Investment banking deals with the process of capital construction and the limitation of the financial risk for other companies. Considering that different jobs in investment banking need different levels of experience, the questions asked in the interview are the level of difficulty appropriate to the job being offered. This way, with a list of probable questions the interviewer would like to ask you is easier and more effective.
Here, we discuss how to prepare for an investment banking interview and get your desired job easily.
Investment Banking Interview Questions and Answers
1. What is an LBO?
LBO or Leverage buyout is a specific investment method where a person buys an organization by availing financial resources like loans and bonds. In this concept, the company’s acquired assets will be utilized as the type of collateral. The debt-to-equity LBO ratio may be 90:10. If the debt percentage is higher, then it enables the company to declare bankruptcy.
2. What is the difference between valuation and pricing?
Thus, only current assets are valued; all the rest of the assets are priced while no income-generating capacity is attributed to them. Examples of assets that could be priced are gold, Bit coins, and currency. Thus, it is clear that fair value is attributed to valuation because of the nature of the asset, and price is attributed to demand and supply in the market.
3. How can two companies with identical earnings in the same industry have different P/E?
Understanding various potential discrepancies is usually led by the higher growth rates of two businesses operating in the same industry and by the disparity in PE ratios, or EV/EBIT multiples, between two organizations within similar industries.
The business that has actually achieved a higher increase in profits than another business in the industry sector will attract a higher multiple from the investor for every dollar of earnings.
4. What is typically higher, the cost of debt or the cost of equity?
The cost of equity is always higher than the cost of debt because the cost of debenture being a liability has a carrying cost, including interest, which is tax-beneficial. Further, the cost of equity is also high as the investors in equity have no fixed returns and, therefore, carry higher risks than the lenders.
Still, debt is cheaper because its Interest payment forms part of overhead. It is also closed ranked in a firm’s capital structure. Thus, if the firm is liquidated or files for Bankruptcy, the debt holders are paid their funds first before the equity holders.
5. What is a deferred tax asset?
In simpler terms, a deferred tax asset is a financial statement element that is usually reported as an asset on the balance sheet at a net amount.
Other examples of intangibles include assets: your enterprise has declared that it has overpaid taxes and may think of recovering in the future. This sometimes happens when there is a change of tax laws that happens mid-fiscal year. This may occur when there is a transformation of tax laws in mid-fiscal year. It can also happen when a company has a loss in some fiscal year because those losses might be considered against future profits for tax calculation purposes.
6. What distinguishes a merger from an acquisition?
The term merger is a legal, complex, and consolidated fusion of two or more business companies by forming a single separate economic body possessing a new hierarchical structure and ownership, competitive advantage, and other characteristics resulting from its synergy.
However, an acquisition is when a corporation of greater financial standing gains control of another corporation with a weaker financial standing by purchasing all or some of the company’s shares.
7. What are the three major valuation methodologies?
- · The multiples valuation method, which is referr to as the “comps” method, involves the use of operational data and multiplies earnings by the P/E ratio of the business sector in which the company exists or uses other ratios.
- ·Transactional valuation method (also known as ‘the precedents’ approach) entails comparing the current value of the business to similar others that have prevail in the market through recent acquisitions or sales.
- ·Discounted cash flow method, where you adjust cash flows from the previous periods for the value today base on the expect future cash flows.
8. How do you value a company?
Various approaches are used to value a company. These include; DCF analysis (Discounted Cash Flow), comparable company analysis, and precedent transactions. DCF analysis discounts the estimate future cash flow of a business based on contractual terms with a discount rate. Comparative analysis for M&A refers to the comparison of the target firm’s financial ratios with those of firms in the same industry, adjusted for size, growth, and risk levels. Another technique for determining a company’s value is the use of precedent transaction analysis, which refers to the valuation approaches multiples of past merger and acquisition transactions of similar companies.
9. Explain EBITDA and its importance.
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. This is calculate and use to determine a company’s operating performance, without regard to non-operational income and expenses such as interest, taxes, and depreciation, respectively. There is merit in evaluating EBITDA, because a figure calculate in this way gives a clearer picture of the earnings of the company’s core business, thus facilitating a comparison of the results of different companies and sectors. The formula for EBITDA is:
EBITDA = Net Income + Interest +Taxes +Depreciation +Amortization
10. Describe a time you worked in a team and faced a challenge.
At [Company Name], in one of my previous organizations, my team was require to deploy a new CRM system in a very short timeframe. The major concern was compatibility and the accompanying resistance to change amongst the working team members. I discusse these problems and their solutions with my teammates and addresse all technical concerns promptly, and encourage everyone to work towards the same objective. As a result, we were able to manage the successful implementation of the CRM system before the indicate period and increase efficiency by 20%.
Conclusion
Most of the jobs in this industry are in investment banking and there is a provision of other numerous positions paying attractive salaries as well. Get ready to ace Investment Banking interview questions and answers and increase your likelihood of being recruited for a job. In this industry especially, it is not that hard to get jobs; there are many availabilities. You could crack and nail it if you really possess a will to power and a determination of the right kind.
