Investment Banking Interview

Additional Questions Answered In Order Received.

Before Jumping into Q&A remember the setup for Investment Banking Interviews is as follows:

Round 1: Phone or quick office visit 30-45mins, “is this person normal and does he know what he is interviewing for”

Round 2: By now the firm knows who they want and don’t want. You’ll be grilled, you’ll be challenged and you’ll be asked much tougher questions to fish out the “wannabe’s” from the “run through a brick wall to get what I want” candidates. Once you’re in the final round, everyone is equal, your job to lose.

Fit Questions

1. Walk Me Through Your Resume?

This of course will be tailored to everyone but at the end of the day you’re selling yourself as a compelling candidate.

“Back in high school I decided to attend ___ university because of its focus on (finance/business). After that I really became interested in Investment Banking after studying ___ and ___ courses which led me to pursue finance internships. I started out with a job in ___ (finance field) which led to an internship at ___ bank over the summer. Fortunately, I received an offer from ___ bank but believe I may be a better for ___ bank as I know the firm focuses on ___ and ___”

Talk longer if its not a 30 minute interview, keep it short like the above if it is a quick phone interview.

2. Why Did You Choose Your University?

The idea here is to make it seem like you made the best possible decision that was handed to you. You don’t necessarily need to choose the most prestigious, maybe you got a scholarship etc.

“To be honest I was also admitted to ___ school however I decided to attend ___ school as I was given a (partial/full-ride) due to ___ , ___ and ___. Overall, I am happy with my decision as I certainly researched the schools to see what opportunities were available and realized the change was relatively minimal given the partial scholarship opportunity.”

You basically want to deliver the following message “I made a logical smart decision and made the most of my time at my university”

3. Why Did You Choose Your Major?

Hopefully you’ll avoid this question but you need to create a mini-story as to how your decisions led to finance.

“I decided to major in Biology as I planned to become a doctor, however as I developed an interest in investing through a few Economics courses I decided to pick up finance as a minor. At that point I realized that I was more interested in finance and decided to take courses in ___, ___ and ___. Even though I may not be a pure finance person, I believe I have taken the important finance courses and could be a good fit for a role in healthcare investment banking”.

The idea here is to show actionable steps on how your views changed and spin it in a way as having an “edge” in terms of knowing the space.

4. Why Our Bank?

This one is less likely to show up in an interview with Goldman or Morgan Stanley but the overall idea is to make sure you know the deals and what group you want to work for.

“I want to work for ___ bank because I believe it offers the right set of experiences for me given transactions in ____ (capital raise), ____ (Acquisition) and ___ (Merger). I believe I would be a great fit because of XXX, XXX and XXX. Over the past year I have noticed XXX (positive comment on direction of company) and believe this is certainly a platform where I can both help add value and learn from over the next few years.”

The idea is to show you know the bank well, that you can be a good asset and finally that you won’t be quitting after 6 months.

5. Why Should We Hire You?

In this question avoid the following phrases ambitious, hard working, dedicated and driven. Instead you want to be able to give these qualities in the form of real experience. Example below:

“I think ___ bank should hire me because of my experience in __, __, __and __. I know you have a lot of qualified candidates to interview and believe my experience in ___, ___ and ___will be helpful for the firm. I have always been interested in ___ bank because of ___ transactions and would enjoy having the opportunity to work with ___ team and hit the ground running.”

To fill in the blanks, use things such as Internship at __bank, course experience in ___, relevant club experience in ___.

Notice you should have experience to draw into the interview that will directly impact their hiring decision.

6. Tell Me About a Failure in Your Life.

This one is tougher as you want to give an example of a set back that you can recover from but not something terrible that you would lose trust. As a guideline if you told this to an acquaintance they should recognize it as a fault but not immediately lose faith in you because the error was so large.

“One failure I remember well was oversleeping one semester to sign up for XYZ course in fall of Sophomore year. It set me back by about 1 semester in terms of classes I wanted to take, the next summer I decided to take the extra course to make up for lost time, but learned the valuable lesson of being organized at all times to avoid costly errors”

The above is right on the line with costly errors, 1) you recovered from it but 2) it certainly was bad to oversleep. Not everyone in the world has overslept something once in their life so you’re in pretty decent shape since you learned from the experience.

7. Are You A Good Multi-Tasker?

The truth in the real world is no one really multi-tasks but at this really means are you good at handling multiple projects.

“Overall I would say I am a good to decent Multi-Tasker given my heavy course load, 2 club commitments and 1-2 part time jobs. To be honest I believe this is something everyone can always improve on, unlike a check box where you have it or you don’t it is certainly something I can continue to improve upon over the long-term.”

The idea here is to give them examples of real multi-tasking at your age bracket and then finishing it off with something that leads them to believe that the interviewer works harder than you do. Note of course they do.

