Analyst/Associate Investment Banking Interview

Questions
This is based on a real form used at bulge bracket for their investment banking
interview questions in the hiring process.

Total Interview time: approx. 45 minutes.

Checklist for Interviewer:

 Welcome, introduce yourself & your position and thank interviewee for
their time & interest.
 Clarify the time for the interview and explain that you may interrupt if
necessary, etc.
 Provide an outline of what they should expect during the interview.
Highlight areas to be covered.
 Mention you may take notes & give candidate permission for “thinking
time”.

Bank/Industry Overview (0-5 minutes):

Warm up by talking with the candidate about how great our bank is and brag
about all our big transactions.

Employment History / Resume (5 minutes):

Opportunity for the interviewer to question candidate about the work experience
that is noted on their resume.

i.e. “Please walk me through your resume in 5 minutes or less.”

Problem Solving Questions (5 minutes):

This section of the investment banking interview questions provides insight into the
candidate’s critical thinking skills.
Question #1
“How many hairstylists or barbers do you estimate there are there in this
city? Explain your logic/assumptions.”

Answer: Explain the logic based on the population of the city, average number of
cuts people have per year, number of cuts one barber can do per year, and thus how
many that implies there must be. (i.e. 2 million people, each get an average of 4
cuts per year, which results in 8 million cuts per year. Each barber works an
average of 8 hours per day, times five days per week, times fifty weeks per year
equals 2,000 hours of cutting time per year. Each haircut takes 1 hour. Thus, 8
million haircuts, equal 8 million hours, divided by 2,000 hours per barber requires
4,000 barbers in the city.)

Question #2
“In the middle of a pond is a single lily pad; the lily pad doubles in size every
day and the pond is completely covered on the last day of the month (30 days).
How long does it take for the pond to be half covered?”

Answer: 29 days because, if it doubles in size each day it also halves each day.
Thus at 29 days is half full in order to be completely full in 30 days.

Question #3
“A windowless room contains three identical light bulbs. Each light is
connected to one of three switches outside of the room. Each bulb is switched
off at present. You are outside the room, and the door is closed. You have one,
and only one, opportunity to flip any of the external switches. After this, you
can go into the room and look at the lights, but you may not touch the
switches again. How can you tell which switch goes to which light?”

Answer: Switch on switches 1 & 2, wait a moment and switch off number 2. Enter
the room. Whichever bulb is on is wired to switch 1, whichever is off and hot is
wired to switch number 2, and the third is wired to switch 3.

Technical Knowledge Questions (15 – 20 minutes):

This section of the investment banking interview questions provides insight into the
candidate’s technical knowledge of finance, accounting, valuation and financial
modeling.

Question #1
“Please walk me through the three financial statements.”
Answer:
The balance sheet is a snapshot at a point in time. On the top half you have the
company’s Assets and on the bottom half its Liabilities and Shareholders’ Equity
(or Net Worth). The assets and liabilities are typically listed in order of liquidity
and separated between current and non-current.
The income statement covers a period of time, quarter or year. It illustrates the
profitability of the company from an accounting (accrual and matching)
perspective. It starts with revenue line and after deducting expenses derives net
income.
The cash flow statement has three sections: cash from operations, cash used in
investing and cash from financing. It can be calculated using the direct approach
or the reconciliation approach. It “undoes” all of the accounting principles and
shows the cash flows of the business.
More info: CFI courses on financial statements

Question #2
“How would you value a company?”

Answer:
There are three common valuation methods used in IB:
1) The multiples approach (also called “comps”), in which you multiply the
earnings of a company by the P/E ratio of the industry in which it competes (and
other ratios).
2) Transactions approach (also called “precedents”), where you compare the
company to other companies that have recently sold/been acquired in that industry.
3) The Discounted Cash Flow approach, in which you discount the values of future
cash flows back to the present.

Question #3
“You have the opportunity to purchase a series of future cash flows that are
$200 in perpetuity. The total cost of capital is 10%, how much are you
prepared to pay today?”

Answer: [Note: Value = Cash Flow / WACC].

$2,000, because: $200 / 10% = $2,000 (i.e. 10x)

Question #4
“When should a company consider issuing debt instead of equity?”

Answer: When the expected return on equity is higher than the expected return on
debt. If it has taxable income and can benefit of tax shields. If the firm has
immediately steady cash flows and is able to make their interest payments. This is
the basis of the Capital Asset Pricing Model CAPM.
Question #5
“List the main components of WACC (i.e. Weighted Average Cost of
Capital).”

Answer: Debt, Equity, Tax, Beta. See more on WACC here.

Question #6
“How do you calculate the WACC?”

Answer: This is calculated by taking the proportion of debt to total capital, times
the debt rate, times one minus the effective tax rate, plus the proportion of equity to
capital, times the required return on equity.

Question #7
“Which is cheaper debt or equity? Why?”

Answer: Debt because: It is paid before equity / may have security. Ranks ahead
on liquidation

Question #8
“What is the average Price/Earnings PE ratio for the S&P 500 Index?”

Answer: About 15-20 times, the PE ratio varies by industry and period in the cycle.

Question #9
“A company has learned that due to a new accounting rule, it can start
capitalizing R&D costs instead of expensing them.“

Part a) What is the impact on EBITDA?

Part b) What is the impact on Net Income?
Part c) What is the impact on cash flow?
Part d) What is the impact on valuation?

Answer:
Part a) EBITDA increases by amount capitalized;
Part b) Net Income increases, amount depends on depreciation and tax treatment;
Part c) Cash flow is almost constant – however, cash taxes may be different due to
depreciation rate
Part d) Valuation is constant – except for cash taxes impact/timing on NPV

Question #10
“What happens to Earnings Per Share (EPS) if a company decides to issue
debt to buy back shares?”

Answer:
Issuance of debt increases after-tax interest expense which lowers EPS.
Repurchase of shares reduces the number of shares outstanding which increases
EPS.
Whether it increases or decreases EPS depends on the net impact of the above two
points.

Question #11
“What makes a good financial model?”

Answer:
Building a financial model takes a lot of practices to be really good at. The best
financial models are clearly laid out, identify all the key drivers of the business, are
accurate and precise yet not overly complicated, can handle dynamic scenarios,
have built-in sensitivity analysis and error checking.

Behavioral Questions (10 minutes):

This section of the investment banking interview questions focuses on the
candidate’s soft skills and personality fit in the firm.

Pick three or four of the following questions:

“Why do you want to work in investment banking? Or at this bank?” [this

question is so common we made a separate page with a full answer to it here].

“How do you deal with risk in your personal life?”

“Give a time where you had multiple options and explain how you arrived at
your decision.”

“If you could live in any city in the world, and money was not an issue, where
would you live and why?”

“What is one of your biggest weaknesses and how do you deal with it?”

“What is one thing you believe to be true, but that most people would disagree
with you on?”

“Which is more important in business – IQ or EQ?”

“What does leadership mean to you? Can you provide some examples of good
and bad leadership?”

“Are you smart?”

Answers: Grade the interviewee based on how well they expand on their
ideas. There are no right or wrong answers. The key is to determine the
following: do they demonstrate maturity, are they comfortable with ambiguity, can
they work as a team, do they have emotional intelligence, would they fit well in
our culture, etc. See more behavioral interview questions.