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25 Investment Banking Interview

Questions (With Answers)
Written by McKayla Girardin
Edited by Jeanine Skowronski — Reviewed by Rachel Pelta
Updated on March 9, 2023
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Investment banking interview questions are ofter hyper-technical, involving

calculating specific numbers and walking through various investment banking
activities. While they can seem overwhelming at first, you can nail an investment
banking interview with a little study and preparation.

In this guide, we’ll go over:

Introductory Interview Questions

Technical Investment Banking Questions
Theoretical Interview Questions
Personality Interview Questions

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Introductory Interview Questions

Investment banking interviews begin the same way as any other interview:
getting to know one another. The interviewer will likely give you an overview of the
company and the position, and then ask you some questions about yourself.

1. Walk me through your resume.

Your answer to this question should be brief and highlight any past finance
experience you have. This is your chance to mention internships, programs, or
previous jobs that are highly relevant to the role. You should also give a quick
overview of your education, especially if you had relevant coursework.

2. Why investment banking?

This is an important question — investment banking is a difficult industry to

break into, and the job requires a lot of dedication, long hours, and hard work.
Employers want applicants who are passionate about investment banking and
who have the drive it takes to succeed in the industry. Preparing a response can
help you hit the key points:

Why you are passionate about investment banking

What you see as your future within investment banking
What about investment banking gets you excited

While more generic responses like “I enjoy fast-paced environments” or “I enjoy

corporate finance” are not bad answers, they won’t make you stand out. Find your
personal tie to investment banking — what makes you passionate about the job.

3. Tell me about a company you admire or a recent deal you

find interesting.

Interviewers want to see that you speak the same language as them, so they may
ask you about a company that you admire, a stock you personally have invested
in, or a recent merger or acquisition that you find fascinating.

You can mention a recent deal the investment bank you’re applying for has
facilitated, for example, but make sure it is something you are actually interested
in. Genuine answers are always better received, and this question gives you an
opportunity to mention some side interests.
For example, if you’re really into video games in your spare time, and a small
game developer you enjoy has recently gone public, that can be a great topic to
introduce!

Technical Investment Banking Questions

The technical portion of an investment banking interview involves specific
questions about accounting, mergers and acquisitions (M&A), IPOs, corporate
finance, and valuation. The questions can seem daunting but remember: you are
not expected to be an expert already. These are common investment banking
interview questions for entry-level or junior roles. The interviewer wants to see
that you have some core investment banking skills and can handle a bit of a
challenge.

1. Tell me about financial statements and why they are

important.

The three common financial statements are balance sheets, income statements,
and cash flow statements.

Balance sheets show a company’s assets and liabilities, including

shareholder equity, debt, and accounts payable.
The income statement displays the company’s net income over a period of
time and shows revenue and expenses.
Cash flow statements show a company’s cash flow from operating, financing,
and investing activities.

2. What is enterprise value versus equity value?

Enterprise value is the overall current value of the company while equity value is
the value of the company’s shares and loans, which can give an idea of the
company’s current and future value.
3. What is the formula for enterprise value?

Enterprise value is market capitalization plus total debt minus cash.

EV = MC + Total Debt – C

Market capitalization (MC) is the current stock price times the number of
outstanding shares.
Total debt is the cumulative amount of short and long-term debt.
Cash (C) is liquid assets.

4. What are the main components of WACC and how do you

calculate it?

Weighted average cost of capital (WACC) is a formula used to determine the

return on investment in a company, and it is comprised of the sum of a
company’s proportional debt and equity multiplied by the cost of debt and cost of
equity, respectively.

WACC = (E/V x Re) + (D/V x Rd x (1-T))

Equity (E) is the market value of the company’s outstanding shares, so E/V
is the percentage of the company’s value that is equity.
Debt (D) is the market value of the company’s debt, so D/V is the percentage
of the company’s value that is debt.
Value (V) is the value of the company’s capital, or E+D.
Re is the cost of equity
Rd is the cost of debt
Tax (T) is the corporate tax rate.

5. What is EBITDA?
EBITDA is an acronym that stands for earnings before interest, taxes, depreciation
and amortization. It is a measure of financial performance and helps determine a
company’s earning potential.

6. How do you value a company?

There are three main ways to value a company — comparable company analysis,
discounted cash flow analysis, and precedent transaction analysis.

Comparable company analysis involves finding companies that are similar to

the one you are trying to value and comparing their EBITDA, stock price, and
price to earnings, among other variables.
Discounted cash flow (DCF) analysis is using how much the company is
projected to make in the future discounted to present values.
Precedent transaction analysis is similar to a comparable company
analysis, except you find how much similar companies have sold to
determine the worth of the company you’re valuing.

7. How do you calculate terminal value?

Terminal value (TV) is the estimated value of a company after a specific period of
time, and it is a core element of DCF analysis. There are two ways to calculate
terminal value: the growth in perpetuity approach or the exit multiple approach.

The growth in perpetuity approach involves assuming that cash flows grow at
a stable rate indefinitely.
The exit multiple approach does not assume perpetual growth and instead
looks at the net value of a company’s assets at a given moment in time. It
is used for a company that is going to be acquired or liquidated in the
future.

8. How do you do a DCF valuation?

At a high-level, DCF valuation involves determining how much a company is set to
make over a 5-to-20-year period and then calculating a terminal value.

Specifically, to do a DCF analysis, you need to project unlevered future cash flows,
determine a discount rate and calculate a terminal value. Then, discount the
unlevered free cash flow and terminal value to present value to determine
enterprise value. By subtracting net debt from the company’s enterprise value,
you calculate the equity value.

9. What is the discount rate you should use in an unlevered

DCF analysis?

