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Technical Interview Questions
Master the technical concepts tested in investment banking interviews. From accounting fundamentals to complex LBO modeling, these questions cover everything you need to know.
Accounting
3 questionsWalk me through the three financial statements.
The three statements are the Income Statement (profitability over time), Balance Sheet (assets, liabilities, and equity at a point in time), and Cash Flow Statement (actual cash movements). They're linked: Net income flows to retained earnings on the Balance Sheet and is the starting point for the Cash Flow Statement.
If depreciation increases by $10, walk me through the impact on the three statements.
Assuming a 25% tax rate: Income Statement - Operating income and pre-tax income decrease by $10, net income decreases by $7.50. Cash Flow Statement - Start with lower net income (-$7.50), add back D&A (+$10), net cash increase of $2.50. Balance Sheet - PP&E decreases by $10, cash increases by $2.50, retained earnings decreases by $7.50.
How do you calculate free cash flow?
Unlevered Free Cash Flow = EBIT ร (1 - Tax Rate) + D&A - CapEx - Change in Net Working Capital. Levered Free Cash Flow = Net Income + D&A - CapEx - Change in NWC - Debt Repayments + Debt Issuances. Unlevered FCF is used in DCF; levered FCF shows cash to equity holders.
Valuation
4 questionsWalk me through a DCF analysis.
A DCF values a company by projecting its future free cash flows and discounting them back to present value using WACC. You project FCF for 5-10 years, calculate a terminal value, and discount everything back to get enterprise value.
What is the difference between enterprise value and equity value?
Enterprise value represents the value of the entire business to all capital providers (debt and equity holders), while equity value represents only the value to shareholders. Enterprise value equals equity value plus net debt.
What is WACC and how do you calculate it?
WACC (Weighted Average Cost of Capital) is the blended rate of return required by all capital providers. It's calculated as: Cost of Equity ร (E/V) + Cost of Debt ร (1-Tax Rate) ร (D/V), where E is equity value, D is debt value, and V is total value.
What is the difference between trading comps and precedent transactions?
Trading comps value a company based on multiples of currently trading public companies, reflecting market value today. Precedent transactions use multiples paid in past M&A deals, including control premiums. Precedents typically yield higher valuations due to the control premium paid in acquisitions.
LBO Modeling
2 questionsWalk me through an LBO model.
An LBO model projects how a financial sponsor can acquire a company using significant debt, operate it for 5-7 years, and exit at a profit. Key outputs are IRR and MOIC. The model involves purchase price, debt structure, operating projections, debt paydown, and exit analysis.
What makes a good LBO candidate?
A good LBO candidate has stable, predictable cash flows to service debt, low capital expenditure requirements, opportunities for operational improvement, a strong market position with barriers to entry, and a capable management team. Mature industries with consistent demand are ideal.