Investment Banker Interview Questions
Depending on the company, investment bankers may be responsible for many duties or may specialize in one specific area. However, no matter what they do, the primary focus of an investment banker is to help clients raise money by selling equity or issuing debt in companies.
An investment banker must be both aggressive and persuasive. They are the go-to people for companies that want to find qualified investors with money to invest. As such, they must be aggressive enough to go after any possible lead and persuasive enough to convince that lead to part with large sums of money. In addition to being a good salesman, an investment banker must also possess a capacity for financial analysis so they can advise their clients.
Investment banker responsibilities may include:
- Facilitating relationships with new and existing clients to effectively leverage their network
- Helping broker M&As by acting as a consultant
- Assisting clients with acquisitions and mergers
- Preparing and reviewing material used to finance clients, including presentations, valuations, and transactions
- Staying on top of current events and changes within the industry in order to advise clients to the best of their ability
Investment bankers work among the wealthy and elite, and as such, they are expected to be experts within their field. In order to effectively advise clients and generate funds, a skilled investment banker will:
- Work in teams in a fast-paced environment with no supervision
- Aggressively seek new leads and better results in order to stay ahead of the competition
- Possess salesmanship qualities to secure new funds for clients
- Communicate clearly and persuasively with both clients and team members
- Possess strong financial modeling skills and business acumen
Investment banking is a highly competitive field that can offer a six-figure income. However, the requirements to become an investment banker are surprisingly easy. Most investment bankers only have a bachelor’s degree, and there are a few that have even less than that. An MBA will certainly set you apart from other applicants and is necessary for management positions. Many positions will also require applicants to complete a set of difficult tests, such as the Series 7, Series 79, and the Series 63, in order to get various banking licenses.
More importantly, an investment banker must show strong interpersonal skills, such as competitiveness, persuasiveness, and a tireless work ethic. Because the amount of applicants outnumber the amount of jobs in investment banking, you must be able to put in the time and effort needed to stand out.
If you’re getting ready to interview for a position as an investment banker, you can prepare by researching the company as much as possible. Learn about the 9 things you should research before an interview.
Salaries for investment bankers range between $77K and $150K with the median being $108K.
Factors impacting the salary you receive as a investment banker include:
- Degrees (associate's or equivalent certificate, bachelor's, master's)
- Years of Experience
- Reporting Structure (seniority of the executive you report to, number of any direct reports)
- Level of Performance - Exceeding Expectations
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Investment Banker Interview Questions
Question: What methods do you use to value a company?
Explanation: This is a typical opening question which the interviewer will use to get you talking and begin the conversation. They are also hoping to learn more about your background and collect additional information they can use for subsequent questions.
Example: “When valuing a company, I default to the two main variations which are intrinsic value and relative value. The intrinsic value considers discounted cash flow valuation which states the value of an asset equals the present value of its cash flows. Relative valuation involves determining the value of a company by comparing it to its peers. These are companies in the same industry with similar operations, risk, and return on capital. I review multiple companies and arrive at a value that represents the median.”
Question: How do you determine the appropriate discount rate to use in an unlevered discounted cash flow (DCF) analysis?
Explanation: This is an example of both an operational and a follow-up question. Operational questions seek to understand how you go about doing your job. Follow-up questions are used to dig deeper into the topic for which you just provided an answer. Operational questions are best responded to by merely describing the steps you take to address the issue the interviewer is asking about.
Example: “The discount rate I use to determine an unlevered discounted cash flow is the weighted average cost of capital, including both debt and equity. The cost of debt is easy to obtain since it is readily available in the debt market. The cost of equity is based on a pricing model for assets as well as the current return on equity in the overall market. Combined, they will help determine a company’s discounted cash flow.”
Question: How do you calculate unlevered free-cash flows for DCF analysis?
Explanation: This is another follow-up question which the interviewer is using to expand on your answer to the previous one. During an interview, you should anticipate follow-up questions every time you provide the interviewer with an answer. Keeping your answers short and to the point will either encourage the interviewer to move on to another topic or provide them with the opportunity to ask follow-up questions.
Example: “The calculation for discounted cash flows involves determining the operating profit or EBITA, subtracting taxes, depreciation and amortization, and considering any changes in the working capital after removing any capital expenditures which were made during the reporting period.”
Question: Which is higher - the cost of equity or the cost of debt, and why?
