Investment Banking Interview Questions
An investment banking is a financial service company or institution that provides credit facilities, security instruments, underwriting, and advisory services related to governments, individuals, and corporations. Investment banking roles are research, investment management, underwriting new stocks issues, and risk management. In this article, we have covered some important investment banking interview questions that you should know while giving an investment banking interview.
Most Frequently Asked Investment Banking Interview Questions
Here in this article, we will be listing frequently asked Investment Banking Interview Questions and Answers with the belief that they will be helpful for you to gain higher marks. Also, to let you know that this article has been written under the guidance of industry professionals and covered all the current competencies.
To answers this question, you have to tell all the essential qualities that are required to become an investment banker.
- Having good communication ability
- Able to think out of the box
- Able to manage multiple project deadlines
- Strong quantitative and analytical skills
- Positive and never give up attitude
A company should issue debt when the rate of taxation is high or there is a huge market and the company does not have enough capital to meet the demand.
Some of the features that make a good financial model are:
- It describes all the functionality.
- Having clear inputs, working, output and results.
- The model is versatile.
- The model is well structured and easy to audit.
- The formula used in the model is most efficient.
The cost of equity is calculated by CAPM. CAPM stands for Capital Asset Pricing Model. Below is the formula used to calculate the cost of equity.
E(Ri) = R(f) + β[E(m) - R(f)]
where,
β = Beta of the stock.
E(m) = Market Rate of Return
[E(m)-R(f)] = equity risk premium.
R(f) = Risk -free Rate of Return.
NOTE: These are the most important questions to ask investment bankers during an interview.
This is the formula to calculate beta for a company.
ΔSi=α+βi×ΔM+e
where:
ΔSi =change in the price of stock i.
α=intercept value of the regression.
βi=beta of the I stock return.
ΔM=change in the market price.
e=residual error term.
The appropriate numerator for a revenue multiple is Enterprise Value.
A company that provides factors like a quality product, good services, and uniqueness and these factors helps to create good names and good reputation of the company in the minds of customers, bankers, and suppliers, etc when we try to value the good name and reputation of the business in terms of money then it is known as Goodwill.
Goodwill = P − (A+L)
Where,
A = Fair market value of assets
L = Fair market value of liabilities
P = Purchase rate for the targeted company
Investing in a company with a negative historical cash flow is generally a high risk. Cash expenditure on the equipment could be greater than the revenue coming in. By profit, and loss company you could value the company with its net profit.
The cost of equity is typically much higher than the cost of debt. As it makes you lose a part of the business to the equity investors. Debt is less expensive because its interest payment is considered as the expense.
| Commercial Banking | Investing Banking |
|---|---|
| Individual or small-sized companies. | Startups and companies. |
| Provides services to the public. | Provides services to corporations, investors, and governments. |
| A risk factor is low. | A risk factor is high. |
| Take deposits. | Don’t take deposits. |
| Provides loans. | Don’t provide loans. |
Enterprise Value is described as the entire cost or market value of the company. Below is the formula used to calculate Enterprise Value
Enterprise Value = Market Capitalization + Debt + Minority shareholdings + Preference Shares - cash and cash equivalents.
Dept is cheaper than equity because it is less expensive in terms of interest. Interest on debt is a tax-deductible expense making it an even more cost-effective form of financing. Both risk and potential return of debt and lower.
The main components of WACC are the cost of debt and the cost of equity.
We can calculate the WACC as given below
WACC = [ Ve / Ve + Vd ] ke + [ Vd/ Ve + Vd ] kd ( 1- T)
Where,
Ve = market value of the equity that is the value of share price ex-div X number of shares
Vd = market value of debt which is the market value of debentures + loan amount
ke = cost of equity
kd = cost of debt
T = company profit tax rate
NOTE: This is one of the most important investment banking technical questions.