8. Are You A Good Presenter?

This is unlikely going to be asked but the idea here is to see if you’re willing to stand up and make a presentation if necessary.

“During my time at ___ school I have made a few presentations including ___ and ___. While I’ll be honest and say it is certainly not a daily occurrence I believe my experience doing presentations for __ class (or ___ case competition) gives me confidence that I can make presentations if needed.”

Again show some real examples of presentations you’ve made. Even better is if you can add to it example: “Case presentation for Jefferies case competition, which led to a 2nd place finish for our team”.

9. What Do You Do for Fun?

This is a key question in your interview abilities, if the person seems to be happy and fun (party type) mention you go watch football games and drink beers. If you peg them as more uptight mention things more simple like traveling or sports.

“During my free time beyond finance related activities I enjoy ___ and ___. Sports have been a big part of my life for many years and I believe its always good to try and set aside thirty minutes to an hour for exercise. Also on weekends I enjoy watching our college ___ team play and grab a few drinks to watch the game with friends.

Don’t come off as a complete type A unless you are certain the person you are speaking to will ding you immediately. No one wants to hear “I stay at home and read the Wall Street Journal”.

10. Describe Your Favorite Course in College.

Unlike conventional answers that will say choose an interesting topic or choose a finance course the best answer is to make a personal connection.

“To be honest one of my favorite classes was History 101. I know the topic may sound dry but the professor did a great job at making the topic interesting and relating it back to real life (insert short example). During the semester I got to know the professor well and we still correspond from time to time. I have no interest in pursuing a career related to history as my real focus is on finance but it was a great course that showed me the importance of keeping a topic interesting.”

The idea here is you’re showing that you made a connection with a professor. Now you may not have this exact example, but the best way to describe your best course is one in a “sales” format. You liked it because the presentation and delivery was key, bankers will know that is extremely important no different than pitching a company.

11. I See You Worked in (Healthcare/Real Estate/Law etc.) Why The Switch?

Very similar to “walk me through your resume” you need to flip your experience to how you concluded with your current interest in Wall Street.

“After leaving law school I joined ___ firm and attended drafting sessions for ___ and ___ companies. After that I became more and more interested in finance and decided to take level 1 of the CFA exam. After completing the first level and working closer with financial firms, my interest was solidified and I believe my experience with S-1’s and other financial documents makes me a good fit for ___ position at ___ firm.”

The idea here is to spin your good experience to directly help the firm. In addition you don’t want to make it seem like you know nothing about finance.

12. What Would You Do With an Offer Today?

“I would sign up for the job. After meeting with __ and __ and doing research on __ and __ I believe this would be a great company to work for.”

You need offers to get offers so simply say you will sign, you can always push out the official sign date by saying “I don’t want to burn bridges with ___ university as I am signed up for X days to attend X events and cannot cancel.”

13. Where Do You See Yourself in Five Years?

The basic rules are 1) in finance, 2) tough to call beyond 2-3 years. If you’re at a Associate/VP level then you can hammer home more on wanting to stay in IB.

“Over five years is a pretty long time horizon however I do know that I want to stay in the financial industry. Knowing that I want to stay in finance for the long-term I believe Investment banking offers the best base skill set for a long-term career. In five years I may still be working in investment banking or getting an MBA but I do know for sure that I want to stay in Wall Street related professions.”

No where in a competitive Wall Street interview do you give them a single ounce of belief that you would not stay in finance. This means you’re not 100% committed so it means you’re going to be shown the door.

14. Tell Me About Negative Feedback You’ve Received from ___ Job?

The idea here is to admit to having some faults good ones if you’ve done an internship in investment banking is 1) Attention to detail (always going to get interviewers to agree) and 2) Industry knowledge.

“Overall the feedback was positive however I learned quickly how important it is to constantly check work and learn about ___ sector. I will be the first to admit I have made errors in Pitchbook drafts and will always try to correct them and make sure they do not reoccur. In addition, the sector specific knowledge is certainly something that I need to focus on as it helps to know the space when reviewing text in a sales memorandum or Pitchbook”.

Both attention to detail and industry knowledge are easy negatives. No one knows either perfectly out of the gate.

15. How Would a Friend Describe You In Just A Few Words?

“Happy, Competitive, Methodical”

You can move it around but the idea is 1) positive personality quality, 2) willing to work without saying driven/dedicated, 3) Clear thinking patterns.

16. Tell Me About a Leadership Position You Have Had?

To be honest this is less likely to come up at a lower end hiring position but a decent answer would be 1) a position in a club, 2) position in a sports team or 3) team leader in a project (school or work related).

17. Tell Me Something Interesting About Yourself?

Sometimes they ask you for things that are not on your resume, its usually best to choose something that is a “one time” interesting event. Such as traveling to ___ country or going skydiving.

“Hmm, one thing you may not know is that I used to be deathly afraid of heights. In order to combat this I decided to go out and go skydiving once, I did this in the summer and believe it was a great once in a life time experience.”

