- 20 min read

Investment Banking Interview Questions With Answers Part 2

Q1- Explain meaning of WACC and how to calculate it?

Suggested Answer: WACC stands for Weighted Average Cost of Capital. It is a measure of a company's cost of capital in which each category of capital is proportionately weighted. WACC is generally calculated by multiplying the cost of each individual component of capital (such as common stock, preferred stock, bonds, and retained earnings) by its relevant weight and then summing the results.

For example, suppose a company has $10 million in common stock, $5 million in preferred stock, $12 million in bonds, and $3 million in retained earnings. The costs of common stock, preferred stock, and bonds are 12%, 10%, and 8%, respectively. The weights for these components would be 40%, 20%, and 40% (since these numbers sum to 100%), based on their relative amounts in the company's capital structure. The WACC for this company would be calculated as follows:

WACC = (0.12 x 0.40) + (0.10 x 0.20) + (0.08 x 0.40) = 0.048 + 0.02 + 0.032 = 0.100 or 10.0%

It is important to note that the weights used in the WACC calculation should reflect the proportions of the various forms of capital that the company actually uses to finance its operations, rather than the amounts it could potentially raise. Also, the WACC is a theoretical calculation and may not reflect a company's actual cost of capital in practice. It is commonly used as a benchmark or starting point for financial analysis and decision making.

Q2- How do you value a startup company with no revenue and profit from last 3 years?

Suggested Answer: It can be challenging to value a startup company that has no revenue or profit, as traditional valuation methods such as price-to-earnings ratio and discounted cash flow analysis are not applicable. In such cases, investors and analysts may need to use alternative methods to estimate the value of the company.

One approach is to use the "venture capital method" of valuation, which is commonly used to value early-stage companies. This method takes into account a number of factors, including the company's potential market size, the strength of its management team, the potential for growth and scalability, and the risks and uncertainties associated with the business.
Another approach is to use a "cost-to-build" method, which estimates the value of the company based on the amount of money that would be required to replicate its operations, products, or services. This method can be useful for companies that have unique or proprietary technology or intellectual property.
Ultimately, the value of a startup company with no revenue or profit will depend on a variety of factors and will be subject to interpretation and negotiation. It is important for investors to carefully evaluate the company's potential and conduct thorough due diligence before making a decision to invest.

Q3- What are the main method to valuing a company?

Suggested Answer: There are several commonly used methods for valuing a company, including:

Earnings multiple method: This method values a company based on its earnings per share and a market-derived multiple, such as the price-to-earnings ratio. The value of the company is determined by multiplying the earnings per share by the market-derived multiple.

Discounted cash flow method: This method values a company based on the present value of its future cash flows. The value of the company is determined by forecasting its future cash flows, discounting them to their present value using a discount rate, and then summing the present values.
Net asset value method: This method values a company based on the value of its assets, such as property, plant, and equipment, and liabilities, such as debt and other obligations. The value of the company is determined by subtracting its liabilities from its assets.
Comparable companies method: This method values a company based on the market values of similar companies in the same industry. The value of the company is determined by comparing its financial ratios and other characteristics to those of comparable companies and adjusting for any differences.
Market capitalization method: This method values a company based on the market value of its outstanding shares. The value of the company is determined by multiplying the number of its outstanding shares by the market price per share.

Each of these methods has its own strengths and limitations, and the appropriate method for valuing a company will depend on the specific circumstances and the information available.

Q4- How do you get to FCF from EBITDA?

Suggested Answer: Free cash flow (FCF) is the cash that a company generates after accounting for capital expenditures, such as investments in property, plant, and equipment. FCF is a measure of a company's financial performance and is used to evaluate its ability to generate cash flow from operations.

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of a company's financial performance that excludes certain expenses, such as interest, taxes, and non-cash items, such as depreciation and amortization. EBITDA is often used as a starting point for calculating FCF.

