Investment Banking Interview Questions

QUESTIONS ASKED AT AN INVESTMENT BANKING INTERVIEW

Any aspiring investment bankers successfully arrive to their IB interview insufficiently prepared for the different kinds of questions they’ll encounter. In this article, we try to provide you a brief outline of what questions to expect during an interview and how to approach them.

Questions interviewers have in store for you seek to ascertain two things about your candidacy:

• Would you fit in?
• Can you do the job?

Thus, broadly, there are two main types of questions you will encounter during your interview: (1) personal questions (Qualitative) and (2) technical questions (Quantitative).

Personal Questions

Personal questions give the interviewer an opportunity to find out about your attitude and to assess whether you are right for the company. We can further break down personal questions into two sub-categories: (1) “background story” questions and (2) general ‘fit’ questions.

Background Story

 Almost every interview starts with a question on your background. Whatever form it takes (“Tell me about yourself”, “Walk me through your resume” etc.), it is by far the most important question you’ll be asked. Interviewers make up their mind about a candidate in the first few minutes of the conversation. Your answer to this question should be logically structured, coherent, and concise. It shouldn’t take longer than 2-3 minutes, so write down your story and practice it to perfection. Here is a simple structure you can use to formulate your answer:

1. Your back story (school / university / prior career)
2. Why you’re interested in finance
3. Why you’re interested specifically in investment banking
4. Why this investment banking firm

A good story should exude enthusiasm and confidence and should leave no doubt as to the motivation behind your career choice as well as why this firm is the right fit for you. Make sure that you do some research on this particular firm before you get to the interview.

Fit Questions

 The fit questions are the other type of personal questions you’ll be asked. As the name suggests, they seek to establish a fit within the company. Investment banking positions involve working long hours with a team of other investment bankers. Therefore, recruiters want to ensure that burning the midnight oil with you won’t make the job intolerable. Senior bankers tend to ask more of these questions, and since they’re the ones making the decisions at the end of the day, acing these questions is crucial.

It’s hard to categorize all the fit questions that could be thrown at you. The best thing to do is remember to relax and be yourself. You should also read as many sample questions as you can and prepare several short stories from your experience that demonstrate abilities and skills required for the position. Don’t be boastful as you could come across as dishonest. Remember, the very fact that you got an interview invitation means that recruiters already believe you’ve got what it takes – you just need to justify that vote of confidence.

Technical Questions

Technical questions are your chance to demonstrate how well prepared for the job you are. These questions are most often asked during the earlier rounds of the process when interviewing with junior investment bankers because they tend to have a more technical focus in their day-to-day lives at the investment bank.

You can expect three main types of technical questions:

1. Accounting and Financial Statements
2. Valuation Methodology
3. Financial Modeling

1. Accounting and Financial Statements Questions

 For these questions you need to know your way around the 3 main financial statements; namely, balance sheet, cash flow statement, and income statement. You’ll also need to know how these 3 statements interconnect. The most common example of an accounting question involves explaining the effect that a change in one of the statements has throughout the others.

Example: Assuming a tax rate of 30%, what happens to the other financial statements if $100 is added as a depreciation expense to the income statement?

2. Valuation Questions

 Valuing companies and projects form the core of a junior investment banker’s duties, so expect interviews to cover this skill extensively. In order to prepare effectively, as a minimum you need to have a good grasp of the three main valuation methodologies:

1. Precedent Transaction Methodology
2. Comparable Company Methodology
3. Discounted Cash Flow Methodology

Make sure to know the differences in outcome that each method is likely to produce. Also make sure to know how all three methodologies are used together to form a conclusive valuation.

3. Financial Modeling Questions

 Modeling is the other core skill an investment banker needs to possess. Modeling interview questions usually revolve around either M&A or LBO models.

Mergers and Acquisitions (M&A) Modeling

 The purpose of a merger model is to demonstrate the impact of an acquisition to the earnings per share (EPS) of the acquiring company. You will need to consider whether the transaction is “accretive” (new EPS is higher) or “dilutive” (new EPS is lower). Needless to say, you will have to know very well what the EPS depends on. Especially, you need to know your way around the different financing options for the acquisition (debt, shares, and/or cash) and how each of them affects EPS. Thus, you have to be ready to make a reasoned conclusion as to the optimal financing solution for an acquisition.

Example: What can cause an EPS dilution in an M&A transaction?

Leveraged Buy-Out (LBO) Modeling

 Interviewers will test your understanding of the mechanics of a Leveraged Buy-Out (LBO) Model. The most typical question is simply “Walk me through an LBO model”. The key to approaching this question is to keep your answer fairly simple. Here is a three-step structure you can use to formulate your response:

1. Lay out the transaction assumptions: involves creating a table of sources and uses (with sources = uses). The uses section outlines the total purchase cost (expressed as a multiple of EBITDA). The sources section outlines how the transaction will be financed.

2. Build an integrated cash flow model: here you need to project the company’s financial statements for a stated period of time including the repayment schedule resulting from new assumed debt.

3. Calculate the company’s IRR: assuming the same EBITDA multiple which the company was purchased, calculate the PE firm’s equity stake. From there, the IRR can be derived.

Example: If in an LBO analysis the Private Equity firm’s return is too low, what drivers will increase the return?

Final Investment Banking Interview Tips

Preparing thoroughly for all kinds of questions is an absolute prerequisite if you want to get that high paying investment banking job.

Keep in mind, though, that when it comes to technical questions, graduating from an academic institution often times is not enough. A lot of candidates fresh out of a Bachelor’s or MBA program have substantial financial knowledge, but they lack the practical skills of financial modeling and valuation. Ensure that your skill set is in order before attending any investment banking interview.

Once you’re fully prepared with investment banking interview questions, please remember to relax and be yourself.

Happy interviewing!