Anything that is interesting and still appropriate for an interview.

18. Are You Smart or Hard Working?

For an interview you’re going to want to veer on the side of being humble versus cocky so the better avenue is to say hard working and imply you’re not a slow learner.

“If I had to choose I would say hard working. My grades are not perfect (they should be above a 3.5) but I believe with long hours and a strong work ethic improvements can be made. There are always going to be people who may be smarter but I’m more than willing to put in the work to learn a new topic as fast as possible.”

19. Why Do You Believe Investment Bankers Work Long Hours?

This is a simple test to see if you understand what you are signing up for.

“Investment bankers work long hours, anywhere from 60-100+ hours per week, as they are involved on multiple projects from pitch books (winning new deals) to live mandates (IPOs and M&A). This means an investment banker must be on call at all times for his clients which could include international deals as well. With this business model, the hours are quite variable and stressful at times as well. Investment bankers must continue to source new business while executing live deals at the same time.

20. Give Me an Example of a Strenuous Week.

This is another spin on if you understand what you are signing up for. The trick is to tow the line between showing you can do the work and not insulting your interviewer by making it seem like you work harder than him/her.

“As example of a stressful week would include waking up at 6 in the morning, going to the gym for an hour, returning and heading off to class for the next few hours while answering emails for ___ and ___ clubs that I am currently involved with. After this I would spend an hour or two studying before heading off to my evening job working at ____ (ideally an investment banking night time rotational program or finance related job). This would be repeated throughout the week and my weekends would be spent working at ___ and ideally taking a few minutes to relax on a Saturday night.”

Technical Questions

1. Can You Walk Me Through The Three Statements?

The income statement shows revenue and profitability metrics over a period of time starting from revenue to gross and operating profit down to net income and EPS.

The balance sheet shows a snapshot at a point in time, the assets equal liabilities + equity. It is linked to the income statement because net income flows to retained earnings.

The cash flow statement starts with net income and shows real cash out flows or inflows from operations, investing and financing activities. The final link to the BS is made as ending cash matches balance sheet cash.

2. What Are The Major Items On The Income Statement?

Income Statement: Revenue – Cost of Goods Sold – Selling General and Administrative expenses (Depreciation & Amortization baked in above the operating income line) – Total Operating Expenses – Operating Income – Other Income or Expense – Pre-tax income – Net Income – Shares – EPS

3. What Is The Balance Sheet Equation And What Are The Major Line Items?

Assets = Liabilities + Equity

Balance Sheet: Current Assets: (Cash & Marketable Securities, Accounts Receivable, Inventory, Deferred/Prepaid Current Assets and Other Assets); Long-term Assets: (Property, Plant & Equipment, Long-term investments, Goodwill, Intangible Assets & Other Long-term Assets); Current Liabilities: (Accounts Payable, Current Accrued Liabilities, Current Debt and other liabilities); Long-term Liabilities: (Long-term debt, Deferred long-term liabilities and other Long-term liabilities); Shareholders Equity.

4. What Are The Major Items On The Cash Flow Statement?

Cash Flow Statement: Beginning Cash; Cash Flow From Operations: (Net Income, Depreciation and Amortization, Change in Working Capital, Other Non-cash charges such as Stock based compensation); Cash Flow from Investing: (Capital expenditure, Purchase or sale of marketable securities, purchases for acquisitions); Cash Flow Financing (Equity or Debt Raises, Dividend payments, Repurchase of common stock [also called a buyback program]); Ending Cash.

5. How Would Depreciation On A Truck Impact The Three Statements After A Year?

If we give a $10K truck a 10-year span of life and use $1K as a reasonable assumption.

Income Statement: Operating income decreases by $1K, assuming 30% tax net income declines by $700.

Cash Flow: Net Income goes down by $700 but D&A is non-cash so $1K is added back so cash increases by $300.

Balance Sheet: On the asset side PP&E goes down by $1K, cash increases by $300, so assets are down $700. This is offset by the decrease of $700 from net income swimming to retained earnings.

6. How Do You Calculate Enterprise Value And What Does It Mean?

Enterprise value is calculated as follow:  Market Cap + Debt – Cash. (More advanced Market cap + Debt + Preferred Stock + Minority Interest – Cash)

It is a valuation that is available to both bond and equity holders. Unlike equity value, which is below the operating income line or “Below the Line”, Enterprise value can have sales and EBITDA metrics applied to them as well. It is used as a takeout valuation as this is a better proxy for how much the buyer must pay for the business.

7. Why Do We Add Debt and Subtract Cash?
The reason why we add debt and subtract cash is because when a company purchases a firm it is now liable for the debt on the balance sheet and now also has the cash on the balance sheet.

8. Can Enterprise Value Be Negative?

Yes. If the Company’s market cap were below its net cash balance (cash – debt) then the company would have a negative enterprise value.