To calculate FCF from EBITDA, the following steps can be followed:

Calculate EBITDA by adding back interest, taxes, depreciation, and amortization to net income.
Calculate the change in net working capital by subtracting the current year's net working capital from the previous year's net working capital. Net working capital is the difference between a company's current assets and current liabilities.
Calculate the change in non-cash working capital by subtracting the current year's non-cash working capital from the previous year's non-cash working capital. Non-cash working capital is the portion of net working capital that does not involve cash, such as accounts receivable and inventory.
Calculate the capital expenditures by subtracting the previous year's capital expenditures from the current year's capital expenditures. Capital expenditures are the funds that a company spends on long-term assets, such as property, plant, and equipment.
Calculate FCF by adding the change in net working capital, the change in non-cash working capital, and the capital expenditures to EBITDA.

For example, suppose a company has net income of $1 million, interest expense of $100,000, taxes of $200,000, depreciation and amortization of $300,000, net working capital of $500,000, non-cash working capital of $400,000, and capital expenditures of $500,000. The FCF for this company would be calculated as follows:

EBITDA = $1 million + $100,000 + $200,000 + $300,000 = $1.7 million
Change in net working capital = $500,000 (current year) - $500,000 (previous year) = $0
Change in non-cash working capital = $400,000 (current year) - $400,000 (previous year) = $0
Capital expenditures = $500,000 (current year) - $500,000 (previous year) = $0
FCF = $1.7 million + $0 + $0 + $0 = $1.7 million

It is important to note that this is just one way of calculating FCF from EBITDA and that there may be other methods or variations depending on the specific circumstances and the information available.

Q5- Walk me through a DCF, LBO and multiples?

Suggested Answer: DCF, or discounted cash flow, is a method of valuing a company based on the present value of its future cash flows. This method involves forecasting the company's future cash flows, discounting them to their present value using a discount rate, and then summing the present values. The value of the company is the sum of the present values of its future cash flows.

LBO, or leveraged buyout, is a method of valuing a company based on the assumption that it will be acquired using borrowed funds. This method involves estimating the amount of debt and equity that would be required to acquire the company, and then using this information to calculate the value of the company based on the expected return on investment.

Multiples, or comparative valuation, is a method of valuing a company based on the market values of similar companies in the same industry. This method involves comparing the financial ratios and other characteristics of the company being valued to those of comparable companies, and then adjusting for any differences. The value of the company is then determined by applying a market-derived multiple, such as the price-to-earnings ratio, to one of its key financial metrics, such as earnings per share or revenue.

Each of these methods has its own strengths and limitations, and the appropriate method for valuing a company will depend on the specific circumstances and the information available.

Top of Form

Q6- What are the three key that UK markets will be focused on over the coming year?

Suggested Answer: The world’s three largest economies are stalling, with important consequences for the global outlook. Inflation is a major concern like commodity. Russia Ukraine war, recession.

Q7- Explain depreciation and which method mostly used

Suggested Answer: There are a few different types of depreciation, but the most common is Straight Line Depreciation. This is where you calculate the depreciation for an asset over its useful life. You divide the cost of the asset by the number of years it is expected to be used, and then subtract that amount from the original cost of the asset each year. This gives you an estimate of how much the asset will be worth at the end of its life.

Q8- How do you expect current trade policy and federal reserve policy to impact the markets over the next One year?

Suggested Answer: Over the next year, I expect current trade policy and Federal Reserve policy to continue impacting the markets. Trade policy is likely to remain a source of volatility for the markets, while the Federal Reserve is expected to continue gradually raising interest rates. These factors are likely to continue impacting asset prices and investor sentiment over the next year.

Q9- What stock to long and hedge

Suggested Answer: Some stocks to long and hedge may include Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), and Google Inc. (GOOGL). These stocks may be good long-term investments due to their strong fundamentals and growth potential. Additionally, hedging these stocks may help protect against downside risk if the stock price declines.

Q10- Tell me the PE ratio is 7 or 10 which wil you choose and why?

Suggested Answer: The price-to-earnings (P/E) ratio is a measure of how much investors are willing to pay for a company's earnings. It is calculated by dividing the company's stock price by its earnings per share (EPS). A lower P/E ratio can indicate that a company is undervalued, while a higher P/E ratio can indicate that a company is overvalued.

In general, a P/E ratio of 7 or 10 is considered to be low. A low P/E ratio can indicate that a company is undervalued, but it can also indicate that the company is struggling to generate profits. As such, it's important to look at a company's P/E ratio in the context of its overall financial performance and industry trends.

