Today we’re going to cover the most common technical questions asked in investment banking interviews.
This list is based on an analysis of 78 real technical questions that were reported on Glassdoor by candidates who recently interviewed for analyst roles at Goldman Sachs, JP Morgan, or Morgan Stanley.
You may be surprised to learn that 88% of the technical questions reported can be boiled down to the 14 questions below.
And if you master just the top 3 questions, you’ll be ready for over half (53%) of the technical questions reported, giving you a great opportunity to focus your preparation.
Let’s get straight to the list.
- Walk me through a DCF
- What are the main methods of valuing a company?
- How does X affect the financial statements?
- How would you value X company?
- Determine if an acquisition is accretive or dilutive
- Build an LBO model
- Walk me through the financial statements
- What is enterprise value?
- How do you calculate / adjust EBITDA?
- How do you calculate WACC?
- When would you use DCF vs. other valuation methods?
- How do you calculate cost of debt and cost of equity?
- Explain minority interest in layman's terms
- What is an LBO and what are its value drivers?
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1. Walk me through a DCF (23%) ↑
This is by far the most common investment banking interview question, and it accounts for roughly 23% of all questions reported. As a result, you should be THOROUGHLY prepared for this question before your interviews, since you will almost certainly encounter it.
DCF stands for Discounted Cash Flow, and the basic formula used to calculate this number is as follows:
Here’s a quick overview of how to answer this question:
- Estimate future cash flows (5-10 years into the future)
- Estimate the terminal value of the company
- Convert these numbers to present values using WACC as the interest rate
- Add the numbers together
- The results of this calculation give you the “enterprise value” of the company
To learn more about each step of performing a DCF analysis, check out this full guide.
2. What are the main methods of valuing a company? (19%) ↑
This question is also sometimes phrased differently, with the interviewer simply asking “how do you value a company?” Both versions of this question are quite common, and together they account for 19% of the questions reported.
Here’s a quick overview:
- There are 3 main ways to value a company:
- The Discounted Cash Flow method
- The Comparable Companies (also called Multiples) method
- The Comparable Acquisitions (also called Precedents or Transactions) method
The Discounted Cash Flow method values a company using the present value of its future cash flows.
The CompCo (Comparable Company) method values a business by comparing its multiples (e.g. the P/E ratio) with similar companies. And the CompAq (Comparable Acquisition) method values a company by comparing it with similar companies that have sold in the past.
3. How does X affect the financial statements? (10%) ↑
This type of question accounts for 10% of all reported questions, and it rounds out the top 3, which together represent 53% of reported questions.
This question can be asked in several different ways, but the most common versions appear to focus on depreciation or impairment charges. For example, “how does depreciation flow through the financial statements?”
Here’s a video walkthrough of how this works:
4. How would you value X company? (~4%) ↑
Starting with this question, all remaining questions in this list account for 4% or less of the total reported questions. With that said, each one could still be the difference between landing an offer and getting turned away, so let’s keep studying!
With this type of question, your interviewer would ask how you would value a specific company, rather than about the general valuation methods. They may or may not give you additional details or data about the company.
As an example, you might be asked “how would you value Morgan Stanley?”
Here’s a quick overview of how you could approach this question:
- Morgan Stanley is a bank
- Banks are typically valued using the Comparable Companies method
- More specifically, I would compare to similar banks using the Price to Book Value multiple
- Price to Book Value is used because a bank’s assets and liabilities are legally required to be “marked to market,” meaning the balance sheet will reflect the bank’s market value.
5. Determine if an acquisition is accretive or dilutive (~4%) ↑
This is an important question any time a company is considering an acquisition.
Fundamentally, any deal that increases the Earnings Per Share of the buyer is accretive. Whereas any deal that decreases the Earnings Per Share of the buyer is dilutive.
