Investment Banking Interview Questions & Answers
Accounting & Financial Statement Questions
Walk me through the three financial statements.
The income statement shows revenue, expenses, and net income over a period. The balance sheet shows assets, liabilities, and shareholders’ equity at a point in time. The cash flow statement reconciles net income to actual cash generated, broken into operating, investing, and financing activities. They’re linked: net income flows from the income statement to the cash flow statement and into retained earnings on the balance sheet.
If you could only use one financial statement to evaluate a company, which would you choose?
The cash flow statement. It shows the actual cash a company generates, which is harder to manipulate than earnings. You can see operating cash flow (core business health), capex requirements, and financing decisions. The income statement can be distorted by accounting choices; the cash flow statement reveals reality.
What happens on each statement when depreciation increases by $10?
Income Statement: Pre-tax income drops by $10, tax decreases by $10 × tax rate (say $4 at 40%), so net income drops by $6. Cash Flow Statement: Net income is down $6, but depreciation (a non-cash add-back) is up $10, so cash from operations increases by $4. Balance Sheet: PP&E decreases by $10, cash increases by $4, and retained earnings decreases by $6. Assets decrease by $6, equity decreases by $6 — balanced.
What is the difference between cash-based and accrual-based accounting?
Cash-based accounting records transactions when cash changes hands. Accrual-based accounting records revenue when earned and expenses when incurred, regardless of cash timing. Virtually all public companies use accrual-based (required by GAAP), which is why the cash flow statement exists — to reconcile accrual earnings back to cash.
Valuation Questions
What are the main valuation methodologies?
Three core approaches: Comparable company analysis (comps) — valuing a company based on multiples of similar public companies. Precedent transactions — valuing based on multiples paid in similar M&A deals. DCF (Discounted Cash Flow) — valuing based on the present value of projected future free cash flows. Comps and precedents give you market-based values; DCF gives you an intrinsic value.
Walk me through a DCF.
Project free cash flow for 5–10 years. Calculate terminal value (using either the perpetuity growth method or exit multiple method). Discount all cash flows back to present value using WACC. Sum the present values to get enterprise value. Subtract net debt to get equity value. Divide by shares outstanding to get price per share.
When would you not use a DCF?
When cash flows are unpredictable or negative (early-stage startups, distressed companies, cyclical companies at the bottom). When comparable companies provide more reliable benchmarks. When the company is being acquired and the deal price is more relevant than intrinsic value. DCF requires confident projections — garbage in, garbage out.
How do you calculate WACC?
WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 – Tax Rate)). Cost of equity comes from CAPM: Risk-Free Rate + Beta × Equity Risk Premium. Cost of debt is the yield on the company’s existing debt or comparable-rated bonds. E/V and D/V are the market-value weights of equity and debt in the capital structure.
M&A Questions
Why would a company acquire another company?
Revenue synergies (cross-selling, new markets, new products), cost synergies (eliminating redundant functions, economies of scale), acquiring talent or technology, eliminating a competitor, or gaining tax benefits. The acquirer believes the combined entity is worth more than the sum of the parts.
What is the difference between a stock deal and a cash deal?
In a cash deal, the acquirer pays cash — shareholders get certainty but the acquirer takes on more risk and potentially uses debt. In a stock deal, the acquirer issues new shares — less cash outlay but existing shareholders get diluted. Stock deals signal the acquirer thinks its stock might be overvalued; cash deals signal confidence. Most deals are a mix of both.
Is this deal accretive or dilutive?
If the combined EPS is higher than the acquirer’s standalone EPS, the deal is accretive. If lower, it’s dilutive. Quick rule: if the acquirer’s P/E ratio is higher than the target’s P/E ratio, a stock deal is likely accretive (you’re buying earnings cheaply with expensive stock). The reverse for dilutive.
LBO Questions
Walk me through an LBO model.
A leveraged buyout acquires a company using significant debt (60–80% of the purchase price). You build sources & uses (debt + equity = purchase price + fees). Project cash flows for 5–7 years. Use excess cash flow to pay down debt. Exit at a target multiple. Calculate IRR and MOIC (multiple on invested capital) for the equity investors. PE firms target 20%+ IRR.
What makes a good LBO candidate?
Stable, predictable cash flows (to service debt). Strong market position with pricing power. Low capex requirements (high free cash flow conversion). Opportunities for operational improvement. A clear exit path (sale to strategic buyer, IPO, or secondary buyout). Industries like healthcare, business services, and software are classic LBO targets.
Behavioral Questions
Why investment banking?
Focus on three things: (1) your genuine interest in M&A, capital markets, and working on transformative deals, (2) the steep learning curve and mentorship from senior bankers, and (3) the skills you’ll build (financial modeling, client management, work ethic) as a foundation for your career. Be specific about why this bank and group.
Tell me about a time you worked on a team under pressure.
Use the STAR framework: Situation, Task, Action, Result. Pick an example that shows you can handle stress, collaborate effectively, and deliver under a tight deadline. Ideally, the example involves quantitative or analytical work. End with a specific, measurable result.
Key Takeaways
- IB interviews test three areas: accounting/financial statements, valuation (DCF, comps, precedents), and deal mechanics (M&A, LBO).
- The “walk me through” format is king — practice walking through financial statements, a DCF, and an LBO model until it’s second nature.
- Behavioral questions matter as much as technicals at many banks — prepare 5–6 polished stories using the STAR framework.
- Understand the “why” behind every concept, not just the “what.” Interviewers probe deeper to test real understanding.
- Practice out loud, not just in your head. Articulation under pressure is a separate skill from knowledge.
Frequently Asked Questions
How long should I prepare for an investment banking interview?
Most successful candidates prepare 4–8 weeks intensively, studying 2–3 hours per day alongside school or work. If you’re coming from a non-finance background, add 2–4 weeks to build foundational knowledge. Technical guides, mock interviews with peers, and practice modeling are all essential components.
Do I need to know how to build a full financial model for the interview?
For analyst positions: you should understand the concepts behind a DCF and LBO at a high level, but you won’t build a full model in the interview. For associate positions (post-MBA): modeling tests are common and you may need to build a simple model in 1–3 hours. Either way, understanding the logic flow is more important than Excel speed.
What is the most commonly asked question in IB interviews?
“Walk me through the three financial statements” and “Walk me through a DCF” are the two most common technical questions. “Why investment banking?” and “Tell me about yourself” are the most common behavioral questions. Prepare these four answers first, then build from there.
How technical are superday interviews vs. first-round interviews?
First-round interviews (often with associates or VPs) tend to be more technical — expect accounting, valuation, and brainteaser questions. Superday interviews (with MDs and senior bankers) shift more toward behavioral and fit questions: why this bank, why this group, tell me about a deal you followed. Both require technical competence, but the emphasis shifts.
Should I mention specific deals in my interview?
Yes — it shows genuine interest and market awareness. Follow 2–3 recent deals relevant to the group you’re interviewing with. Be able to discuss the strategic rationale, approximate valuation, and your opinion on whether it was a good deal. Check the bank’s recent tombstones on their website.