9. How Do You Value A Company?

There are many methods to valuing a Company however some of the major ones would include the following.

  1. Comparable companies analysis, using multiples of like companies to justify valuation
  2. DCF, using future free cash flows to value the firm
  3. LBO, using cost savings & revenue synergies to value cash flows of a take-out compared to increases in payments from required debt
  4. Precedent transactions, using similar transactions in a space to justify a take-out valuation
  5. Premiums Paid, looking at public take-outs and seeing a percentage above current stock price in which the Company was taken out.

Italics are the most common and where you will likely receive the most questions.

10. Which Of The Valuation Methods Yield Higher Valuations?

It depends. Both Precedent Transactions and Premiums Paid should yield higher valuations that Comparable Companies analysis as these valuations are done on take-out transactions. In addition, the DCF analysis could yield a high valuation if the terminal value produces a significantly higher valuation for the firm (could also be quite low if discount rates are high and terminal value is low). Finally, the highest valued comparable could yield a significantly inflated multiple while the LBO is likely yielding a lower valuation as this would be a financial rather than strategic transaction.

11. Walk Me Through A Discounted Cash Flow Analysis & Tell Me The Flaws Of Such Valuation

Using a 5-year or 10-year convention calculate Cash flow by taking Net Income + D&A + Non-Cash Charges – CAPEX +/- Changes in Working Capital. (Note change in Working Capital is a +/-)

DCF = CF1/(1+r)+(CF2/(1+r)^2…..+(CF5/(1+r)^5+FCFN(1+g)/(R – g) (discount back to 5 or 10 yrs).

(Alternatively use an exit multiple to EBITDA/FCF/EBIT for the terminal value, discount back)

CF = Cash flow, R = Discount Rate, G = Long-Term Growth (Appropriate would be roughly GDP of ~2-5%)

A DCF is a poor metric for valuing cash flow negative companies or companies with hyper growth as the terminal value can make up for north of 70% of the total valuation.

12. Why Do We Use 5-10 Years For A DCF?

This is a general convention as it is difficult to predict 10+ years of free cash flow for a firm. Depending on the industry you can choose the most reasonable time frame to value the firm and attach a terminal value at the end to come up with a valuation.

13. What Do You Do If The Growth Rate Exceeds Your Discount Rate? (Advanced)

“If the growth rate exceeds the discount rate then your terminal value calculation becomes negative. Assuming the numerator is positive the best course of action is to derive a lower long-term growth number or adjust your discount rate on the terminal value calculation. “

Note: This is likely the last question you are going to be asked on DCF’s and will be more conversational in nature.

14. What Are Some Problems With Using Comparable Companies Analysis?

While comparables are a great way to get an idea for the valuation of a company, no two companies are exactly the same. A Company may have higher growth rates, better margins or lower risk (balance sheet, size, better customers). This creates problems in justifying an exact multiple to be applied to each company.

15. I Have Retail Comps Trading At X Valuations, How Would I Apply These Numbers To Value Facebook?

Trick question. This is an “are you thinking question”. The answer is you should not apply oil/gas comps to Facebook.

“To be honest unless there is a reason why we would compare retail companies to Facebook it would likely not make sense to compare retail companies to a technology growth company such as Facebook. Technology comparables would be more appropriate.”

16. What Multiples Would You Use To Value A Company?

There are many multiples that can be applied depending on the industry however a few would be.
1. EV/Sales
3. Price/Earnings
4. Price/Free Cash Flow
5. Price/Book Value

Many others dependent on the space (know the other simple metrics they would use).

17. Assuming We Have The Prefect Multiples At 2x LTM Sales, 5x LTM EBITDA and LTM 10x P/E. How Would You Estimate the Value of the Firm Given an LTM Income Statement?

Sales Multiple = LTM Sales * 2x (which is EV/LTM Sales) = Enterprise Value Estimate (Sales cancels out)

EBITDA Multiple = LTM EBITDA * 5x (which is EV/LTM EBITDA) = Enterprise Value Estimate (EBITDA cancels out)

P/E Multiple = LTM Net Income * 10x (Which is Equity Value/([Shares*Earnings Per share] = Net Income)) = Equity Value

18. Which M&A Precedent Transaction Would Likely Lead To A Higher Multiple Or Valuation, Private or Public? (Advanced)

It depends, however in general a small private take out would likely warrant a higher multiple as the larger company that purchases the private company could immediately sell the product to a wide variety of new customers and geographies. If the private company was distressed, not growing and recent public companies have been acquired for high multiples, then the answer would switch.

19. In Simple Terms What Is An LBO?

A leveraged buy-out is a transaction in which a Private Equity Firm raises debt and buys a company that it believes it can fix. In general terms the Private Equity firm believes it can improve the Company’s financials over the long-term and exit the transaction generating a profit by either selling the company or taking it public.