Explanation: This is a pretty basic question. The interviewer probably already knows the answer, but they’re interested in your reasoning for the answer you provide. The best way to respond to this question is to answer it and then give the rationale for your answer.
Example: “The cost of equity will always be higher than the cost of debt. This is because the cost of debt, which is the interest expense, is tax-deductible. Other reasons the cost of equity is higher is investors are not guaranteed repayment or a fixed rate of return, and they are always last in line for repayment if the company were to go bankrupt.”
Question: What are the calculations used to determine the cost of equity?
Explanation: This is yet another follow-up question. You should always anticipate follow-up questions during an interview. If an interviewer asks multiple follow-up questions about a single topic, it indicates the topic is essential to them. Keep this in mind during the interview and when asking your questions toward the end.
Example: “The most common calculation used to determine the cost of equity is the capital asset pricing model. his considers the expected return an asset or investment will provide and the impact movements in the overall market have on this value. The calculations used for this include the risk-free rate, equity’s beta value, and market-risk premium. The beta is what defines how sensitive the asset is to movements in the value of the overall market.”
Question: What is the beta for a company, and how would you calculate it?
Explanation: This is a technical question. Technical questions ask you to define a term used in the industry or profession for which you are interviewing. Technical questions are best answered directly and succinctly with little embellishment. The interviewer can always ask follow-up questions if they need additional information.
Example: “Betas are easily determined by reviewing the company’s performance relative to the market in the past. Projecting future betas is more challenging due to errors in estimations. For future betas, the best method is to use the overall industry beta. You can adjust this by adding in a factor that considers the amount of leverage a company has.”
Question: What is the difference between equity value and enterprise value, and what is the appropriate numerator for a revenue multiple?
Explanation: This question is meant to determine whether you understand the difference between equity value and enterprise value and their relevance to multiples. This is a concept any seasoned investment banker should be familiar with. When preparing for an interview, it is best to review the essential terms, concepts, and principles used in this profession. Practicing these questions will also help.
Example: “The simple answer to this is the equity value equals the enterprise value minus the net debt. The net debt is equivalent to the total debt minus any excess capital. The appropriate numerator to determine the revenue multiple uses the enterprise value. The reason for this is the equity value is non-levered or doesn’t consider the company’s debt.”
Question: If a company had negative historical cash flow, how would you value it?
Explanation: This is another operational question that is seeking to determine how you would value a company that had not been making money for some time. This is typical among startups and technology companies. Again, simply describe the methodology you use and anticipate follow-up questions.
Example: “Since the company is not making any money, using any of the traditional ratios or multiples for my analysis would not be appropriate. Therefore, I would use the discounted cash flow valuation approach.”
Question: When is it appropriate to value a company using a revenue multiple instead of EBITDA?
Explanation: This question is similar to the previous one because it is asking about valuing a company that has yet to generate any profits. Interviewers will often ask similar questions to confirm your answer and make sure you truly understand the concept which they are questioning you about. Make sure you keep your answers consistent.
Example: “It’s appropriate to value a company using a revenue multiple when the company has yet to generate any profits. Companies with negative profits will have multiples or ratios which are meaningless. Therefore, revenue multiples are a better way to determine the company's value.”
Question: If the financial performance for two companies are similar, but they were trading at different price-to-earnings multiples, which would you recommend as an investment?
Explanation: This is a relatively simple question which the interviewer is making more complex by adding in another factor. Interviewers will sometimes mask easy questions by adding a great deal of irrelevant or unimportant information. The purpose of this is to see how insightful you are and determine your ability to cut through distractions to get to the meat of an issue. You should always listen carefully to interviewers’ questions to separate irrelevant information from the actual question.
Example: “If the bulk of the financial information and multiples in ratios were similar, I would always value the company with a lower price-to-earnings ratio as a better investment. Everyone always wants to pay the lowest price for similar products.”
Additional Investment Banker Interview Questions
When should a company consider issuing debt instead of equity?
Can you tell me about the four financial statements?
Can you tell me how an income statement and balance sheet relate?
Do you happen to know firm evaluation methods? If so, which ones?
How would you value a company in an industry you know little to nothing about?
Have you been following the market lately? Tell me some updates.
A word of warning when using question lists.
Question lists offer a convenient way to start practicing for your interview. Unfortunately, they do little to recreate actual interview pressure. In a real interview you’ll never know what’s coming, and that’s what makes interviews so stressful.
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