Technical Interview Questions for Finance
Accounting & Financial Statements
Walk me through the three financial statements.
The income statement shows revenues, expenses, and net income over a period. The balance sheet shows assets, liabilities, and equity at a point in time. The cash flow statement reconciles net income to actual cash generated. They link: net income flows to retained earnings (balance sheet) and is the starting point for the cash flow statement. For deeper coverage, see our accounting interview questions guide.
How does $10 of depreciation flow through the statements?
Income statement: depreciation expense reduces pre-tax income by $10. Assuming a 25% tax rate, net income falls by $7.50. Cash flow statement: you add back the $10 non-cash charge to operating cash flow, then subtract $2.50 in lower taxes. Net cash impact: +$2.50 from the tax shield. Balance sheet: PP&E decreases by $10, cash increases by $2.50, and retained earnings decreases by $7.50.
What is enterprise value and how do you calculate it?
Enterprise value (EV) represents the total value of a business to all capital providers. EV = Market Cap + Total Debt + Minority Interest + Preferred Stock − Cash & Equivalents. EV is used for valuation multiples like EV/EBITDA because it allows comparison regardless of capital structure.
Valuation
What are the main valuation methodologies?
The three primary approaches are: (1) Comparable company analysis — valuing a company based on trading multiples of similar public companies, (2) Precedent transactions — using multiples from past M&A deals, and (3) Discounted cash flow (DCF) — projecting free cash flows and discounting them to present value using WACC. Each has strengths and limitations, so bankers typically use all three and triangulate.
When would you use a DCF vs. comparable companies?
Use a DCF when you want an intrinsic value based on fundamentals — it’s best for companies with predictable cash flows. Use comps when you need a market-based valuation and have a good set of comparable companies. DCFs are more sensitive to assumptions (growth rates, discount rate) while comps are more dependent on market conditions and peer selection.
How do you calculate WACC?
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 − Tax Rate)). Cost of equity is typically calculated using CAPM: Risk-Free Rate + Beta × Equity Risk Premium. Cost of debt is the company’s average borrowing rate. Use market values for weights, not book values.
| Valuation Method | Best For | Key Limitation |
|---|---|---|
| DCF | Stable, cash-generating businesses | Highly sensitive to terminal value and discount rate |
| Comparable Companies | Quick market-based valuation | Assumes peers are truly comparable |
| Precedent Transactions | M&A pricing context | Past deals may reflect different market conditions |
| LBO Analysis | PE acquisition pricing | Relies on exit assumptions and leverage capacity |
M&A and Deal Questions
Walk me through a basic merger model.
Start with the acquirer’s EPS. Add the target’s net income, subtract financing costs (interest on debt raised, foregone interest on cash used), add synergies, and adjust for new share issuance. Compare pro forma EPS to the acquirer’s standalone EPS. If pro forma EPS is higher, the deal is accretive. If lower, it’s dilutive. Key drivers: purchase price, financing mix, and synergies.
What makes an acquisition accretive vs. dilutive?
An acquisition is accretive if pro forma EPS exceeds the acquirer’s standalone EPS. This depends on: the target’s P/E ratio relative to the acquirer’s, the financing mix (debt is usually cheaper than equity), and expected synergies. Generally, if you buy a lower-P/E company with stock, it’s more likely accretive. Cash or debt financing is accretive when the target’s earnings yield exceeds the after-tax cost of debt.
Why might a company choose debt vs. equity financing for an acquisition?
Debt is cheaper due to the tax shield and doesn’t dilute ownership. However, it increases leverage and risk. Equity avoids balance sheet strain but dilutes existing shareholders and signals the stock may be overvalued. Companies with strong cash flows and low leverage lean toward debt. Companies with high valuations may prefer equity to use their stock as currency.
LBO and PE Questions
What makes a good LBO candidate?
The ideal LBO target has: stable and predictable cash flows, low capex requirements, strong market position, opportunities for operational improvement, a solid management team, and assets that can serve as collateral. The key is generating enough cash flow to service debt while creating equity value through deleveraging and EBITDA growth.
What are the main return drivers in an LBO?
Three primary drivers: (1) EBITDA growth — increasing revenue and margins, (2) Debt paydown — using free cash flow to reduce leverage, converting debt to equity value, and (3) Multiple expansion — selling at a higher EV/EBITDA multiple than the purchase price. The most reliable driver is debt paydown because it doesn’t depend on market conditions.
Brain Teasers and Quick Math
Some firms still throw in quick mental math or brain teasers. Common ones include: “What’s 15% of 380?” or “If a stock drops 25%, how much must it rise to break even?” (Answer: 33.3%). These test your comfort with numbers under pressure. Practice mental math daily.
Key Takeaways
- Master the three financial statements and how they link — this is the foundation of every technical interview.
- Know DCF, comps, and precedent transactions inside out — be ready to discuss pros, cons, and when to use each.
- Understand accretion/dilution mechanics for M&A and the three return drivers for LBOs.
- Practice verbalizing your answers — technical knowledge is useless if you can’t communicate it clearly.
- Pair technical prep with behavioral question practice for a complete interview preparation strategy.
Frequently Asked Questions
How technical are first-round investment banking interviews?
Moderately technical. Expect questions on accounting, basic valuation (EV, multiples), and the three-statement linkage. Deeper questions on LBOs and merger models typically come in Superday rounds. See our IB interview guide for specifics.
Do I need to know how to build a full DCF model for interviews?
You need to understand every step conceptually and be able to walk through a DCF verbally. You won’t build one on the spot, but you should know how to project free cash flows, calculate WACC, and estimate terminal value. Some firms may give you a modeling test separately.
What technical questions do hedge fund interviews focus on?
Hedge fund interviews lean heavily into valuation, stock pitches, and market analysis. You’ll discuss specific investment ideas, evaluate trades, and demonstrate independent thinking. The questions are less formulaic and more about your investment judgment.
How long should I spend preparing for technical interviews?
Plan for 4–8 weeks of focused preparation. Spend the first two weeks on accounting and financial statement fundamentals, weeks 3–4 on valuation methodologies, and weeks 5–8 on deal mechanics (M&A, LBO) and practice. Daily practice of 1–2 hours is more effective than marathon cramming sessions.
Are technical questions the same for all finance roles?
No. IB emphasizes deal mechanics and modeling. PE focuses on LBOs and operational improvements. Equity research tests valuation depth and industry knowledge. Corporate finance focuses on budgeting, working capital, and capital allocation. Tailor your prep accordingly.