So, you’re preparing for an interview for an investment banking or finance position and you want to study up – good thinking. One of the first things employers look for during an interview is the commitment to understand a task and see it through to its end. Beyond that, however, you’ll need to show off your knowledge of the investment banking culture as well as your technical expertise. If you thought that you might be able to make it through the interview without mentioning math, you are probably wrong.
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The Wall Street Prep blog published an article on investment banking interviews, and it included a pretty straightforward comment by a recruiter on the expected technical background of potential employees: “While we do not expect liberal arts majors to have a deep mastery of highly technical concepts, we do expect them to understand the basic accounting and finance concepts as they relate to investment banking,” he said. “Someone who can’t answer basic questions like ‘walk me through a DCF’ has not sufficiently prepared for the interview, in my opinion”.
With that thought in mind, let’s take a look at some of the questions you can expect to face in a typical investment banking interview.
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Technical Investment Banking Interview Questions
Q1: What is working capital?
A: Working capital is equal to current assets minus current liabilities. It informs a user about how much money is being used for business operations, and how much more will be necessary throughout the year.
Q2: What does WACC mean?
A: It stands for weighted average cost of capital, and this is a calculation of an organization’s capital that is weighted proportionally. It includes every source of capital, and takes into account factors like depreciation, tax rates, debt, and equity.
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Q3: What is a deferred tax asset?
A: A deferred tax asset is created when a business pays more tax to the IRS than is reported on their income statement. They can be created from net operating losses and differences in revenue recognition.
Q4: What are the steps that occur during a cash flow statement?
A: Begin with the net income, and examine each line of the major adjustments. These include changes in deferred taxes and working capital, as well as depreciation. Be sure to mention asset purchases and sales, investment securities, and capital expenditures. Create cash flows for financing, business operations, and investments, and add them together to get the total cash flow. The end-of-period balance can be derived by adding the change in cash to the beginning-of-period balance.
Q5: What is a DCF?
A: A discounted cash flow. This type of cash flow is used to determine how lucrative a potential investment might be. It is similar to the cash flow described above, but uses future projections of free cash flow to discount the price on the investment. Taking into account future trends results in a more accurate valuation to judge the investment by.
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Q6: What is the financial impact of a business buying a new piece of equipment, in terms of income statements, balance sheets, and cash flows?
A: There is no initial impact on the income statement, but PP&E (property, plant, and equipment) will go up and cash will go down on the balance sheet. This represents a cash outflow. Depreciation causes net income to go down, as well as PP&E and retained earnings. Because depreciation is a non-cash expense that ends up reducing net income, this value is added back into the cash flow in the operations section.
Does this guide match up to your own interview experiences? Did we miss something you find crucial? Let us know in the comments below!