Here are the top 3 investment banking interview questions
Investment banking interviews are designed to evaluate how fit a candidate is for the leading job role in the field of finance, and therefore should be attended with a decent level of preparation.
Candidates must have a solid understanding of corporate finance fundamentals, and company valuation, along with a certain degree of knowledge about the tools used in the industry, accounting, investing fundamentals, and banking. The following article will explore the top investment banking interview questions for you to prepare.
Q. How do you value a company?
Top investment banks seek candidates who can value a firm, to a certain degree of accuracy, by evaluating different pieces of information such as the company’s financial statements,growth drivers, etc. and making appropriate assumptions. The 2 primary valuation methodologies are Intrinsic value, and Relative valuation (multiple-based valuation).
You may get a case study from the recruiter and be required to provide an in-depth analysis of the given company during the interview. You can also carry one of your investments to demonstrate how you value a company.
When talking about absolute valuations – Intrinsic Value or the DCF method, you must mention that the value of all financial, productive assets equals the present value of the future free cash flows, discounted at an appropriate discount factor. To know more about DCF valuation you can also refer to this article.
Q. What are the different methods of valuing a company and how would you value a loss-making business?
With the rise of loss-making startups hitting Wall Street, the possibility and relevance of such a question are high. This question is about different valuation techniques that you must be familiar with and know how to value a loss-making company. Since most valuation methods rely on earnings, valuing a loss-making company could be tricky.
You can start your answer by describing different ways to value a company on both an absolute and relative basis. Common valuation methods include:
- Asset valuation
- Liquidation value
- DCF Valuation
- Abnormal Earnings Valuation
- Earnings multiple or variation of relative valuation method
Coming to valuing a loss-making company, you can mention relative valuation techniques based on a sales multiple or the basis of users. Moreover, if you have a good understanding of the company, the industry in which it operates and its competitive landscape and feel confident about projecting its cash flows, you can also mention DCF valuation. However, you must have very deep industry knowledge to project cash flows and future CapEx (capital expenditure).
Q. The cost of debt or the cost of equity – which is higher?
This is one of the most asked investment banking interview questions since it tells the interviewer about your knowledge of finance beyond the basic formulas and definitions.
The cost of equity, generally, is higher than the cost of debt. A higher cost of equity means that equity holders require a higher rate of return as compared to debt holders. This compensates for the additional risk that equity holders take by not being guaranteed fixed payments, unlike debt holders. Moreover, they are also last in line to receive compensation in the case of liquidation, after the debt holders. Additionally, the cost of equity is also higher because interest payments – the cost associated with debt (interest expense) is tax deductible, offering businesses a tax shield.
Practising finance, valuation, and mergers and acquisitions questions extensively will help you ace your investment banking interview. You should focus heavily on the fundamentals of corporate finance and company valuation to get good results. You should also reflect on your experiences if you have previously been through IB interviews to learn from them and correct any shortcomings. You can also check out online courses on investment banking interview preparation for added guidance.