Investment Banking Technical Interview Guide

There is no real shortcut other than practicing and genuinely learning the concepts. The time required depends heavily on your finance background, but the average finance student can usually understand the basics of each topic after a few focused hours.

Middle Market Firms

For middle market firms, such as RBC, Santander, and Raymond James, you need to know the concepts, formulas, and basic to medium-difficulty calculations, such as calculating free cash flow. You are less likely to encounter paper LBOs or thorough accretion and dilution questions, but you still need to be solid on the fundamentals.

Bulge Bracket Firms

For bulge bracket firms, such as Morgan Stanley, Goldman Sachs, and Citi, difficulty can vary greatly. A UBS capital markets role may only cover mid level technicals while a Morgan Stanley Menlo Park interview will squash you. To be safe, it's best to be prepared for advanced, in-depth questions across the core topics, including questions with heavy calculations and multi-step accounting problems.

Elite Boutiques

Elite boutiques, such as Centerview, Evercore, and Lazard, are usually the hardest interviews to pass. These interviews often stray from common guides and may include multi-step questions with difficult mental math in unfamiliar topics. You should be ready for everything from fundamentals to niche elite boutique-style questions, all of which are included in our question database.

If you are starting with no experience, learn accounting first, then move into key vocabulary and definitions. Accounting is vital because it supports every other topic. For instance, someone who does not know what EBITDA is will struggle to understand why a DCF makes sense.

Study the concepts before diving into complex math. Once the foundation is in place, calculations and harder follow-ups become much easier to understand.

The fundamental questions in our database are a strong place to start because they help you build the base before moving into more advanced material.

When practicing, talk out loud regularly so you can simulate what it feels like to walk someone through your thinking. In the vast majority of interviews, you are allowed to use pen and paper, though sometimes you may specifically be asked not to use a calculator.

For elite boutique interviews, get comfortable doing large calculations and using close approximations. Lastly, if you get truly stuck, ask for a hint instead of completely giving up.

Accounting

Walk me through the 3 financial statements.

The three financial statements are the income statement, the balance sheet, and the cash flow statement. The income statement shows a company's revenues and expenses over a period of time and ends with net income. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a single point in time, and it must always balance, since Assets = Liabilities + Shareholders' Equity. The cash flow statement starts with net income, adjusts for non-cash items and changes in working capital, and then layers in cash flow from investing and financing to show how the company's cash balance changed over the period. They connect: net income flows from the income statement into the top of the cash flow statement and into retained earnings on the balance sheet, and the ending cash balance on the cash flow statement flows into cash on the balance sheet.

If you could only choose one financial statement to analyze a company, which would you choose?

The cash flow statement, because it shows how much actual cash the company is generating. The income statement includes non-cash items like depreciation and can be shaped by accounting choices, and the balance sheet is only a snapshot at a single point in time. The cash flow statement reconciles net income down to the real change in cash, so it gives you the clearest picture of whether the business can sustain its operations, fund itself, and return capital to investors.

Walk me through the 3 financial statements when depreciation goes up by $10.

Assume a 40% tax rate. On the income statement, operating income falls by $10 from the extra depreciation, so pre-tax income falls by $10, taxes fall by $4, and net income falls by $6. On the cash flow statement, net income at the top is down $6, but you add back the $10 of depreciation because it is a non-cash expense, so cash from operations and total cash are up $4. On the balance sheet, assets change by cash up $4 and PP&E down $10, for a net decrease of $6, and on the other side retained earnings is down $6 from the lower net income. Both sides fall by $6, so the balance sheet still balances.

Valuation

What are the main valuation methodologies?

The three most common are comparable company analysis (trading comps), precedent transaction analysis (deal comps), and the discounted cash flow (DCF). Comparable companies value a business based on the multiples that similar public companies trade at, such as EV/EBITDA or P/E. Precedent transactions value a business based on multiples paid in past M&A deals for similar companies, which usually include a control premium. The DCF values a company based on the present value of its projected future free cash flows. Other approaches include an LBO analysis, which sets a floor based on what a financial sponsor could pay, and a sum-of-the-parts analysis.

Which methodology gives the highest and lowest valuation?

There is no universal rule, but generally precedent transactions produce higher valuations than trading comps because acquirers pay a control premium and often factor in synergies on top of the market price, while trading comps reflect the current minority-stake trading price with no premium. A DCF can land highest or lowest depending on your assumptions, since it is very sensitive to inputs like the discount rate and terminal growth rate. Best practice is to use several methods together and triangulate a valuation range rather than relying on any single one.

When would you use trading comps versus precedent transactions?

You use trading comps to see how the public market currently values similar businesses on a standalone, minority basis, and precedent transactions to see what buyers have actually paid to acquire similar companies, including a control premium. Precedent transactions are especially relevant in an M&A context because they reflect real acquisition prices, while comps are more relevant for a standalone or IPO context. Both are relative valuation methods, so their quality depends entirely on finding truly comparable companies or deals.

DCF

Walk me through a DCF.