20. A Company generates an additional $100M in revenue with gross margins of 40% and no change to any operating expenses, what happens to the Income Statement?

The Company sees revenue increase by $100M, Cost of Goods Sold increases by $60M, Gross Profit Increases by $40M, with no change to OPEX, Operating income also increases by $40M, if we assume no change to other income/expense, Pre-tax income is also up by $40M, finally this is taxed at ~40% which means net income increases by $24 and EPS increases as well with no change to share count.

21. What is the difference between GAAP and Non-GAAP Earnings?

Many companies have non-cash charges such as stock based compensation, write-offs, amortization and other non-cash expenses (no cash outlay occurs). So, non-gaap financials or “pro-forma” excludes these charges and generally increases the Net Income and EPS of the Company.

22. What Are Basic Shares Versus Diluted Shares?

Basic shares exclude the impact of options (depending on the transaction may include warrants as well). If a Company has several option contracts in-the-money then the diluted shares would include the impact of such options being executed. As an example a company with a current share price of $15 with many options at the $10 mark, the diluted shares would be higher than the basic shares.

23. How Do You Calculate Diluted Shares?

Note that if the options price is above the current stock price the options do not execute. In this case, basic shares are equal to diluted shares.

Basic Shares + ((Current Stock Price – In-The-Money Options Price)*Number of Options)

Normally companies have an options table in a 10-K or 10-Q filing that outlines tranches of options so a table is necessary to calculate each tranche and add up the impact. Finally, diluted shares can also be found in the 8-K earnings release each quarter, but it is best to calculate total shares outstanding as the stock price changes.

24. A Company has a $100M write-down how does this impact the three statements?

Income Statement: Usually a write-down or one-time charge happens at the Pre-tax income line so a -$100M charge is seen here, same 40% tax rate and you see net income decline by $60M.

Cash Flow: Net income declines by -$60M but the charge is added back so you have cash flow from operations increase by $40M.

Balance Sheet: Cash increases by $40M, Retained earnings decline by -$60M, this is balanced by a -$100M charge on the asset side.

25. What Happens To Your Three Statements If A Company Initiates A Dividend?

Income statement: No change however a line-item usually appears below the Income Statement to show the $/share distributed.

Cash Flow: Cash flow from financing decreases by dividend amount.
Balance Sheet: Cash declines by dividend amount (Assets) this is balanced by a decrease in Retained Earnings

26. What Is Treasury Stock?

Treasury Stock is stock purchased by the issuing company to reduce the amount shares outstanding in the open market. Generally speaking, this is usually done as part of a buyback or repurchase program where the Company buys back shares in the open market when it believes the current stock price is undervalued.

27. What Happens To Your Three Statements If A Company Initiates A Share Repurchase Program?

Income Statement: Total share count declines, increasing EPS, no change to Net Income
Cash Flow: Cash flow from Financing decreases by amount spent on share repurchases
Balance sheet: Cash declines by amount spent on buying back shares and balanced out by a change in treasury stock a decrease in shareholders equity (usually a negative entry)

Note this is more advanced and will likely only occur if you tell an interviewer that Retained Earnings = Previous Retained Earnings + Net Income – Dividends. As this is yet another way to see if you understand the 3 statements.

28. How Could You Use Premiums Paid On A Private Company With No Shares?

If we want to use premiums paid on a private company with no shares, one possible method would be to derive an equity value for the firm by taking Net Income and multiplying by the best comparable P/E Multiple to obtain an Equity value. At this point we can take the Equity Value which is no different than Shares*Price = Market Cap and place the premiums paid percentage on the implied equity value.

29. Why Do We Calendarize Income Statements?

Companies have different fiscal year ends, so we cannot overlay companies with a Fiscal Year ending in September with a Fiscal Year Ending March as it will create discrepancies when comparing the quarters and years. As a convention we calendarize the statements to end in December across all companies to make the comparisons apples to apples.

30. How Does Purchasing Inventory With Cash Impact The Income Statement?

No change to Income Statement. Cash flow from operations decreases by the purchase amount, cash declines. This is balanced by an increase in assets (inventories) on the balance sheet.

Note: All else equal increases in current assets decrease CFO, increases in current liabilities increase CFO.

31. How Would Inventories Impact The Income Statement?

When inventories are used to create products then it would be recognized as cost of goods sold or an operating expense (depends on industry, what inventories are being used for). However, simply purchasing inventories does not impact the Income Statement.

32. What Does It Mean When A Transaction Is Accretive?

This is when the Purchasing Company + Company Acquired combine and form a New Company where Net Income increases post the combination. The transaction would be dilutive if the acquisition causes Net Income to decline post the combination. The negative impact from the acquisition (interest lost on cash, debt payments) should be offset by additional net income.

