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Clarify the time for the interview and explain that you may interrupt if necessary, etc.
Provide an outline of what they should expect during the interview. Highlight areas to be covered.
Mention you may take notes & give candidate permission for “thinking time”.
Question #1
“How many hairstylists or barbers do you estimate there are there in this city? Explain your
logic/assumptions.”
Answer: Explain the logic based on the population of the city, average number of cuts people have
per year, number of cuts one barber can do per year, and thus how many that implies there must be.
(e.g., 2 million people, each get an average of 4 cuts per year, which results in 8 million cuts per year.
Each barber works an average of 8 hours per day, times Jve days per week, times Jfty weeks per
year equals 2,000 hours of cutting time per year. Each haircut takes 1 hour. Thus, 8 million haircuts,
equal 8 million hours, divided by 2,000 hours per barber requires 4,000 barbers in the city.)
Question #2
“In the middle of a pond is a single lily pad; the lily pad doubles in size every day and the pond is
completely covered on the last day of the month (30 days). How long does it take for the pond to
be half covered?”
Answer: 29 days, because if it doubles in size each day it also halves each day. Thus at 29 days is half
full in order to be completely full in 30 days.
Question #3
“A windowless room contains three identical light bulbs. Each light is connected to one of three
switches outside of the room. Each bulb is switched o! at present. You are outside the room, and
the door is closed. You have one, and only one, opportunity to "ip any of the external switches.
After this, you can go into the room and look at the lights, but you may not touch the switches
again. How can you tell which switch goes to which light?”
Answer: Switch on switches 1 & 2, wait a moment and switch oR number 2. Enter the room.
Whichever bulb is on is wired to switch 1, whichever is oR and hot is wired to switch number 2, and
the third is wired to switch 3.
Question #1
“Please walk me through the three #nancial statements.”
Answer:
The balance sheet is a snapshot at a point in time. On the top half you have the company’s Assets
and on the bottom half its Liabilities and Shareholders’ Equity (or Net Worth). The assets and
liabilities are typically listed in order of liquidity and separated between current and non-current.
The income statement covers a period of time, such as a quarter or year. It illustrates the
proJtability of the company from an accounting (accrual and matching) perspective. It starts with
the revenue line and after deducting expenses derives net income.
The cash Zow statement has three sections: cash from operations, cash used in investing, and cash
from Jnancing. It can be calculated using the direct approach or the reconciliation approach. It
“undoes” all of the accounting principles and shows the cash Zows of the business.
Question #2
“How would you value a company?”
Answer:
There are three common valuation methods used in IB:
1) The multiples approach (also called “comps”), in which you multiply the earnings of a company by
the P/E ratio of the industry in which it competes (and other ratios).
2) Transactions approach (also called “precedents”), where you compare the company to other
companies that have recently sold/been acquired in that industry.
3) The Discounted Cash Flow approach, in which you discount the values of future cash Zows back to
the present.
Question #3
“You have the opportunity to purchase a series of future cash "ows that are $200 in perpetuity.
The total cost of capital is 10%, how much are you prepared to pay today?”
Question #4
“When should a company consider issuing debt instead of equity?”
Answer: There are many reasons to issue debt instead of equity: (1) It is a less risky and cheaper
source of Jnancing compared to issuing equity; (2) If the company has taxable income, issuing debt
provides the beneJt of tax shields; (3) If the Jrm has immediately steady cash Zows and is able to
make their interest payments; (4) higher Jnancial leverage helps maximize the return on invested
capital; (5) when issuing debt yields a lower weighted cost of capital (WACC) than issuing equity.
Question #5
“List the main components of WACC (i.e. Weighted Average Cost of Capital).”
Question #6
“How do you calculate the WACC?”
Answer: This is calculated by taking the proportion of debt to total capital, times the debt rate, times
one minus the eRective tax rate, plus the proportion of equity to capital, times the required return
on equity.
Question #7
“Which is cheaper debt or equity? Why?”
Answer: Debt because: It is paid before equity / may have security. Ranks ahead on liquidation
Question #8
“What is the average Price/Earnings PE ratio for the S&P 500 Index?”
Answer: About 15-20 times, the PE ratio varies by industry and period in the cycle.
Question #9
“A company has learned that due to a new accounting rule, it can start capitalizing R&D costs
instead of expensing them.“
Answer:
Part a) EBITDA increases by amount capitalized;
Part b) Net Income increases, the amount depends on depreciation and tax treatment;
Part c) Cash Zow is almost constant – however, cash taxes may be diRerent due to depreciation rate
Part d) Valuation is constant – except for cash taxes impact/timing on NPV
Question #10
“What happens to Earnings Per Share (EPS) if a company decides to issue debt to buy back
shares?”
Answer:
Repurchase of shares reduces the number of shares outstanding which increases EPS.
Whether it increases or decreases EPS depends on the net impact of the above two points.
Question #11
“What makes a good #nancial model?”
Answer:
Building a Jnancial model takes a lot of practice to be really good at it. The best Jnancial models are
clearly laid out, identify all the key drivers of the business, are accurate and precise yet not overly
complicated, can handle dynamic scenarios, and have built-in sensitivity analysis and error checking.
“Why do you want to work in investment banking? Or at this bank?” [this question is so common
we made a separate page with a full answer to it here].
“Give a time where you had multiple options and explain how you arrived at your decision.”
“If you could live in any city in the world, and money was not an issue, where would you live and
why?”
“What is one of your biggest weaknesses and how do you deal with it?”
“What is one thing you believe to be true, but that most people would disagree with you on?”
“What does leadership mean to you? Can you provide some examples of good and bad
leadership?”
Answers: Grade the interviewee based on how well they expand on their ideas. There are no right or
wrong answers. The key is to determine the following: do they demonstrate maturity, are they
comfortable with ambiguity, can they work as a team, do they have emotional intelligence, would
they Jt well in our culture, etc. See more behavioral interview questions.
Next Steps:
This is the end of the investment banking interview questions.
Advise the candidate that HR will be in contact shortly with an update (within the next couple of hours/days)
Become a certiJed Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online Jnancial
modeling classes and training program!
CPE Credits
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