Breaking into the world of Investment Banking is highly competitive. Whether you’re interviewing for an analyst internship, full-time role, or associate position, preparation is everything. Investment banking interviews are designed to test not only your technical knowledge, but also your communication skills, confidence, business awareness, and ability to think under pressure.
In this guide, we’ll cover the most common investment banking interview questions, why interviewers ask them, and how to answer them effectively.
Technical Investment Banking Questions
The technical section of an investment banking interview typically includes questions on accounting, valuation, corporate finance, IPOs, and mergers & acquisitions (M&A). While these questions may appear intimidating, candidates are not expected to possess expert-level knowledge from the start. Instead, interviewers aim to assess whether you understand fundamental investment banking concepts, can think critically under pressure, and are capable of handling challenging problems. This is why such questions are commonly asked in entry-level and junior investment banking interviews.
Accounting Questions & Answers
1. Walk me through the 3 financial statements.
“The 3 major financial statements are the Income Statement, Balance Sheet and Cash Flow Statement.
The Income Statement gives the company’s revenue and expenses, and goes down to Net Income, the final line on the statement.
The Balance Sheet shows the company’s Assets – its resources – such as Cash, Inventory and PP&E, as well as its Liabilities – such as Debt and Accounts Payable – and Shareholders’ Equity. Assets must equal Liabilities plus Shareholders’ Equity.
The Cash Flow Statement begins with Net Income, adjusts for non-cash expenses and working capital changes, and then lists cash flow from investing and financing activities; at the end, you see the company’s net change in cash.”
2. How do the 3 statements link together?
“To tie the statements together, Net Income from the Income Statement flows into Shareholders’ Equity on the Balance Sheet, and into the top line of the Cash Flow Statement.
Changes to Balance Sheet items appear as working capital changes on the Cash Flow Statement, and investing and financing activities affect Balance Sheet items such as PP&E, Debt and Shareholders’ Equity. The Cash and Shareholders’ Equity items on the Balance Sheet act as “plugs,” with Cash flowing in from the final line on the Cash Flow Statement.”
3. Let’s say I could only look at 2 statements to assess a company’s prospects – which 2 would I use and why?
You would pick the Income Statement and Balance Sheet, because you can create the Cash Flow Statement from both of those (assuming, of course that you have “before” and “after” versions of the Balance Sheet that correspond to the same period the Income Statement is tracking).
4.Walk me through how Depreciation going up by $10 would affect the statements.
Income Statement: Operating Income would decline by $10 and assuming a 40% tax rate, Net Income would go down by $6.
Cash Flow Statement: The Net Income at the top goes down by $6, but the $10 Depreciation is a non-cash expense that gets added back, so overall Cash Flow from Operations goes up by $4. There are no changes elsewhere, so the overall Net Change in Cash goes up by $4.
Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets side because of the Depreciation, and Cash is up by $4 from the changes on the Cash Flow Statement.
Overall, Assets are down by $6. Since Net Income fell by $6 as well, Shareholders’ Equity on the Liabilities & Shareholders’ Equity side is down by $6 and both sides of the Balance Sheet balance.
Enterprise / Equity Value Questions & Answers
1. Why do we look at both Enterprise Value and Equity Value?
Enterprise Value represents the value of the company that is attributable to all investors; Equity Value only represents the portion available to shareholders (equity investors). You look at both because Equity Value is the number the public-at-large sees, while Enterprise Value represents its true value.
2. What’s the formula for Enterprise Value?
EV = Equity Value + Debt + Preferred Stock + Minority Interest – Cash
3. Why do you subtract cash in the formula for Enterprise Value? Is that always accurate?
The “official” reason: Cash is subtracted because it’s considered a non-operating asset and because Equity Value implicitly accounts for it.
The way I think about it: In an acquisition, the buyer would “get” the cash of the seller, so it effectively pays less for the company based on how large its cash balance is. Remember, Enterprise Value tells us how much you’d really have to “pay” to acquire another company. It’s not always accurate because technically you should be subtracting only excess cash – the amount of cash a company has above the minimum cash it requires to operate.
4.Could a company have a negative Enterprise Value? What would that mean?
Yes. It means that the company has an extremely large cash balance, or an extremely low market capitalization (or both). You see it with:
- Companies on the brink of bankruptcy.
- Financial institutions, such as banks, that have large cash balances.
Valuation Questions & Answers
1. 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 (cash flows that do not take into account any debt the company has), determine a discount rate, and calculate a terminal value. Then, you 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.
2. What other Valuation methodologies are there?
Other methodologies include:
- Liquidation Valuation – Valuing a company’s assets, assuming they are sold off and then subtracting liabilities to determine how much capital, if any, equity investors receive
- Replacement Value – Valuing a company based on the cost of replacing its assets
- LBO Analysis – Determining how much a PE firm could pay for a company to hit a “target” IRR, usually in the 20-25% range
- Sum of the Parts – Valuing each division of a company separately and adding them together at the end
- M&A Premiums Analysis – Analyzing M&A deals and figuring out the premium that each buyer paid, and using this to establish what your company is worth
- Future Share Price Analysis – Projecting a company’s share price based on the P / E multiples of the public company comparables, then discounting it back to its present value
3. What are the most common multiples used in Valuation?
The most common multiples are EV/Revenue, EV/EBITDA, EV/EBIT, P/E (Share Price /
Earnings per Share), and P/BV (Share Price / Book Value).
4.What are the main components of WACC and how do you calculate it?
Weighted average cost of capital (WACC) determines the return on investment in a company, and it’s 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-Tc))
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 (Tc) is the corporate tax rate.
These were some highly repeated questions from Investment Banking Interview, but these are just some basic level questions, to really be a pro in Investment Banking, one needs to deep dive into it. You can download more questions from this pdf.
Check out our course on Investment Banking, which will help your chances to break into Investment banking.
