Example Dcf Questions In Investment Banking Interviews
The DCF is real valuation multiples are just abbreviated ways to express it.
So, you can expect questions on everything from the basic idea to a walk-through to the Discount Rate and Terminal Value calculations.
QUESTION: Explain the big idea behind a DCF analysis and how it is used to value a company.
ANSWER: A DCF is an expansion of this formula:
Company Value = Cash Flow / , where Cash Flow Growth Rate < Discount Rate
The problem is that that formula assumes the companys Discount Rate and Cash Flow Growth Rate never change but in real life, they keep changing until the company reaches maturity.
So, in a Discounted Cash Flow analysis, you divide the valuation into two periods: One where those assumptions change and one where they stay the same .
You then project the companys cash flows in both periods and discount them to their Present Values based on the appropriate Discount Rate.
Then, you compare this sum the companys Implied Value to the companys Current Value or Asking Price to see if its valued appropriately.
QUESTION: Walk me through an Unlevered DCF.
ANSWER: You start by projecting the companys Unlevered Free Cash Flows over the next 5-10 years by making assumptions for revenue growth, margins, Working Capital, and CapEx.
Unlevered FCF excludes all financing and non-core-business activities and equals EBIT * + D& A +/- Change in Working Capital CapEx.
Get more on Unlevered Free Cash Flow in our YouTube channel.
How Would You Figure Out How Much An Aircraft Carrier Weighs Without Using A Scale
This question displays how you break down difficult problems. There are a lot of different ways to tackle this question. For example, you could ask an engineer who is familiar with aircraft carriers or try to gauge how much individual components of the aircraft carrier weigh. The solution itself is less important than you showing how you would think this problem through.
Most Common Technical Interview Questions
Here are some of the questions that you are likely to encounter. As always, the best way to prepare is to practice! Our investment banking coaches have experience at firms like Lazard, Morgan Stanley, Goldman Sachs, and others and are happy to do mock interviews to help you prep. Browse them all here.
1. What is the appropriate discount rate to use in an unlevered discounted cash flow analysis?
2. How do you value a company?
3. How would you value a company with a negative historical cash flow?
4. How do you calculate WACC?
5. When would you value a company using EBITDA versus a revenue multiple?
6. What is a companys beta and how do you calculate it?
7. What is typically higher: the cost of equity or debt, and why?
8. How do you calculate the cost of equity?
9. What is a leveraged buyout and how does it work?
10. What is the appropriate numerator for a revenue multiple?
11. There are two companies that have the exact same growth prospects, leverage, ROC, risk, and earnings. The first is trading at 7 P/E multiple, while the second is trading at 12 P/E. Which one would you choose to invest in?
12. How do you calculate unlevered free cash flows for DCF analyses?
13. When would it be appropriate for a company to issue debt instead of equity?
14. What are the three most important financial statements and why are they significant?
15. How are the income statement and balance sheet connected?
17. Tell me some recent trends or updates in the market.
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Investment Banking Interviews: Accounting Questions
Typical Interview Questions About Your Background/cv
- Tell me about yourself
- Talk me through your CV
- Why did you choose your university?
- Why did you choose your field of study?
These are the most predictable questions, and, for that reason, often the most revealing. A candidate who isnt prepared to discuss their skills and experience with confidence and authority will likely be seen as unserious or, even worse, incompetent.
The trickiest of these preliminary questions is the oft-used tell me about yourself. This provides you with a valuable opportunity to share important details of your CV, and also demonstrate your personality. However, its vital that you keep your response relevant and concise. For example, its fine to discuss your passion for karate if you also emphasise how its taught you self-discipline and the ability to perform well under pressure.
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Investment Banks Want To See Evidence Of Two Qualities
When large investment banks ask why specifically you?, they dont want you to demonstrate your technical prowess. There are two primary qualities that investment banks want to see in their junior recruits that you interact well with a team and that you have a strong work ethic. Show evidence of this during an interview or you can forget your chances.
However, boutique investment banks do not have the resources to train new recruits, and are more interested in juniors that have had prior experience in investment banking and that could start on projects immediately. If that is the case, you should also make this clear during the interview.
Investment Banking Interview Questions Category : Technical Questions And Answers
For this last category, I do not have any magical tips that will get you results in hours instead of weeks or months.