When choosing between two companies with P/E ratios of 7 and 10, it's important to consider the other factors that can affect a company's value, such as its growth prospects, competitive advantages, and debt levels. It's also important to diversify your portfolio and not put all your eggs in one basket by investing too heavily in a single company. It's always a good idea to consult with a financial advisor or conduct thorough research before making any investment decisions.

Q11-Walk from Revenue to EBITDA

Suggested Answer: EBITDA is a measure of a company's financial performance that helps investors and analysts compare the profitability of different companies. It stands for earnings before interest, taxes, depreciation, and amortization.

EBITDA is calculated by starting with a company's revenue and then adjusting for expenses such as cost of goods sold, selling, general and administrative expenses, and research and development expenses. These adjustments are made to remove the effects of financing, tax, and accounting decisions from the calculation, making it easier to compare the profitability of different companies.

Here is an example of how to calculate EBITDA from revenue:

Start with the company's revenue.
Subtract the cost of goods sold to arrive at the gross profit.
Subtract selling, general and administrative expenses and research and development expenses to arrive at the operating profit.
Subtract depreciation and amortization expenses to arrive at the EBITDA.

For example, if a company has revenue of $100,000, cost of goods sold of $50,000, selling, general and administrative expenses of $25,000, and depreciation and amortization expenses of $10,000, its EBITDA would be calculated as follows:

Revenue: $100,000

Cost of goods sold: -$50,000

Gross profit: $50,000

Selling, general and administrative expenses: -$25,000

Operating profit: $25,000

Depreciation and amortization: -$10,000

EBITDA: $15,000

EBITDA is a useful measure of a company's profitability, but it is not a complete picture of a company's financial health. It does not take into account a company's debt levels, cash flow, or other factors that can affect its long-term viability. As such, it's important to consider EBITDA in the context of a company's other financial metrics when evaluating its investment potential.

Q12- How depreciation move throughout the financial statements?

Suggested Answer: The depreciation expense moves through the financial statements in the order of the income statement, balance sheet, and statement of cash flows. The depreciation expense is first recognized as an expense on the income statement. This decreases the net income for the period. The depreciation expense then appears as a deduction from net income on the balance sheet. This decreases the shareholders' equity on the balance sheet. Finally, the depreciation expense is shown as a cash flow outflow on the statement of cash flows.

Q13- What is 10-year treasury bond returns?

Suggested Answer: A 10-year Treasury bond is a bond issued by the U.S. government with a maturity of 10 years. The 10-year Treasury bond yield is the annual interest rate the U.S. government pays on the bond.

Q14- What are the adjustments between EBITDA and adjusted EBITDA in a pharma company?

Suggested Answer: Adjusted EBITDA is a variation of the earnings before interest, taxes, depreciation, and amortization (EBITDA) metric that makes additional adjustments to exclude certain non-recurring or one-time items from the calculation. The specific adjustments made to calculate adjusted EBITDA can vary depending on the company and the purpose of the calculation.

In a pharmaceutical company, some common adjustments made to calculate adjusted EBITDA may include the following:

Excluding the costs of research and development (R&D) expenses, which can be significant for pharmaceutical companies and can vary greatly from one period to the next.
Excluding the costs of acquiring or licensing new drugs or technology, which can also be significant for pharmaceutical companies and can affect the comparability of EBITDA between periods.
Excluding the costs of restructuring or reorganizing the company, which can be one-time expenses that do not reflect the ongoing operations of the business.
Excluding the impact of changes in the value of assets such as goodwill or intangible assets, which can affect the calculation of EBITDA but are not directly related to the company's operations.

By making these adjustments, adjusted EBITDA can provide a more consistent and comparable measure of a pharmaceutical company's profitability over time. However, it's important to remember that adjusted EBITDA is not a substitute for net income or other measures of financial performance and should be used in conjunction with other financial metrics when evaluating a company's investment potential.

Q15- Tell me what are the different valuation methodologies?

Suggested Answer: There are various different valuation methodologies that can be used to value a company. The most common methods are: - discounted cash flow analysis - comparative analysis - precedent transactions analysis - net asset value

Q16- If cost of equity increase how does the value of company change?