Rule of Thumb for Stock Transactions: If you buy a Company that is trading at a higher P/E the transaction is more likely dilutive as you are paying “more for earnings”. If you buy a company with a lower P/E it is likely accretive. Note, this is an all stock transaction, in all cash transaction you are simply comparing pre-tax income to new debt interest payments and interest lost on your cash.

33. Why Would A Company Choose To Use Stock or Cash In A Transaction?

If the company could be acquired for a lower P/E the transaction would likely be accretive. In addition, if the company has a great valuation it would want to use its peak price point to acquire a company to take advantage of its high current stock price. In addition, the company may not have enough cash on hand to buy the company and be unwilling to take out debt to finance the transaction.

On the cash side the transaction would likely be accretive, assuming the target company is profitable, as the interest rate on cash is at all time lows of near 1%.

34. Who Would Pay More A Strategic Company Or A Private Equity Firm?

In general a strategic buyer would likely pay more as they can quickly recognize immediate synergies from the transaction (revenue and cost saving). The companies are more likely than not in the same space and distribution channels can be used by the acquiring company to expand the reach of the new products and services. Private Equity firms have a tougher time realizing synergies as they attempt to “fix” the business by stripping out operating expenses and attempting to grow sales organically.

35. What Are Synergies In A Transaction?

Synergies are generally broken into two categories:

Revenue Synergies – Acquiring company can sell to more geographies, combine with current portfolio to bundle goods, up-sell to other products, further penetrate existing customers and address new customer bases.

Cost Synergies – The Company can reduce the cost structure by shutting down facilities, combining facilities or reducing the head count.

36. What Is EBITDA? Followed By What Are The Flaws?

EBITDA is a proxy for cash flow, however the issue is that CAPEX is not included in the metric so a Company could generate EBITDA for many years and still go bankrupt if CAPEX exceeds Cash Flow from Operations

37. What Do You Use For A Discount Rate?

Generally you can use either the weighted average cost of capital (WACC) or calculate a rate (Cost of Equity) based on the capital asset pricing model (CAPM).

WACC = ((Cost of Debt*(Debt/(Debt+Equity))*(1 – Tax Rate))+(Cost of Equity*(Equity/(Debt+Equity))

Cost of Equity = Risk-Free Rate + ((Beta * (Market Return – Risk Free Return))

Un-Levered Beta = Levered Beta / (1+((1-Tax Rate)*(Total Debt/Equity)))
Levered Beta = Un-Levered Beta * (1+((1-Tax Rate)*(Total Debt/Equity)))

38. What Is Working Capital? Followed By What Happens If Accounts Receivables Are Increasing?

Working Capital is a metric that shows if a Company can pay off its short term liabilities with its short term assets so it is calculated by taking Current Assets – Current Liabilities. Depending on the Company and industry it could be a good or bad sign (know the answer for the group you’re interviewing with).

Finally, while seeing accounts receivables increase can be a positive, it means more customers should pay you in the future; it causes cash to go down as you have not received the actual dollars from the customers just yet. (If you are a real rock-star you can look up the AR days for the group)

39. If A Company’s Stock Price Increases By 25% Today What Happens To The Balance Sheet?

Nothing. Many people confuse Equity Value or Market Cap which is Shares * Price with Shareholders Equity. Shareholders Equity is a Book Value Calculation.

40. With No Information Which Of The Three Statements Would You Use To Value A Company?

Assuming the Company is profitable, I would choose the cash flow statement as it can give me a sense for the overall long-term value proposition. At the end of the day cash is king. We can use a DCF, analysis, or even use Net Income as a proxy for Cash flows and derive some profitability metrics. Now, if it was a rapidly growing and cash flow negative Company I would use a built out projected income statement or Equity Research report as many multiples require income statement projections.

Note: The only wrong answer here is really the balance sheet as it shows no long-term profitability or cash flow metrics and is simply a snapshot of the company’s assets and liabilities.

41. If You Could Choose Two Statements Which Would You Choose?

Balance Sheet and Income Statement as the combined statements can be used to generate a cash flow statement.

42. Why Would A Company Buyback Its Debt?

If the Company is running into covenants such as Total Debt/EBITDA or EBITDA/Interest Expense, the Company would likely need to buy back its debt. In addition the company may want to buy back its debt because it can reissue debt at lower rates, perhaps some outstanding debt is significantly higher than what they can receive in the market today.

43. What Are The Main Differences Between A Cash Transaction And A Cash Transaction Funded By Debt?

In a debt transaction the interest expenses are higher, the leverage on the Company changes and you have a higher chance of the acquisition being dilutive to earnings.

44. If Your Company Has Annual EPS That Is Decreasing Over The Next Five Years Is Your Current LTM P/E Multiple Higher or Lower Compared To A 5-Year Out P/E?

Some people make quick errors and simply say higher, but the answer is lower. Your current price does not change today so if your EPS is expected to decrease over the next 5 years you are seeing a higher P/E multiple in the future.