Put simply, to succeed in investment banking interviews, you need to put in the time to study accounting, finance, valuation, and M& A and LBO modeling.
If you dont, you wont have a great chance against candidates who are obsessed about becoming an investment banker and have spent months preparing.
We cover all these topics comprehensively in our full Investment Banking Interview Guide, but you can also get good introductions to them in our YouTube channel and the articles on this site:
With limited time, focus on accounting, equity value and enterprise value, and valuation and DCF analysis. They are the most common topics, especially in entry-level interviews.
There are thousands of possible questions to test your technical knowledge, so I will list a few representative examples in each of the main categories.
I will focus on questions and answers that you probably havent seen on other sites and other resources, so most of these are in the more challenging range:
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Q How Would You Calculate Beta For A Company
Calculating raw betas from historical returns and even projected betas is an imprecise measurement of future beta because of estimation errors . As a result, it is recommended that we use an industry beta. Of course, since the betas of comparable companies are distorted because of different rates of leverage, we should unlever the betas of these comparable companies as such:
- Unlevered = /
Then, once an average unlevered beta is calculated, relever this beta at the target companys capital structure:
- Levered = x
Wsos Bonus Tips To Excelling In Hirevue Interviews:
- Dress appropriately This is pretty self-explanatory, make sure you are dressed well and look presentable.
- Rehearse and practiceYoure at an advantage with Hirevue as you can anticipate which questions are going to be thrown at you. Prepare for these questions beforehand, rehearse and practice your stories. Record yourself and replay it, find places to improve, and repeat the process until you are able to consistently and confidently answer questions. Ideally, the actual Hirevue interview itself should simply be a rehearsal of your past practice sessions, nothing should be catching you off guard. If you want the upper hand, ask your close friends and other respectable people in the industry to review your recordings and offer feedback. Perfect your delivery, practice makes perfect.
- Adopt good speaking practicesAdjust your audio settings well in advance, and ensure your voice is clearly transmitted through the microphone. Maintain eye contact with the camera, straighten your posture and deliver your answers with confidence.
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What Is The Difference Between Accounts Receivable And Deferred Revenue
Sample Answer:Accounts receivable is revenue, which has been earned and recognized because the product has been delivered, but the customer has not yet paid the cash. Deferred revenue is cash that has been collected for products that have not yet been delivered, so the revenue has not yet been recognized. Accounts receivable is an asset on the Balance Sheet, whereas deferred revenue is a liability.
Investment Banking Interviews: How To Prepare
Don’t Miss: Front End Interview Questions With Answers
Top Investment Banking Interview Questions
The purpose of this Investment Banking Interview Questions and Answers is to help you learn about the investment bankingAbout The Investment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more interview topics. As a fresher in this field, I am sure you may have had questions about what and how to prepare for your first step in this finance world. There could be an unlimited number of questions that can be asked on investment banking topics, and since it is difficult to cover all of them here, we would be discussing a few of them which are important.
While reading through this write-up, I suggest you actively keep answering the questions yourself before checking the correct answer. This will help you develop the habit of brainstorming and answering these structured questions. Please consider this as a first draft of the article. I will regularly update this with more questions and answers based on your feedback.
You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:
Question #2
If you have the chance to evaluate the companys financial viability, which statement would you choose and why?
Question #3
Question #4
Question #6
Question #7
Wso’s Bonus Ib Interviews Tip From An Interviewer
Walk me through every calculation you are doing. I want to hear you think out loud.
- The process matters far more than your answer and gives you a chance to demonstrate a grip on the concepts.
I sometimes just ask for a simple calculation, along with “Are you sure?” to put on a little pressure and see how you respond.
- I am looking here for you to take five seconds, double-check your math, and answer with a confident, “Yes, I am sure.”
Don’t be afraid to say, “I don’t know” to a tough technical question.
- As an analyst, I expect you to ALWAYS tell me when you don’t know something, and never wing your way through an answer.
- If you give an, “I don’t know” follow it with, “But here is what I am thinking. Tell me if I am on the right track.”
- And walk me through your thoughts. This is a great analyst quality because it shows that you’ll think about a problem critically before you call me and ask about it.
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Typical Questions About Your Career Choices
- Why do you want to work in investment banking?
- Why have you applied to this bank?
- Why have you applied to this division?
- Why do you want this internship?
