Investment banking interview questions, with strong answers
12 questions from Compass's mock interviews, the way an interviewer asks them. Each has a strong answer, a common miss, and why one lands and the other doesn't.
Accounting
Walk me through how the three financial statements are linked.
A strong answerNet income starts the cash flow statement and adds to retained earnings. Cash flow adjusts for non-cash items, working capital, capex and financing; the change in cash hits the balance sheet.
Complete and in order. That's the answer they want.
A common missThey're three separate reports that companies publish for different audiences, so they don't really connect, but together they show the overall health of a company.
They link tightly; that's the whole point of the question.
Depreciation goes up by $10. Walk me through the statements, at a 25% tax rate.
A strong answerNet income falls $7.50. On cash flow, add back $10, so cash rises $2.50. Assets: cash +$2.50, PP&E −$10, down $7.50. Equity down $7.50, so it balances.
Every number right, and you closed by showing it balances.
A common missCash falls by $10 because the company is spending more on depreciation, so assets fall $10 and equity falls $10, and it balances.
Depreciation isn't cash spent. It saves $2.50 of tax, so cash goes up.
Inventory goes up by $20. What happens to cash?
A strong answerBuying inventory uses cash: a $20 negative change in working capital on the cash flow statement, so cash falls $20 and assets swap cash for inventory.
Right direction, the right line, and the balance sheet swap.
A common missCash goes up by $20, because more inventory means the company has more to sell, so it will bring in more money from its customers soon.
More inventory ties up cash today. Cash falls by $20.
Which statement would you look at first if you could only pick one?
A strong answerThe cash flow statement: it shows whether the business really generates cash, which accounting choices can't hide easily, and it's what debt is paid from.
A pick with a reason a lender or investor would agree with.
A common missThe balance sheet, because it's the biggest of the three statements and has the most numbers, so it gives you the most information.
Size isn't a reason. Argue from what you'd learn.
Valuation
Walk me through a DCF.
A strong answerProject unlevered free cash flow for five years, discount it at the WACC, add a discounted terminal value for enterprise value, then bridge to equity per share.
The five steps in order, ending at a share price.
A common missYou take the company's net income, multiply it by the average P/E ratio of similar companies, and that gives you the value of the business.
That's a comparables method, not a DCF.
A company trades at $50 a share with 10 million shares, $200 million of debt and $50 million of cash. What's its enterprise value?
A strong answerEquity value is $50 × 10 million, or $500 million. Add $200 million of debt and subtract $50 million of cash: enterprise value is $650 million.
Clean steps and the right answer.
A common missEnterprise value is the share price times the shares, so $500 million, since debt and cash belong to the company and don't affect its value.
EV adds debt and subtracts cash. That's the point of it.
Would you use EV/EBITDA or P/E to compare companies with very different debt levels?
A strong answerEV/EBITDA, because EBITDA is before interest and EV includes debt, so leverage doesn't distort the comparison. P/E mixes in each company's interest costs.
Right pick, and the reason is about matching numerator and denominator.
A common missP/E, because it's based on net income, which is the most accurate measure of profit and isn't affected by how much debt a company has.
Net income is after interest, so debt does affect P/E.
In your DCF, the discount rate rises from 8% to 10%. What happens to the value, and why?
A strong answerThe value falls: future cash flows are worth less today at a higher rate, and the terminal value, often most of the total, is hit hardest because it's furthest out.
Direction, mechanism, and why terminal value dominates.
A common missThe value goes up, because a higher discount rate means investors expect higher returns from the company, which makes it more valuable.
Higher rate, lower present value. The value falls.
Deals and your story
Walk me through your resume.
A strong answerAudit taught me the statements; in corporate development I valued two deals and loved them. I want deals full time, and your healthcare M&A work is where I can add most.
A story with a thread, ending on why this firm.
A common missI'll go job by job: in audit I did testing, documentation, client meetings, reviews, and then in corporate development I did research and models.
Responsibilities aren't a story. Pick the moments that led here.
A buyer at 20x earnings acquires a target at 12x, all stock. Accretive or dilutive?
A strong answerAccretive: the buyer pays 12x for the target's earnings while issuing stock valued at 20x its own, so it gains more earnings than it gives away, before synergies.
Right answer and the reasoning behind the shortcut.
A common missDilutive, because the buyer has to issue new shares to pay for the deal, and issuing new shares always reduces earnings per share.
New shares add earnings too. Compare the P/Es.
What drives returns in an LBO?
A strong answerThree things: growing EBITDA, paying down debt with the company's cash flow, and selling at a higher multiple than you bought at. More leverage amplifies all three.
The three levers plus the role of leverage.
A common missCutting costs as fast as possible after the deal closes, because private equity firms make their money mainly by firing staff and selling assets.
A caricature. Name the actual return drivers.
Tell me about a recent deal you followed.
A strong answerA medtech buyout: the buyer paid about 15x EBITDA for a device line its sales force could sell. I'd question the price, but the synergy is real.
A real view: the logic, the price and your own take.
A common missI don't really follow individual deals, because I've been focused on learning the technical material, but I'm planning to start reading more soon.
Every banker will ask this. Prepare two deals you can discuss.
Reading answers helps. Saying them under a little pressure helps more: Compass runs these as mock interviews and scores each turn.
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