Investment Banking Interview Questions and Answers - English

1. Basic Finance Concepts

Q: What are the three main financial statements, and how do they relate to each other?

A: The three main financial statements are the Income Statement, Balance Sheet, and Cash Flow Statement.

The Income Statement shows a company's revenues, expenses, and profits over a period.

The Balance Sheet shows a company’s assets, liabilities, and shareholders' equity at a specific point in time.

The Cash Flow Statement reconciles the beginning and ending cash balances by outlining cash inflows and outflows from operating, investing, and financing activities. These statements are interconnected. For example, net income from the Income Statement feeds into the Shareholders' Equity section of the Balance Sheet (retained earnings), and it also flows into the top line of the Cash Flow Statement (starting point for operating cash flows).

2. Valuation Techniques

Q: Walk me through a discounted cash flow (DCF) analysis.

A: In a DCF, we project a company’s free cash flows over a period (typically 5-10 years), discount them to the present value using the company’s weighted average cost of capital (WACC), and then calculate the terminal value. The two components, discounted free cash flows and terminal value, give the enterprise value (EV). Steps:

Project free cash flows for a set period.

Determine the terminal value using either the Gordon Growth Model or Exit Multiple Method.

Discount both the projected cash flows and the terminal value back to present value using WACC.

Add the discounted cash flows and terminal value to determine the company’s enterprise value.

Q: What are some other methods to value a company?

A: Besides DCF, common methods include:

Comparable Companies Analysis (Comps): Comparing valuation multiples of similar public companies.

Precedent Transactions Analysis: Looking at valuation multiples paid in similar historical transactions.

Leveraged Buyout (LBO) Analysis: Estimating what a private equity firm would pay, leveraging a large portion of the purchase with debt.

3. Market and Industry Questions

Q: What’s happening in the market right now?

A: Stay updated with current events, like interest rate changes, M&A trends, or economic reports (e.g., inflation rates, GDP). For instance, if interest rates are rising, it might affect valuation by increasing the cost of debt and reducing DCF valuation. Be prepared to discuss specific industries relevant to the firm you're interviewing with.

4. Accounting Knowledge

Q: How does depreciation affect the financial statements?

A: Depreciation affects all three financial statements:

Income Statement: It reduces taxable income as an expense, lowering net income.

Balance Sheet: It reduces the value of fixed assets (PP&E) and is reflected in accumulated depreciation, a contra-asset account.

Cash Flow Statement: Depreciation is added back to operating cash flow because it is a non-cash expense.

Q: What is goodwill, and how is it treated in financial statements?

A: Goodwill arises when a company acquires another company for more than its fair value. It is an intangible asset on the Balance Sheet. Goodwill is not amortized but is tested for impairment annually. If impaired, the loss is recorded on the Income Statement, reducing net income and assets.

5. Behavioural and Fit Questions

Q: Why do you want to work in investment banking?

A: Highlight a passion for finance, analytical challenges, and deal-making. Example: "I’m drawn to investment banking because it offers a unique combination of strategic thinking and analytical rigor. The fast-paced environment and exposure to large transactions align with my long-term goals of learning the intricacies of corporate finance and working on complex deals."

Q: Tell me about a time you worked in a team under pressure.

A: Use the STAR method (Situation, Task, Action, Result). Example: "During my internship, my team was tasked with completing a valuation for a client’s acquisition target under a tight deadline. I took the initiative to create detailed financial models, dividing the tasks among the team, and ensured we communicated effectively. We delivered the analysis ahead of schedule, impressing both the client and senior leadership."

6. Technical Questions

Q: What is EBITDA, and why is it important?

A: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a proxy for a company's cash flow from operations. It's important because it removes the impact of non-cash items (depreciation and amortization) and financing decisions (interest and taxes), allowing investors to compare operational performance across companies.

Q: How would you value a company with negative earnings?

A: When a company has negative earnings, methods like DCF and comparable multiples based on earnings may not be appropriate. Instead, you can use:

Revenue multiples (EV/Revenue).

Adjusted EBITDA multiples if the company has positive cash flow before interest, taxes, depreciation, and amortization.

Asset-based valuation, particularly in distressed situations.

7. Brain Teasers / Problem Solving

Q: How many gas stations are there in the U.S.?

A: This question is testing your ability to think logically. Example approach:

U.S. population is roughly 330 million.

Estimate there’s 1 car for every 2 people (165 million cars).

Each car needs gas about once per week.

Assume a gas station serves 2,000 cars per week.

Divide 165 million by 2,000: around 82,500 gas stations.

By preparing answers that demonstrate strong technical skills, awareness of current market conditions, and teamwork abilities, you'll be ready to tackle both the technical and behavioural parts of your investment banking interview.