Interview Questions for Investment Banking


Interview Questions for Investment Banking

For a job opening on investment banking, the interviewers usually look for a candidate with a sound technical knowledge in finance, accounting, financial modelling, and valuation. Here are a few questions along with their answers that can help you prepare for the interview:

Question: Give a brief description of the three financial statements.

Answer: The three financial statements are:

Balance sheet – The balance sheet is one of the three basic financial statements, which are significant to both financial modelling and accounting. The balance sheet shows the company’s total assets and the way in which these assets are financed, which could either be through debt or equity.

Assets = Liabilities + Equity.

Income statement – The income statement is one of the three fundamental financial statements of a company that displays its profit and loss during a time period. The profit or loss is calculated by considering all revenues and subtracting all expenditures from both operating and non-operating undertakings.

Cash flow statement – A cash flow statement is also known as the Statement of Cashflows and comprises information about the amount of cash produced by a company and utilized in a specific time duration. It consists of three segments, namely:

•cash from operations;

•cash from investing; and

•cash from financing.

Question: How can we value a company?

Answer: Three common valuation methods are employed in investment banking for valuing a company, which are:

Multiples approach – It is also known as “comps”. In this method, the earnings of a company are multiplied by the P/E ratio of the industry in which it contends.

Transactions approach – It is also known as “precedents”. In this method, the company is compared with the other companies in the industry that have been just sold or acquired.

Discounted cash flow approach – in this method, the values of the future cash flows are discounted back to the present.

Question: What are the important constituents of Weighted Average Cost of Capital (WACC)?

Answer: The important constituents of WACC are debt, equity, tax, and beta.

Question: How can we calculate WACC?

Answer: WACC can be determined by taking the proportion of debt to total capital, times the debt rate, times one minus the effective tax rate, plus the proportion of equity to capital, times the required return on equity.

Question: Is debt cheaper than equity? Justify your answer with an appropriate reason.

Answer: Yes, debt is less priced than equity because it is paid before equity and may have security. In addition, debt ranks ahead on liquidation.

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