Ex: $10/1 = 10x versus $10/$0.50 = 20x.

Note: This is a decent sanity check for comp sheets as well flip it around when looking at out years for growing companies.

45. What Is In A Pitchbook?

A pitchbook can contain multiple sections or be quite thin depending on the content. A general pitchbook for an M&A transaction for example could include the following: 1) Introduction to Bank with tombstones of previous deals, 2) Overview of Company being pitched; 3) Combined model of said transaction 4) Other valuation items (DCF, precedent transactions) 5) Comparable company analysis in the back and 6) An appendix with an overview of team members and executive teams for the deal.

Note: Unlikely will be asked this without prior Investment Banking Experience.

46. How Do We Project Depreciation and Amoritzation and Capital Expenses (or Other Line Items)?

For projection type questions keep it simple and use a percent of revenue for D&A/CAPEX or you can use an annual run-rate. Notably, many companies also provide an estimated next year or NTM capex spend in their filings.

For balance sheet items use a projection that is related to the item, (ex. Receivables should be linked to sales, Payables to COGs, Expenses to OPEX). For overall revenue numbers you would use a combination of guidance (public companies) or industry estimates (ex. Industry grows at GDP then you would stick to using GDP as your annual revenue growth rate).

47. Can You Pitch Me a Couple of Stocks?

“I like XYZ stock, it has ___, ___, and ___ going for it. In an upside case I see the stock going up XX% and in a downside case I see the stock being flat/down XX%. Given this I see more positive than negatives working for the stock making it well positioned compared to peers because of XYZ. Finally, I think the balance sheet/cash flow/valuation is good because of XYZ metrics”

The interviewee has implied many things, one you understand that you could be wrong with downside cases. Two you understand companies are compared against one another “well positioned compared to peers”. The last part while a bit vague, implies you at least understand the basics of finance and/or valuation.

Now if you want to go deeper you have to draw in themes such as:

“I like XYZ stock because I believe the investment community has XXX and XXX incorrect about the stock. The reason why i believe this is because of reason 1, reason 2, reason 3. While the bears will point to XXX and XXX I’m more bullish on the name because of reason 1 and reason 2. Finally, from a valuation perspective I believe the stock is undervalued due to XXX metrics”

To further clarify here’s an example that everyone could relate to (certainly choose a different stock to be more differentiated).

Notably, if you would like to go deeper and know that they will be grilling you on reasons for the stock here are some additional ideas:

1. Buzz phrases – Believe selling is “Overdone” at these levels because people have “baked in” a quarter that implies “units/volume/metric” are going to be down severely on a year over year basis.
2. Technicals – Pull up a 20/50 day moving average and find and indicator to help back your argument, just pased XYZ moving average
3. Disasters – Maybe there was a “blow up quarter” last year in this space, you can use a y/y basis and compare it to say when the Japanese Tsunami hit and the compares in that quarter on a relative basis to the (insert most impacted industry) will be better
4. Read throughs – Say for wahtever reason every single comparable company printed good/bad numbers in units of XYZ… Your company directly works with XYZ so there is likely upside this time around versus prior
5. Pricing – Say the company you are pitching has extremely high exposure to “copper” or any other component could be a semiconductor etc… So you say “margins should expand” and the stock hasnt moved since the pricing of said component has dropped XYZ percent

Finally, have an opinion on the main bull/bear argument and take a side, if they argue heavily against you read them and decide to hold your ground or to nod in agreement. Usually its better to hold your ground in a non-attacking manner.

48. What is Investment Banking?

“Investment banks earn fees by raising capital through Equity and debt offerings or by advising on strategic transactions such as a merger or acquisition.”

How to Prepare For an Interview Once You Know the Technicals and Behaviorals?

Bucket your Banks:
1. Boutique – You want to emphasize your individualism and ability to work under higher responsibilities a story involving you randomly being asked to do a much harder task last second will flatter your interviewer
2. Middle Market – You want to see where the platform is expanding to “compete” with the “big boys” all of them are trying to be bulge brackets, so find that spot and bring up positive transactions in that spot. Flattered again.
3. Bulge Bracket – Explain why that BB is the best. This one is much harder unless you’re at MS or GS because they already have through the roof egos.