Here’s a quick overview of how to answer this question:
- Ask your interviewer if it’s an all stock deal
- If it is an all stock deal, then it’s easy to determine if it’s accretive/dilutive:
- If the buyer has a higher P/E ratio, it’s accretive
- If the seller has a higher P/E ratio, it’s dilutive
6. Build an LBO model (~4%) ↑
A leveraged buyout (LBO) is basically the acquisition of a company that is financed with debt (typically a very high percentage of debt).
Here’s a video walkthrough that covers this question. Focus on timestamp 2:37-5:30, as the rest of the video covers other questions.
7. Walk me through the financial statements (~4%) ↑
The 3 main financial statements are as follows:
- Income statement
- Cash flow statement
- Balance sheet
And your interviewer might ask you a question like this, to see how well you understand accounting basics and how the various statements flow together.
Here’s a nice video overview of how to approach this type of question:
You'll also find our investment banking interview cheat sheet helpful in preparing for this type of question, because it uses arrows to illustrate multiple "paths" that run through the three main financial statements.8. What is enterprise value? (~4%) ↑
According to the reported questions we’ve analyzed, this question is only asked in Morgan Stanley interviews. So, if you’re only interviewing with other firms, then you should prioritize the other questions in this list before preparing for this one.
Enterprise value is a method of calculating the valuation of a company that is more comprehensive than the company’s equity value (or market cap). Enterprise value considers a company’s equity, debt, and cash.
Here is the formula for calculating enterprise value:
Enterprise value = market capitalization + preferred stock + minority interest + debt - cash and cash equivalents
During an interview, you’ll typically be expected to explain what enterprise value is (which you can do using the description above) and possibly what numbers are used to calculate enterprise value (which you’ll know if you memorize the formula above).
9. How do you calculate / how do you adjust EBITDA? (~4%) ↑
According to the reported questions we’ve analyzed, this question was only asked in Goldman Sachs interviews. So, if you’re only interviewing with other firms, then you should prioritize the other questions in this list before preparing for this one.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is sometimes used as an “anchor” for various accounting interview questions.
In other words, you might be asked how to get to EBITDA from revenue. Or you might be asked how to get to free cash flow from EBITDA. Or you may encounter some other variation.
Answering these questions will require a thorough understanding of EBITDA and the financial statements, not necessarily because the specific question is complex, but because it’s difficult to predict which element your interviewer will ask you to focus on.
Let’s look at how to answer the following example: “how do you get from EBITDA to FCF?”
- First, confirm which version of FCF the interviewer wants. Let’s assume they want FCFF (free cash flow to the firm, also called unlevered cash flow).
- FCFF = EBITDA - Tax - Change in Working Capital - Capital Expenditures
- If you’ve been provided with data, you can then crunch the numbers.
You can learn more about the relationship between EBITDA and cash flow in this short video:
10. How do you calculate WACC? (~3%) ↑
According to the reported questions we’ve analyzed, this particular question was only asked in Goldman Sachs interviews, although you will probably still need to understand WACC to answer questions for other firms (including DCF questions).
WACC (Weighted Average Cost of Capital) is the weighted average of a company’s cost of debt and cost of equity.
WACC is also usually the discount rate used in the DCF formula.
In other words, WACC is used to put the “Discounted” in “Discounted Cash Flow,” because it’s the rate used to discount the future cash flows to their present value.
Here’s an overview of how you could answer this question:
- Give the high-level explanation: WACC is the weighted average of a company’s cost of debt and their cost of equity.
- If the interviewer wants to dig deeper, you can discuss the formula in more detail:
- WACC = [Cost of Equity * E/(E + D)] + [Cost of Debt * D/(E+D) * (1 - Tax Rate)]
- Note: E = market value of equity, D = market value of debt
11. When would you use (or not use) DCF instead of other valuation methods? (~3%) ↑
As we’ve mentioned previously, DCF questions are extremely common in investment banking interviews. And this is an additional DCF question variation that you could encounter.
