5 = $1,250.
Remaining Debt = $250, so Exit Enterprise Value = $1,500.
Required EBITDA = $150, since $1,500 / 10 = $150. So, EBITDA must grow by 50%.
What NOT to Worry About: Brain Teasers and Investment Banking Interview Questions to Ask
Phew. OK, we’re done with that list of sample questions that ended up being surprisingly long. Onto the next topic.
I’ve seen some obsession over two subjects that do not matter much for traditional IB interviews: brain teasers and the questions you ask the interviewer when he/she asks if you have any questions at the end.
Brain teasers are more likely in sales & trading interviews or consulting interviews, and less likely in banking because they have nothing to do with the job.
So, I wouldn’t recommend spending much time learning how to estimate the number of golf balls that fit in a 747 or how to move water between jugs of different sizes.
If you are worried because you’re interviewing at an elite boutique or a group/firm known for brain teasers, get a book to prepare.
On another note, interviewees tend to obsess over “the right questions” to ask interviewers at the end.
But the truth is, these questions are almost irrelevant unless you say something stupid or inappropriate.
Just ask a question about the person’s background, experience at the bank so far, etc., and don’t devote brain cells to this one.
Investment Banking Associate Interview Questions
There are no huge differences for Associate-level candidates, as the same topics and types of questions tend to come up.
The main difference is that you need to be more polished because everyone at this level is articulate and has more real-world experience.
It’s also quite important to focus on a specific industry because they want candidates who can leverage their pre-MBA experience for something useful on the job.
Finally, case studies – sometimes informal verbal ones, sometimes in writing, and sometimes in Excel – are more likely to come up at this level.
This article was very long, but the most important point is simple: You cannot “prepare” for the technical questions at the last minute.
You can come up with a halfway decent story and reasonable answers to common “fit” questions with limited time – such as a few hours or days before the interview.
But you cannot answer detailed questions about LBO models, the components of Enterprise Value, or how WACC changes under different conditions unless you have a firm grasp of the technical side, which takes time to acquire.
At the minimum, you’ll have to start ~2-3 months in advance to get a good sense for these concepts (assuming no background or limited accounting/finance knowledge).
The other question categories can wait until the last minute, but you can’t cram and master the technical side in that span of time.
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