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Investment Banking Interview Questions

Last update: 09 Jun 2021, 13 Questions

An investment banking is a financial service company or institution that provides credit facilities, security instruments, underwriting, and advisory services related to governments, individuals, and corporations. Investment banking roles are research, investment management, underwriting new stocks issues, and risk management. In this article, we have covered some important investment banking interview questions that you should know while giving an investment banking interview.

Investment Banking Technical Questions

Here in this article, we will be listing frequently asked Investment Banking Interview Questions and Answers with the belief that they will be helpful for you to gain higher marks. Also, to let you know that this article has been written under the guidance of industry professionals and covered all the current competencies.

1. What are the essential qualities to become Investment Bankers?

To answers this question, you have to tell all the essential qualities that are required to become an investment banker.

  • Having good communication ability
  • Able to think out of the box
  • Able to manage multiple project deadlines
  • Strong quantitative and analytical skills
  • Positive and never give up attitude
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2. When should a company consider issuing debt instead of equity?

A company should issue debt when the rate of taxation is high or there is a huge market and the company does not have enough capital to meet the demand.

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3. What makes a good financial model?

Some of the features that make a good financial model are:

  • It describes all the functionality.
  • Having clear inputs, working, output and results.
  • The model is versatile.
  • The model is well structured and easy to audit.
  • The formula used in the model is most efficient.
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4. How do you calculate the cost of equity?

The cost of equity is calculated by CAPM. CAPM stands for Capital Asset Pricing Model. Below is the formula used to calculate the cost of equity.

E(Ri) = R(f) + β[E(m) - R(f)]

where,
β = Beta of the stock.
E(m) = Market Rate of Return
[E(m)-R(f)] = equity risk premium.
R(f) = Risk -free Rate of Return.

NOTE: These are the most important questions to ask investment bankers during an interview.

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5. How would you calculate beta for a company?

This is the formula to calculate beta for a company.

ΔSi=α+βi×ΔM+e

where:
ΔSi =change in the price of stock i.
α=intercept value of the regression.
βi=beta of the I stock return.
ΔM=change in the market price.
e=residual error term.

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6. What is the appropriate numerator for a revenue multiple?

The appropriate numerator for a revenue multiple is Enterprise Value.

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7. What is the meaning of goodwill? How is it calculated?

A company that provides factors like a quality product, good services, and uniqueness and these factors helps to create good names and good reputation of the company in the minds of customers, bankers, and suppliers, etc when we try to value the good name and reputation of the business in terms of money then it is known as Goodwill.

Goodwill = P − (A+L)

Where,
A = Fair market value of assets
L = Fair market value of liabilities
P = Purchase rate for the targeted company

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8. How would you value a company with negative historical cash flow?

Investing in a company with a negative historical cash flow is generally a high risk. Cash expenditure on the equipment could be greater than the revenue coming in. By profit, and loss company you could value the company with its net profit.

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9. What is typically higher – the cost of debt or the cost of equity?

The cost of equity is typically much higher than the cost of debt. As it makes you lose a part of the business to the equity investors. Debt is less expensive because its interest payment is considered as the expense.

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10. What is the difference between Commercial and Investment Banking?
Commercial Banking Investing Banking
Individual or small-sized companies. Startups and companies.
Provides services to the public. Provides services to corporations, investors, and governments.
A risk factor is low. A risk factor is high.
Take deposits. Don’t take deposits.
Provides loans. Don’t provide loans.
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11. What is the formula to calculate Enterprise Value?

Enterprise Value is described as the entire cost or market value of the company. Below is the formula used to calculate Enterprise Value

Enterprise Value = Market Capitalization + Debt + Minority shareholdings + Preference Shares - cash and cash equivalents.

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12. Which is cheaper debt or equity? Why?

Dept is cheaper than equity because it is less expensive in terms of interest. Interest on debt is a tax-deductible expense making it an even more cost-effective form of financing. Both risk and potential return of debt and lower.

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13. List the main components of WACC & how do you calculate the WACC?

The main components of WACC are the cost of debt and the cost of equity.

We can calculate the WACC as given below

WACC = [ Ve / Ve + Vd ] ke + [ Vd/ Ve + Vd ] kd ( 1- T)

Where,
Ve = market value of the equity that is the value of share price ex-div X number of shares
Vd = market value of debt which is the market value of debentures + loan amount
ke = cost of equity
kd = cost of debt
T = company profit tax rate

NOTE: This is one of the most important investment banking technical questions.

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Questions to ask investment bankers

As you must be aware of the fact that the investment banking interviews are very much structured. In this area, we have created a list of all the possible questions that can be asked to the investment bankers in their interviews. This list is for the people who are already in the investment banking domain and have a high level of experience as investment bankers. So if you are experienced in investment banking and looking to change your organization or planning to apply for the bigger roles; so make sure you prepare the answers for the following investment banking interview questions.

  • What are the three principal financial statements of a corporation?
  • What factors would you need to consider in the merging of new data?
  • If a company incurs $10 (pretax) of depreciation expense, how does that affect the three financial statements?
  • What is the best method for startup valuation?
  • If you Could Use Only One Financial Statement to Evaluate the Financial State of a Company, Which Would You Choose?
  • What is WACC and how do you calculate it?
  • What methods are used to value a company?
  • How many times revenue is a business worth?

You just need to spend some amount of time studying them. Be confident with your answers.

Good luck!

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