Suggested Answer: The cost of equity is the required rate of return that investors expect to earn on their investment in a company. It is calculated based on the level of risk associated with the company's stock, taking into account factors such as the company's financial stability, industry trends, and the overall state of the economy.

If the cost of equity for a company increases, it means that investors are demanding a higher rate of return to compensate them for the increased risk associated with the company's stock. This can lead to a decrease in the value of the company's stock, as investors will be less likely to buy the stock if they expect to earn a lower return on their investment.

However, the impact of an increase in the cost of equity on the value of a company can vary depending on a number of factors. For example, if the company is able to maintain or increase its profits despite the higher cost of equity, it may be able to offset the negative impact on its stock price. Additionally, if the overall market is performing well and other companies in the same industry are experiencing similar increases in their cost of equity, the negative impact on the company's stock price may be less pronounced.

Overall, an increase in the cost of equity can lead to a decrease in the value of a company's stock, but the exact impact will depend on the company's financial performance and the broader market conditions.

Q17- Walk me through a recent M&A transactions that you have heard about it?

Suggested Answer: Microsoft Acquire Activision Blizzard on 68.7 billion in Cash.

Q18- What is your outlook for the overall global economy going forward?

Suggested Answer: My outlook for the global economy is optimistic in next 3 years after recession. Although there are some risks and uncertainties, I believe that the global economy will continue to grow steadily in the coming years. This will provide opportunities for businesses around the world to expand and grow, and will create jobs and improved standards of living for people worldwide.

Q19- Tell me weather a company with high P/E aquires a target with low P/E it will accretive or dilutive?

Suggested Answer: A company with a high price-to-earnings (P/E) ratio acquiring a target with a low P/E ratio can potentially be accretive, meaning that it can increase the acquiring company's earnings per share (EPS). This is because the acquiring company's higher P/E ratio indicates that it is currently trading at a higher valuation compared to the target company. If the acquiring company is able to successfully integrate the target company and realize synergies, it can potentially increase its EPS, making the acquisition accretive.

Q20- Walk me about the cash flow statement?

Suggested Answer: The cash flow statement is a financial statement that shows how much cash a company has generated and used over a specific period of time. The cash flow statement can be used to help investors and analysts understand a company's liquidity and ability to generate cash flow from operations.

A cash flow statement is a financial document that shows the sources and uses of a company's cash over a given period of time. It is one of the key financial statements that investors and analysts use to evaluate a company's financial health and performance.

The cash flow statement is organized into three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities: This section shows the cash generated or used by the company's core business operations. This can include cash inflows from the sale of goods or services, as well as cash outflows for expenses such as salaries, rent, and taxes.
Cash flows from investing activities: This section shows the cash generated or used by the company's investments in long-term assets such as property, plant, and equipment. This can include cash inflows from the sale of investments, as well as cash outflows for the purchase of new assets.
Cash flows from financing activities: This section shows the cash generated or used by the company's financing activities, such as borrowing money or issuing new shares of stock. This can include cash inflows from the issuance of debt or equity, as well as cash outflows for the repayment of debt or the repurchase of shares.

The cash flow statement also includes a reconciliation of net income (the company's profit or loss) to net cash flow from operating activities, to show how the company's net income was affected by non-cash items such as depreciation and amortization.

Overall, the cash flow statement provides valuable information about a company's ability to generate cash and manage its financial obligations. It is an important tool for investors and analysts to use in evaluating a company's financial health and performance.

Q21- Which main ratios would be used to value a company?

Suggested Answer: There are a variety of financial ratios that investors and analysts use to evaluate the value of a start-up company. Some of the main ratios that may be used to value a start-up include the following:

Price-to-earnings (P/E) ratio: This ratio is calculated by dividing the company's stock price by its earnings per share (EPS). It is a measure of how much investors are willing to pay for the company's earnings. A higher P/E ratio can indicate that investors are confident in the company's growth prospects and are willing to pay a premium for its stock.
Price-to-sales (P/S) ratio: This ratio is calculated by dividing the company's stock price by its revenue per share. It is a measure of how much investors are willing to pay for the company's sales. A higher P/S ratio can indicate that investors believe the company has strong growth potential and a high level of demand for its products or services.
Return on equity (ROE): This ratio is calculated by dividing the company's net income by its shareholder equity. It is a measure of how effectively the company is using its equity to generate profits. A higher ROE can indicate that the company is generating strong returns on its equity and is well-positioned to grow and generate value for its shareholders.
Debt-to-equity (D/E) ratio: This ratio is calculated by dividing the company's total debt by its shareholder equity. It is a measure of the company's financial leverage and its ability to service its debt obligations. A lower D/E ratio can indicate that the company has a strong balance sheet and is not heavily reliant on borrowed funds to finance its operations.

