Investment Banking Interview Questions | Investment Banking Interview | Intellipaat

Summary

This video provides an essential guide for those pursuing a career in investment banking, offering insight into common interview questions and effective response strategies. It covers key financial concepts such as the three main financial statements, DCF analysis, Enterprise Value vs. Equity Value, and valuation methods like comparable company and precedent transaction analysis. The video also explores intermediate and advanced interview topics, including negative working capital, cash vs. accrual accounting, LBO models, IPO valuations, and problem-solving approaches in complex financial scenarios. It's a comprehensive resource for both beginners and experienced professionals looking to excel in investment banking interviews.

Takeaways

• 😀 Investment Banking plays a crucial role in providing financial services to companies and governments, assisting with issues like IPOs, mergers, and acquisitions.
• 😀 A strong understanding of investment banking is essential for both new graduates and experienced professionals aiming to advance their careers in the field.
• 😀 Key financial statements include the income statement (shows profitability), balance sheet (snapshot of assets, liabilities, and equity), and cash flow statement (reconciles cash balance).
• 😀 Enterprise Value (EV) reflects a company’s total value, while equity value focuses on the value of the company's shares and loans.
• 😀 Beta is a measure of a company's risk relative to the overall market; a higher beta indicates higher risk and potential returns.
• 😀 Mergers involve combining two companies into one, while acquisitions refer to one company acquiring another, either entirely or partially.
• 😀 Discounted Cash Flow (DCF) analysis is a method of valuing investments based on projected future cash flows and discounting them to the present value.
• 😀 There are three common methods for valuing a company: Comparable Company Analysis, DCF Analysis, and Precedent Transaction Analysis.
• 😀 Terminal value represents the estimated value of a company beyond a certain projection period and can be calculated using the growth perpetuity method or exit multiple method.
• 😀 Negative working capital occurs when a company’s short-term liabilities exceed its current assets, often indicating potential liquidity concerns but may be seen positively in some transactions.

Q & A

What are the three main financial statements used in investment banking?

The three main financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement. The Income Statement shows a company's profitability, the Balance Sheet provides a snapshot of assets, liabilities, and equity, and the Cash Flow Statement reconciles cash balance over a period.

What is the difference between Enterprise Value and Equity Value?

Enterprise Value represents the total value of a company, including debt and equity, whereas Equity Value refers only to the value of the company's equity, representing shareholders' ownership after subtracting debt.

What is Beta and how is it calculated?

Beta measures the volatility of a company's stock returns compared to the overall market. A beta greater than 1 indicates more volatility, while a beta less than 1 indicates lower volatility. Beta is typically calculated using historical stock price data compared to market indices.

What is a DCF (Discounted Cash Flow) analysis and why is it important?

DCF is a valuation method that estimates the present value of an investment based on its expected future cash flows, discounted by a required rate of return. It's important for determining the intrinsic value of a company and making investment decisions.

When should a company issue debt rather than equity?

A company should issue debt instead of equity when it can benefit from lower borrowing costs due to tax breaks, consistent cash flows to meet interest payments, and to increase financial leverage, thus improving return on equity.

What does the PEG ratio tell us about a company’s stock?

The PEG ratio, or Price/Earnings to Growth ratio, is a valuation metric that accounts for both the company's P/E ratio and its earnings growth rate. A PEG ratio below 1 typically indicates the stock is undervalued relative to its growth prospects.

How is negative working capital viewed in investment banking?

Negative working capital occurs when a company's liabilities exceed its current assets, which can signal potential liquidity issues. However, buyers may view it positively in certain cases, as it indicates less capital tied up in short-term assets and can improve operational efficiency.

What is the key difference between cash-based accounting and accrual accounting?

Cash-based accounting records revenue and expenses only when cash is exchanged, whereas accrual accounting records transactions when they are incurred, regardless of cash flow, and is typically used by larger companies for a more accurate financial picture.

What is an LBO (Leveraged Buyout), and what factors drive its success?

An LBO is an acquisition where a large portion of the purchase price is financed with debt. Key factors driving success include the cost of acquisition, the amount of debt used, debt servicing costs, and the exit strategy, which often involves restructuring or growing the acquired business.

How do revolvers function in LBO models?

Revolvers in LBO models are revolving credit lines that provide additional cash for debt repayments. They start undrawn and only accumulate debt when necessary to meet debt obligations. The revolver is used to cover any cash shortfalls before term loan repayments.