This type of question is also similar to question number 2 above, because your interviewer will probably be expecting you to compare DCF to the other valuation methods (i.e. CompCo and CompAq).
Here’s an overview of this concept:
- A relative valuation method would usually be better than DCF, when…
- The business has really unpredictable cash flows, because DCF is dependent on the numbers you have for future cash flows.
- There is not enough financial data available to use the DCF method. For example, if you only have the company’s revenue, you could make a relative valuation but you wouldn’t be able to use DCF.
- The business is a financial institution, because they operate differently than a typical cash flowing business (e.g. by profiting on the spread on debt).
- Note: this is not a comprehensive list of examples, but it will probably be enough for answering the above interview question.
- DCF would work better than a relative valuation, when…
- The business is well established and has highly predictable cash flows.
- There are no companies similar enough to the business, in order to create a good relative valuation. This could be the case for companies with really varied revenue sources (e.g. they sell muffins and jet turbines).
12. How do you calculate cost of debt and cost of equity? How do they impact a company’s value? (~3%) ↑
It can be important for a company to know its cost of debt and cost of equity, for the purpose of making investment decisions.
Cost of debt is basically the average amount of interest a company pays on all its debt. And the cost of equity is the average rate a company returns to its shareholders.
Here is a brief overview of how to calculate them:
- There are 2 main ways to calculate cost of debt
- The pre-tax approach: Cost of Debt = Total Annual Interest on Debt / Total Debt
- The after-tax approach: Cost of Debt = Pre-Tax Cost of Debt x (1 - Tax Rate)
- Alternative: Cost of Debt = (Risk Free Rate + Credit Spread) x (1 - Tax Rate)
- The primary method for calculating cost of equity is using CAPM
- CAPM = Capital Asset Pricing Model
- Cost of Equity = (Risk Free Rate + Beta) x (Expected Market Return - Risk Free Rate)
- Note: to learn more about Cost of Equity calculations, visit this guide.
Now, regarding the impact of these two metrics on the valuation of a company:
A company with a high cost of debt is typically riskier, and would often have a lower valuation than a comparable company with a low cost of debt.
Similarly, a company with a low cost of equity will likely have a higher valuation than a comparable company with a high cost of equity, because they can get capital for cheaper today to generate more profit in the future.
13. Explain minority interest in layman’s terms (~3%) ↑
According to the reported questions we’ve analyzed, this question is only asked in Morgan Stanley interviews. So, if you’re only interviewing with other firms, then you should prioritize the other questions in this list before preparing for this one.
In simple terms, minority interest is a person or company that owns less than half of a company.
If you’d like to learn more about minority interest in-depth, you can check out this guide from Investopedia. Here are a few highlights:
- Minority interest is also sometimes called NCI (Non-Controlling Interest) because they typically don’t get to make decisions on behalf of the company.
- There are two sub-types of minority interest:
- Active minority interest: owns 21-49% of the company and has some influence on decision making.
- Passive minority interest: owns 20% or less of the company and has little-to-no influence on decision making
- Minority interest is recorded on the balance sheet of the majority owner as a liability.
14. What is an LBO and what are its value drivers? (~3%) ↑
LBO is a less common interview topic, but it’s good to have an understanding of the types of questions you may be asked, especially if you’re applying to a role with an LBO focus.
As a refresher: a Leveraged Buyout (LBO) is an acquisition made using debt (typically a very high percentage of debt).
The most basic drivers for the success / failure of an LBO are as follows:
- The purchase price
- The amount of debt used and the cost of debt
- The expected exit price
It’s also worth mentioning that the success of an LBO is heavily influenced by the actions the acquiring firm takes in order to increase the exit price of the target business. For example, successful LBOs typically involve expanding or restructuring the business to increase its value.
You may recall that we covered another LBO question above (question #6), and we’d recommend that you revisit the video provided with that question in order to develop a deeper understanding of LBOs and how they work. An additional resource that we’ve found helpful is this article.
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