These ratios are just a few of the many tools that investors and analysts use to evaluate the value of a company. It's important to remember that no single ratio can provide a complete picture of a company's value, and that different ratios may be more or less relevant depending on the company's industry, business model, and financial performance.

Q22- How would you compare investing in an FTSE index vs the S&P given todays market conditions

Suggested Answer : An FTSE index is a good investment option today because it is more stable than the S&P. The S&P has higher risk and therefore potential for higher returns, but also a higher chance of losing value.

Q23- Walk through DCF with levered FCF and what is perpetuity method?

Suggested Answer: A discounted cash flow (DCF) analysis is a method of valuing a company or investment based on its expected future cash flows. In a DCF analysis, the company's future cash flows are forecasted and then discounted back to the present using a required rate of return or discount rate. This allows investors to determine the present value of the company's future cash flows and use that value to assess the potential investment opportunity.

The levered free cash flow (FCF) is a variation of the DCF analysis that takes into account the impact of the company's debt on its cash flows. In a levered FCF analysis, the company's future cash flows are forecasted and adjusted for the interest payments and principal repayments on its debt. This provides a more accurate picture of the company's ability to generate cash and pay dividends to its shareholders.

The perpetuity method is a way of estimating the present value of a company's future cash flows when those cash flows are expected to continue indefinitely into the future. In the perpetuity method, the company's future cash flows are forecasted for a certain number of years and then extrapolated into perpetuity using a constant growth rate. The present value of the company's future cash flows is then calculated using the perpetuity formula, which is the expected future cash flows divided by the required rate of return minus the growth rate.

The perpetuity method is often used when valuing a company with a stable and predictable cash flow stream, such as a utility or telecommunications company. However, it is important to note that the perpetuity method relies on a number of assumptions and can be subject to significant uncertainty, so it should be used with caution and in conjunction with other valuation methods.

Q24- How you will value a oil and gas company?

Suggested Answer: There are several methods that investors and analysts can use to value an oil and gas company. Some of the main methods that may be used to value an oil and gas company include the following:

Comparable company analysis: In this method, the company's valuation is determined by comparing it to similar companies in the same industry. This can be done by looking at key financial metrics such as price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and price-to-sales (P/S) ratio.
Discounted cash flow (DCF) analysis: In this method, the company's future cash flows are forecasted and then discounted back to the present using a required rate of return or discount rate. This allows investors to determine the present value of the company's future cash flows and use that value to assess the potential investment opportunity.
Net asset value (NAV) analysis: In this method, the company's valuation is determined by calculating the value of its assets, such as its oil and gas reserves, and subtracting its liabilities, such as its debt. This provides a measure of the company's intrinsic value based on the value of its underlying assets.
Residual income valuation: In this method, the company's valuation is determined by estimating the present value of its future residual income, which is the company's net income minus the opportunity cost of its equity capital. This provides a measure of the company's intrinsic value based on the profitability of its operations.

Each of these methods has its own strengths and limitations, and the appropriate method to use will depend on the specific circumstances of the company and the information available. It's important to consider a range of valuation methods and to consult with a financial advisor or conduct thorough research before making any investment decisions.

Q25- How do you calculate the market capitalization of a listed company?

Suggested Answer: Market capitalization (market cap) is the total market value of a company's outstanding shares. It is calculated by multiplying the number of shares outstanding by the current market price of one share. For example, if a company has 1,000,000 shares outstanding and the current market price is $10 per share, the market capitalization would be $10,000,000.

Q26- You have $1 million to invest in global equity, what will your exposure?

Suggested Answer 1- In general, if you have $1 million to invest in global equity, you may want to consider diversifying your portfolio across a range of different industries, countries, and market capitalizations. This can help to reduce your exposure to any single stock or market and can provide greater protection against potential losses.

