Top 10 Investment Banking Interview Questions (and Answers)

Summary

This video provides essential insights to help you prepare for an investment banking interview, covering both behavioral and technical questions. It guides you through how to answer common questions such as 'Can you walk me through your resume?' and 'What do investment bankers do?', offering tips on how to stand out and impress interviewers. The video also tackles technical questions like valuation methods, calculating free cash flow, and understanding enterprise versus equity value. With useful resources and expert tips, this guide is perfect for anyone aiming to land a career in investment banking.

Takeaways

• 😀 Always be prepared to walk the interviewer through your resume, highlighting key achievements and experiences relevant to investment banking.
• 😀 Don’t overlook the basics: understand what investment bankers do, including raising capital, advising on M&A, and providing strategic guidance.
• 😀 Research the company thoroughly before your interview, highlighting aspects like firm culture, history, and recent deals to show your genuine interest.
• 😀 Practice explaining complex financial concepts clearly and confidently, especially when asked to present a chapter from a finance textbook.
• 😀 Be prepared to answer technical questions about company valuation, including methods like DCF, comparable company analysis, and precedent transactions.
• 😀 Understand the key differences between enterprise value and equity value, and how each reflects the company's total value versus value for shareholders.
• 😀 Know how to calculate free cash flow starting from net income, adding back non-cash expenses and adjusting for capital expenditures and working capital changes.
• 😀 Learn how to calculate terminal value using either the perpetuity growth model or the exit multiple approach, as part of a DCF analysis.
• 😀 Be ready to interpret financial ratios like P/E, and understand their context within the industry to determine whether they are high or low.
• 😀 When asked about financing options, be able to explain the advantages of debt financing over equity, such as tax benefits and maintaining ownership control.

Q & A

What is the first question typically asked in an investment banking interview?

The first question is often 'Can you walk me through your resume?' This question allows the interviewer to learn about your background, education, work experience, and key achievements that are relevant to the investment banking role.

How should I respond when asked, 'What exactly do investment bankers do?'

When asked this question, you should explain that investment bankers help companies raise capital through issuing stocks or bonds, and they also provide advisory services on mergers and acquisitions. It's essential to demonstrate that you understand the core activities of the profession.

Why is it important to research the company before an investment banking interview?

Researching the company helps you answer 'Why did you choose to apply to our firm?' effectively. By understanding the firm's history, culture, and recent deals, you can demonstrate genuine interest and show how your values align with theirs.

How can I prepare for explaining a finance concept during an interview?

To prepare for explaining a finance concept, practice presenting complex topics like Discounted Cash Flow (DCF) or P/E ratios in a clear and concise manner. Rehearse in front of a friend or colleague to build confidence and ensure a smooth delivery.

What are the key valuation methods you should know for an investment banking interview?

The three key valuation methods are: 1) Discounted Cash Flow (DCF) analysis, which discounts future cash flows to present value; 2) Comparable Company Analysis, which compares financial metrics with similar companies; and 3) Precedent Transaction Analysis, which compares the prices of similar companies in past transactions.

What is the difference between enterprise value and equity value?

Enterprise value reflects a company’s total value, including debt and cash, and is calculated as market capitalization plus debt minus cash. Equity value, on the other hand, represents the value available to shareholders and is calculated by multiplying the stock price by the number of shares.

How do you calculate free cash flow from net income?

To calculate free cash flow, start with net income, add back non-cash expenses like depreciation and amortization, subtract capital expenditures (CapEx), and adjust for any changes in working capital.

What are the two primary methods for calculating terminal value in a DCF analysis?

The two primary methods for calculating terminal value are: 1) the Perpetuity Growth Model, which assumes stable growth in cash flows indefinitely; and 2) the Exit Multiple Approach, which estimates terminal value based on a financial metric multiple, like EBITDA.

Is a P/E ratio of 10 considered high?

A P/E ratio of 10 is not inherently high or low; it depends on the industry. Growth companies typically have higher P/E ratios because their earnings are low relative to their stock price, with expectations of significant future earnings growth.

Why might a company choose to issue debt instead of equity?

A company might choose to issue debt instead of equity for several reasons: debt offers tax advantages, provides fixed interest payments, and allows the company to maintain control over ownership and decision-making, unlike equity, which dilutes ownership.