Bucket your Interviewers:
1. Managing Directors – Basically a MD or Director only cares about two things 1) will this guy be happy if we crush him with 48 hours of work. 2) will this guy be decent in front of clients long-term? So with that said since he is the most important here is the breakdown:

– Reason why his group/sector
– Name drop some info BEYOND his major deal so it shows you did research (I would name drop the major deal and then another one maybe 2-3 deals back in time so it implies you keep your eye on the market)
– Have your story IRON clad strong, he will absolutely ask you about your history/why you want to do it
– Be happy not nervous. This sounds “lame and stupid” but its the truth. When you pick up the phone people can feel your personality immediately. This separates average people from good workers in some cases. He wants to be talking to someone who has a positive attitude.
– Have a sector/stock in mind with some basic investment thesis “high level” (tablets versus PC’s would be an example everyone would be aware of) but of course choose one related to the space.
2. Vice Presidents – Have your intensity up here. These guys are in the rockiest part of finance. People are into themselves so they will feel only as they feel themselves. So the point is be MUCH more professional. Give very very conservative answers. No joking around. You’re going to give humble, professional answers that are correct. No “rounding” write out numbers on your note pad so it makes it obvious you double check your work.
3. Associates – In between an analyst and associate so sometime you can joke a bit, these guys are bitter but not as bitter as a second/third year analyst so veer on the side of professionalism and try to make some sort of connection.
4. Analysts – Towards the tail end of the interview, you may be able to lighten up. Of course you can read them and if they are “super bankers” like the VP type personality then yeah veer on side of professionalism, but this is just bonus points because they don’t make major decisions anyway. If you have to choose always get the higher ranked analyst to like you.

Bucket your Products:
M&A – Choose one mega deal and one niche deal that you can speak to, always start with major deal so they can toot their horn and flip to the smaller deal. (this is done in Q&A). Basically you make their mood positive then turn on the “i did my research bulb” in their head and now they think … hmm he’s a good hire
ECM/DCM – Emphasize your salesmanship more here because you’re going to be doing tons of pitches and chasing deals and your MD’s are going to get paid on that deal closing. They have less interest in your ability to put an Acc/Dil model together… because you wont.
Consumer/Tech/Financials – Know the metrics the company is valued on and drop this in the interview. A smart way to do it would be during Q&A when they say “hey so do you have questions for me”. If you’re going to work with Financials bankers you can drop some stock you like in the REIT sector then talk about how its trading at X.X to book value… This does two things, gets convo flowing about if the guy invests in the sector and shows you understand one of the main valuation methods for that space.

Geographically Lock Yourself In:
If you’re interviewing in NYC somehow put a strong tie to NYC and how your family or some other jargon is tied up here so that’s why you’re location specific to that area. This gives them a very minimal but important psychological selling point on why you would bother staying in that area. Again they want to make sure you are not a “one and done”


  1. needhelp says

    Got asked this in a recent interview that I bombed:

    Imagine there’s this company x that we would like to know more about in order to pitch to a PE firm. What sort of things would you like to know about the business to better understand it’s prospects?

    I sort of went down the path of supply / demand factors, competitors, social factors etc. but is there a more structured response they are looking for?

    • needhelp says


      And how would the answer to this question differ in an equity research interview?

      “When looking at a company for the first time, what information would you like to know before you invest?”

    • Wall Street Playboys says

      Same as pitching a stock…

      Market size, market share, sales and eps growth, margin profile
      All these items compared to the comps

      Management team, product lead/innovation/competitive advantage

      The only real difference is PE firms are looking for companies to “fix” an investor simply wants a good company at a good price. Pretty clear distinction.

    • Wall Street Playboys says

      That is very open ended just start with the easy cookie cutter stuff:

      What type of transaction does the PE firm we are pitching like to engage in? Do they tend to get rid of management or do they look for deep value in terms of cutting OPEX.

      Then go through the same jargon
      1) what is the operating margin profile compared to the comps
      2) who are the customers relative to the PE firms relationships
      3) are their “sales or cost synergies” and pitch it towards one of those two directions
      4) do they have contacts to improve the management team

      That’s the basic starting point and it turns into a discussion

  2. Incoming SA says

    Hey Guys,

    I am an incoming SA at a BB. I love the posts here, always hits home. I know this section is for interviewing, but I have a relatively strange question regarding group placements. Although my summer offer is generalist, I have been interviewing/networking with various groups because we get placed right before the internship starts. I have been almost entirely talking with coverage groups, but a small, relatively obscure, product group emailed me and asked if I am interested in learning more. I am assuming no one ranks them in preferences, so they reach out to incoming SAs. I would rather not be in that group this summer. My question is – is it better to ignore the email? Respond with something along the lines of I am not interested? or agree to talk with them and “learn more”. Although I do not want to be placed in this group, I do not want to come off as rude before the internship even begins.

  3. WC says

    As a new IB analyst, how likely are you to get brought in on working capital peg negotiations for a complicated business – is that more associate level work?

    To relate to this section of the site, is that something that would be asked to an incoming analysts? (ie. what are implications on the purchase price of a business if a banker fails to address a working capital target in a business that operates at a negative working capital?)

  4. almostthere says


    Love your stuff. With your help I was able to secure an IBD internship as well as a PE internship!

    When recruiting for full time positions, I get asked a lot in interviews why I want to get back into IBD. The interviewers know that PE shops don’t hire graduates full time out of school and I haven’t been able to come up with a solid response yet.

    Any tips?

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