Investment banks ask questions about your career choices, at both application and interview stage, to find out how serious you are about working for them. The only way to provide solid answers is to research the bank, division and role, and find out what makes them different. More information on the type of research and preparation you should do can be found here .
Nail The Technical Questions
With 203+ questions and 10+ hours of videos across the 11 Key Technical categories including 17 brainteasers, 20 charts and 184 Flash Cards for easy learning and retention and 32 video Q& A’s from banking veterans so you won’t leave a single stone unturned and will be 100% prepared for anything they throw at you…
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What Is Beta And Why Would You Unlever It
Beta, symbolized by the Greek character ,is an estimate of how volatile a security is compared to the overall market . The baseline for beta is 1.0, so anything above 1.0 is more volatile and holds more inherent risk.
It is best to use an unlevered beta when comparing a company that is not on the market yet. Additionally, because unlevered beta does not consider debt, it allows you to see the volatility of the companys equity alone as if the company had not taken on any debt.
Ib Interview First Impressions
We’ve all heard about it at one point or another. Forbes has on it.“First impressions are the best impressions.”
Within just a few seconds of meeting, people will form a solid opinion of who you are. Perfecting your first impression while carrying yourself with a healthy balance of confidence and humility lays the foundation and tone for the rest of the interview. The following section has been written by Patrick Curtis, CEO of WallStreetOasis, based on his vast experience of interviewing candidates for investment banking positions.
Read it over, perfect your entry and learn how to leave a lasting impression on your interviewer from the get-go.
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What Is 17 Squared What’s 18×22
Answer:Don’t worry they want to know how you will handle this question, and it is not difficult if you think about it correctly.
Think 17 x 17 is just 17 x 10 plus 17 x 7. You know 17 x 10 is 170. Now 17 x 7 is 10 x 7 and 7 x 7. This gives you 170 + 70 + 49, or 289. Whatever you do, don’t panic!
Now see if you can do 18 x 22: 18 x 20 + 18 x 2. Easy, 360 + 36 = 396.
As far as brainteasers go, this is a rather common one. You will do better if you have practiced these types of questions.
Nine Technical Concepts Require Much Of Your Preparation Effort
Technical questions The most familiar part that anyone can think of when mentioning an investment banking interview. Again, break the technical concepts down, and practise by types:
Concept 1. Accounting and The Three Financial Statements
Concept 2. Projecting Three Financial Statement
Concept 3. Enterprise Value and Equity Value
Concept 4. Valuation and DCF Analysis
Concept 5. Merging and Acquisition
Concept 6. Leveraged Buyouts and LBO Models
Concept 7. Equity Capital Markets , Debt Capital Markets and Leveraged Finance
Concept 8. Private Company Analysis
Concept 9. Industry-specific concepts, including FIG , Restructuring/ Distressed M& A, REIT , RE Properties, and Natural Resources
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What Skills Have You Learned From Previous Roles That You Think Transfer To An Investment Banking Position
Professionals in investment banking have a strong background in finance, accounting or mathematics. Review your resume to find out which skills from these roles can amplify your performance in an investment banking role.
Example:”Since I have an accounting background, I believe my ability to understand complex calculations gives me the confidence to offer financial advice to clients. During my previous accounting internship, I assisted the controller with proofreading balance sheets, invoices and financial reports to ensure their accuracy. I ended up correcting two mistakes that allowed the management team to present these reports to external stakeholders on time. I think this experience prepares me for working with clients in high-intensity situations.”
How Do You Value A Company
There are three main ways to value a company comparable company analysis, discounted cash flow analysis, and precedent transaction analysis.
- Comparable company analysis involves finding companies that are similar to the one you are trying to value and comparing their EBITDA, stock price, and price to earnings, among other variables.
- Discounted cash flow analysis is using how much the company is projected to make in the future discounted to present values.
- Precedent transaction analysis is similar to a comparable company analysis, except you find how much similar companies have sold to determine the worth of the company youre valuing.
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Describe The Work Environment You Thrive In
It is no secret that investment bankers work long, fast-paced hours, so it is probably best to not say you work best in a slow-moving, low-intensity environment. But this is a good opportunity to talk about the type of people that inspire you to do great quality work and the type of day-to-day structure that you align with. Additionally, noting things about your preferred management styles and office culture can help the interviewer get a better sense of if youd be a good fit for their company.
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