One approach you may want to consider is to invest a portion of your $1 million in a globally diversified index fund, which can provide broad exposure to a wide range of stocks across different regions and industries. You could also invest in individual stocks or sector-specific funds to gain exposure to specific industries or markets that you believe have strong growth prospects.

It's important to remember that investing in global equity carries risks, and it's essential to conduct thorough research and consult with a financial advisor before making any investment decisions.

Suggested Answer 2- Assuming you want a globally diversified equity portfolio, with no restrictions on investment style or geography, you would invest $1 million in a mutual fund or exchange-traded fund that tracks a global equity index. This would give you exposure to thousands of stocks from around the world, representing all major market sectors.

Q27- What is PEG multiple and when do you use a PEG multiple?

Suggested Answer: The price-to-earnings growth (PEG) ratio is a measure of a company's valuation that takes into account both its price-to-earnings (P/E) ratio and its expected earnings growth rate. It is calculated by dividing the P/E ratio by the expected earnings growth rate, expressed as a percentage.

The PEG ratio is used to determine whether a company's stock is fairly valued, undervalued, or overvalued based on its earnings growth prospects. A PEG ratio of less than 1 is generally considered to be attractive, as it indicates that the company's stock is undervalued relative to its expected earnings growth. A PEG ratio of greater than 1 is generally considered to be less attractive, as it indicates that the company's stock is overvalued relative to its expected earnings growth.

The PEG ratio can be a useful tool for investors and analysts when evaluating the potential investment opportunities of a company. However, it is important to remember that the PEG ratio is not a perfect measure of a company's value, and it is subject to a number of assumptions and limitations. As such, it should be used in conjunction with other financial metrics and analysis when evaluating a company's investment potential.

Q28- How does an LBO work? Would you rather finance an acquisition with a debt or equity ?

Suggested Answer: A leveraged buyout (LBO) is a type of corporate finance transaction in which a company is acquired using a combination of equity and borrowed funds. In an LBO, the acquiring company typically takes on significant amounts of debt to finance the acquisition, which is then repaid using the cash flow and assets of the acquired company.

An LBO typically involves several steps:

The acquiring company identifies a target company to acquire and negotiates the terms of the acquisition with the target company's management and shareholders.
The acquiring company raises the funds needed to finance the acquisition, typically through a combination of equity and debt. The equity can be provided by the acquiring company's shareholders, private equity firms, or other investors. The debt can be provided by banks, other financial institutions, or the target company itself.
The acquiring company uses the funds raised to purchase the target company's shares, assets, or both. The acquiring company may also restructure the target company's operations and financial structure to improve its profitability and cash flow.
The acquiring company repays the debt used to finance the acquisition using the cash flow and assets of the acquired company. This typically involves making regular interest and principal payments to the lenders, as well as refinancing or restructuring the debt as needed.
As for whether to finance an acquisition

Q29- Imaging a company borrow 100,000 dollar to buy an equipment, how will it affect the financial statement in the first year?

Suggested Answer: If the company borrows $100,000 to buy an equipment, the financial statement in the first year will show an increase in assets of $100,000 and an increase in liabilities of $100,000. The company's equity will not be affected.

Q30- Tell me how CAPEX can be affect market cap?

Suggested Answer: Capital expenditures (CAPEX) refer to the funds that a company spends on acquiring, maintaining, or improving its long-term assets such as property, plant, and equipment. These expenditures can have a significant impact on the company's market capitalization, which is the total market value of the company's outstanding shares.

If a company's CAPEX is high, it can indicate that the company is investing heavily in its long-term assets and is positioning itself for future growth. This can be seen as a positive by investors, who may be willing to pay a higher price for the company's stock and therefore increase the company's market capitalization.

On the other hand, if a company's CAPEX is low, it can indicate that the company is not investing as much in its long-term assets and may be lagging behind its competitors in terms of growth and innovation. This can be seen as a negative by investors, who may be less willing to pay a high price for the company's stock and therefore decrease the company's market capitalization.

Overall, CAPEX can have a significant impact on a company's market capitalization, and investors and analysts will typically consider a company's CAPEX levels when evaluating its investment potential.