The discount rate is the required rate of return of both debt and equity, so the rate
should be the weighted average cost of capital (WACC).

10. What is Beta, and why would you unlever it?

Beta, symbolized by the Greek character β, is an estimate of how volatile a

security (or tradeable asset) is compared to the overall market (often the S&P
500). The baseline for beta is 1.0, so anything above 1.0 is more volatile and holds
more inherent risk.

It is best to use an unlevered beta when comparing a company that is not on the
market yet. Additionally, because unlevered beta does not consider debt, it allows
you to see the volatility of the company’s equity alone as if the company had not
taken on any debt.

11. Which is more expensive: the cost of debt, or the cost of

equity?

The cost of equity is how much shareholders are expected to make from their
investment in a company, while the cost of debt is the rate of return that
bondholders expect from investing. So, the cost of equity is typically higher, since
shareholders are not guaranteed fixed payments and they assume a higher risk
when investing.

Additionally, the cost of debt is lower because the interest expense when
borrowing debt is tax-deductible.

12. What are the main factors that cause a need for mergers
and acquisitions?

The major factors that lead to a merger or acquisition include:

Saving money
Improving financial health and overall metrics
Eliminating competition from the market
Gaining more power over pricing by buying out a distributor or supplier
Diversifying or specializing — expanding the company’s product or finding
ways to make it more niche for a specific market
Expansion of technological abilities or absorbing new technologies from
acquired companies

13. When should a company issue debt instead of equity?

Since the cost of debt is generally cheaper than the cost of equity, there are quite
a few situations where issuing debt makes more sense than issuing equity.
Issuing debt instead of equity makes sense if:

The company can get tax shields from issuing debt.

The company has stable cash flows and can make interest payments.
It results in a lower WACC.
The company can get a better return on investments with more financial
leverage.
14. What is net working capital?

Net working capital (NWC) is essentially how much money a company has if it
pays off all current short-term debts.

NWC = Current Assets – Current Liabilities

Current assets include items found on a balance sheet, such as accounts

receivable, inventory, and prepaid expenses, while current liabilities are short-
term debts like accrued expenses, deferred revenue, and accounts payable.

If a company has a positive NWC, it means the company is able to cover all short-
term liabilities with its current assets. A negative NWC would mean the company
cannot cover these liabilities, though, and indicates that the company either
needs to increase cash reserves or seek more financing.

15. What is an IPO?

An IPO is an initial public offering. That’s when a private company wants to

transition to being publicly traded and an investment bank helps sell its shares
to investors for the first time. An IPO is sometimes called “going public” and it
can help companies raise capital and allows investors, original owners, and
employees to cash-out some of their investments in the company.

16. Explain the process of helping a company complete an

M&A from the buy-side.

Helping a company find an appropriate acquisition involves:

1. Researching potential companies

2. Filtering the options based on feedback from your client, the buyer
3. Figuring out if the potential companies are interested in being purchased
 4. Discussing offer price with the buyer and seller
5. Negotiating the purchase agreement
6. Announcing the M&A transaction

>>MORE: Learn the skills you need to ace these tough interview questions with
our Investment Banking Skills Passport.

Theoretical Interview Questions

In an attempt to understand how your brain works and how you process difficult
problems, the interviewer will likely ask some brain teasers and word problems.
Investment banking requires strong analytical skills, so being able to analyze a
hard question and tackle it logically is important. Some of these types of
investment banking interview questions may seem outlandish, while others may
be specific to investment banking.

1. Two companies are almost exactly the same in every way,

except Company A is trading at 20 P/E and Company B is
trading at 18 P/E. Which would you invest in?

P/E is the price-to-earnings ratio, which demonstrates the cost per $1 of earnings.
In this situation, it’s best to invest in Company B because a lower price/earnings
ratio is a better investment — you are paying less for each $1 of earnings.

2. Why are manhole covers round?

This question is to see your logical thinking in action. Some responses to this
include the fact that round covers cannot fall into round holes and can be easily
rolled if they need to be moved. Additionally, round covers are easy to fit and
align.

3. How would you figure out how much an aircraft carrier

weighs without using a scale?

This question displays how you break down difficult problems. There are a lot of
different ways to tackle this question. For example, you could ask an engineer who
is familiar with aircraft carriers or try to gauge how much individual components
of the aircraft carrier weigh. The solution itself is less important than you showing
how you would think this problem through.

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Personality Interview Questions

Some interview questions are common to all careers, and personality questions
are no different. Whether it’s an interview for investment banking or for
zookeeping, interviewers want to get a sense of what type of person and worker
you are.

1. Tell me about a time when you…

“Tell me about a time when you” questions are designed to see how you would
react in specific scenarios. For example, the interviewer may ask you to tell them
about a time when you disagreed with a manager.

Using the “STAR” (Situation, Task, Action, and Result) method can help you give
clear and concise answers – describe the situation and what task or challenge
you were dealing with, then say what actions you took to overcome the issue and
the outcome of your actions.

2. What are your hobbies?

What you do in your free time doesn’t need to be job-related, but if you run a small
business in your spare time, or spend your nights finding new companies to
invest in, that could gain you some bonus points with the interviewer.

However, having interests outside of work portray you as a more well-rounded

candidate. Stick to only mentioning work-appropriate hobbies, but let your
personality shine through here.

3. Describe the work environment you thrive in.

It is no secret that investment bankers work long, fast-paced hours, so it is

probably best to not say you work best in a slow-moving, low-intensity
environment. But this is a good opportunity to talk about the type of people that
inspire you to do great quality work and the type of day-to-day structure that you
align with. Additionally, noting things about your preferred management styles
and office culture can help the interviewer get a better sense of if you’d be a good
fit for their company.

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