Do you want to nail your investment banking interview, and land your dream job? Are you interested in investment banking, and want to excel in the interview process?
Join us, and discover the top 15 investment banking interview questions and answers!
We know that investment banking interviews can feel overwhelming, but you really don’t need to worry. We’ve researched the best answers and provided key pointers to ensure you succeed.
In this blog, we cut through the noise and give you the knowledge and confidence to smash that interview.
Are you ready? Let’s go!
What are the top investment banking interview questions?
The top investment banking interview questions are finance and technical questions – such as, ‘How would you value a company?’, and ‘define Beta’.
Investment banking interviews also include top questions about how you fit the industry and role, for example, ‘How does your experience give you the skills for investment banking?’, and ‘Why this bank?’.
But how do you nail these core questions, with answers that are sharp, intelligent and flawlessly correct? Join us to find out, as we take you through the top 15 questions and answers for investment banking interviews.
Top Finance and Technical Questions
How would you value a company?
You can use 2 key valuation methods: Intrinsic value (discounted cash flow valuation), and Relative valuation.
To value a company by intrinsic value, you should look at project free cash flows for 5-120 years (depending on if you can get the information) and then calculate a terminal value.
You’ll discover the company’s enterprise value, through discounting the free cash flow projection and terminal value, by an appropriate cost of capital. To arrive at equity value per share, divide equity value by diluted shares outstanding.
To value a company by relative valuation (multiples), you need to look at companies which are in the same industry. These companies need to have similar operational, growth, risk and return on capital characteristics.
You should calculate appropriate industry multiples. Then, you should apply the median of these multiples on the relevant operating metric of the company you’re valuing, to arrive at a valuation. You could also research different industries, to get an idea of the valuation multiples they use.
Which is higher – the cost of debt or the cost of equity?
The cost of equity is generally higher than the cost of debt. This is because debt holders tend to have less risk of not getting their money back, and are happier to accept lower returns.
How do you calculate unlevered free cash flow?
Unlevered Free Cash Flow is a theoretical cash flow figure for a business, after operating expenses, expenditures and investments in working capital. The formula to calculate it is:
Unlevered free cash flow = EBIT – Taxes + Depreciation & Amortization – Capital Expenditures – increases in non-cash working capital.
What is WACC and how do you calculate it?
WACC is the weighted average cost of capital. You need to multiply the cost of each capital component by its proportional weight, and calculate the results. WACC lets us find the average rate of return in order for a company to pay all its investors.
How are the three financial statements linked together?
The three financial statements are: the Income Statement, the Balance Sheet, and the Cash Flow Statement.
The net income in the income statement relates to the cash flow statement and balance sheet.
In the balance sheet, net income comes into stockholder’s equity through retained earnings.
In the cash flow statement, we use net income to calculate cash flows from operations.
What is the appropriate numerator for a revenue multiple?
How do you calculate the cost of equity?
You can calculate the cost of equity by using the CAPM (Capital Asset Pricing Model), which is the main model we use.
The CAPM Formula:
Cost of equity (re) = Risk free rate (rf) + β x Market risk premium (rm-rf )
The Risk-Free Rate of Return:
The return you can expect from a risk-free investment. You can use the 10-year Treasury note to calculate the expected return for a US company.
Beta is a method to estimate an asset’s systematic risk. You can calculate Beta using regression. You divide the covariance of the asset and the market’s returns by the variance of the market.
βi < 1: Asset i is less volatile (relative to the market)
βi = 1: Asset i’s volatility is the same rate as the market
βi > 1: Asset i is more volatile (relative to the market)
Expected Market Return
The average return of the market over a specified period of time (5-10 years, for example).
When should you value a company using a revenue multiple vs. EBITDA?
You should use Revenue multiples when a company has negative profits, as EBIDTA will be meaningless.
Beta is how much the price of a given security moves in relation to the overall market.
For example, a Beta of 1 means that when the market moves, the stock moves along with it.
A Beta <1 means that when the market moves, the stock moves less than that amount.
A Beta >1 means that if the market moves a certain amount, the stock moves more than that amount.
- Which two companies should merge, and why?
Mergers and acquisitions are crucial in investment banking, so it’s worth having an original and fascinating answer to this. Interviewers aren’t necessarily looking for an example of a perfect merger – you just have to demonstrate your thinking behind it. Sell Side handbook have a great guide to answering this question, and wowing your interviewer.
Questions about how you fit the industry and role
Why do you want to go into investment banking?
Your interviewer will ask this question, because they want to know if you have the drive, dedication and near-obsession to work long hours in this tough industry.
You’ll need to prove that you’re super committed to a career in investment banking, despite its challenges. You can give a stronger answer by including specific and original reasons for your desire to go into investment banking. Here’s two easy pointers to prove your passion:
- refer to any bankers you’ve spoken to that have inspired you (especially if they work in the bank you’re interviewing with).
- refer to the bank itself – what makes it stand out as a firm, and how it inspires you to work in investment banking.
How does your previous experience give you the skills to work in investment banking?
You can excel in this question, by using the S.T.A.R technique – situation, task, action, and result. Pick a few situations you handled in your past jobs or work experience. Choose examples which showcase what bankers want to see – leadership, hard work, attention to detail, and financial skills.
Summarise the tasks you had to complete, and demonstrate the actions you took. Then, discuss the concrete results – did you slash budgets, solve a major problem, or increase revenue? This gives your interviewer cold, hard proof that you can take action and deliver results as an investment banker.
Why do you want to work at our company?
This is your chance to show the interviewer why you’re the person they should hire. Make them believe that nobody wants to work at this company more than you! This is also your opportunity to demonstrate that you know the company well. Do a deep dive into the firm and explore:
- the company’s financial model, and what works about it. This is also a great chance to show off your knowledge of financial models and what makes them work well.
- Which area of their business is strongest.
- Who their main competitors are, and where they have the edge. You could also discuss the risks and opportunities they face against their competitor.
Can you tell me about a team activity that didn’t go as planned? How did you manage the challenges?
Again, this is a great chance to use the fool proof S.T.A.R method. You simply cover a situation where you had a task to do as a team, and explain the problems that arose. Then hit them with the incisive action you took, and you solved the problem and gained the positive results.
What are you three biggest strengths and three biggest weaknesses?
Choose strengths that will go far in investment banking – leadership, grit and persistence, and financial ability. Always back these up with an example – you want to show, not tell, your abilities.
Be honest about your weaknesses, but always frame them as a learning opportunity. It might be that you second-guess your decisions, or you’re not the best at delegating tasks. But always come up with an example of how you realised this weakness in your past work, and took steps to overcome it. This will show that you’re self-aware, resilient and flexible, perfect qualities for an investment banker.