A DCF values a company as the present value of its future free cash flows. First you project the company's unlevered free cash flow, usually for five to ten years, where unlevered free cash flow is EBIT times (1 minus the tax rate), plus depreciation and amortization, minus capital expenditures, minus the increase in net working capital. Then you discount those cash flows back to today using the weighted average cost of capital (WACC). Next you calculate a terminal value to capture cash flows beyond the projection period, using either the perpetuity growth method or the exit multiple method, and discount that back as well. Adding the present value of the projected cash flows and the present value of the terminal value gives you enterprise value, from which you can bridge to equity value by subtracting net debt.

How do you calculate WACC?

WACC is the blended, after-tax cost of a company's capital, weighted by the proportion of debt and equity in its capital structure. The formula is WACC = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate), where E is the market value of equity, D is the market value of debt, and V is the total. The cost of equity is usually found with the Capital Asset Pricing Model: the risk-free rate plus beta times the equity risk premium. The cost of debt is based on the company's current borrowing rate or the yield on its debt, and it is tax-affected because interest is tax-deductible.

What are the two ways to calculate terminal value?

The perpetuity growth (Gordon Growth) method and the exit multiple method. The perpetuity growth method assumes free cash flow grows at a constant modest rate forever and calculates terminal value as the final year's free cash flow times (1 + g), divided by (WACC − g). The exit multiple method applies a valuation multiple, usually EV/EBITDA, to the company's final-year metric based on where comparable companies trade. In practice you often calculate both and sanity-check one against the other, for example by backing out the implied growth rate from the exit multiple.

LBO

Walk me through a basic LBO.

In a leveraged buyout, a private equity firm acquires a company using a large amount of debt and a smaller amount of equity. First you set the purchase price and lay out the sources and uses of funds, deciding how much debt versus equity funds the deal. The company then uses its free cash flow to pay down debt over the holding period, typically three to seven years. At the end, the firm exits by selling the company or taking it public, usually at a similar or higher multiple. Because the debt has been paid down and ideally EBITDA has grown, the equity value at exit is much larger than the initial equity investment, which generates the return. You measure that return with IRR and the multiple on invested capital (MOIC).

What drives returns in an LBO?

There are three main levers. First, debt paydown: using the company's cash flow to reduce debt increases the equity portion of the value over time. Second, EBITDA growth: growing revenue and improving margins increases the company's earnings. Third, multiple expansion: exiting at a higher multiple than the entry multiple, though this is the least reliable because it depends on the market. Leverage amplifies all three, which is why firms use so much debt, but it also raises the risk.

What makes a good LBO candidate?

A strong candidate has stable, predictable cash flows so it can support and pay down significant debt, a low existing debt load, and a strong position in its market with steady demand. It ideally has low capital expenditure needs, room for operational improvement or margin expansion, strong management, and a clear exit path. Undervaluation and hard assets that can serve as collateral also help. In short, you want a company that can safely carry leverage and generate steady cash to deleverage.

Merger Analysis

Walk me through a basic merger model (accretion / dilution).

A merger model combines the acquirer and the target to see the effect on the acquirer's earnings per share. First you set the purchase price and how the deal is financed, using some mix of cash, debt, and stock. Then you combine the two income statements: you add the target's pre-tax income, subtract new interest expense on any acquisition debt and the foregone interest on cash used, and account for new shares issued if stock is used. That produces the combined, or pro forma, net income. You divide pro forma net income by the new pro forma share count to get the combined EPS. If combined EPS is higher than the acquirer's standalone EPS, the deal is accretive; if it is lower, the deal is dilutive.

How do you tell if a deal is accretive or dilutive?

You compare the acquirer's pro forma EPS after the deal to its standalone EPS: if it goes up, the deal is accretive, and if it goes down, it is dilutive. A useful shortcut is to compare the after-tax yield of what the acquirer gives up to the yield of what it gets. For an all-stock deal specifically, compare the two companies' P/E ratios: if the acquirer's P/E is higher than the target's, the deal is generally accretive; if it is lower, it is dilutive.

How does the form of financing affect accretion or dilution?

Generally cash is the cheapest form of financing, because the foregone interest on cash or the interest on new debt is usually a lower after-tax cost than issuing equity, so cash and debt deals are more likely to be accretive. Stock is typically the most expensive because equity has a higher cost, so stock deals are more likely to be dilutive unless the acquirer's P/E is well above the target's. The rule of thumb is to compare the after-tax cost of each financing source to the target's earnings yield, the inverse of the P/E it is being acquired at: if the yield you get exceeds the cost of that source, it is accretive.

Enterprise Value and Equity Value

What is the difference between enterprise value and equity value?

Equity value is the value of the company available to just its common shareholders, which is share price times diluted shares outstanding (market capitalization). Enterprise value is the value of the company's entire core business to all capital providers, both debt and equity holders. Enterprise value is capital-structure-neutral, meaning it does not change if the company raises debt or equity, which is why it is used for operational comparisons. You get from equity value to enterprise value by adding net debt and other claims and subtracting cash.

Walk me through the bridge from equity value to enterprise value.

You start with equity value, add total debt, preferred stock, and noncontrolling (minority) interest, then subtract cash and cash equivalents. So Enterprise Value = Equity Value + Total Debt + Preferred Stock + Noncontrolling Interest − Cash. You add debt and the other claims because an acquirer would have to assume or repay them, and you subtract cash because an acquirer could use the target's cash to pay down the purchase price, effectively lowering the cost of the acquisition.

Why do you subtract cash when calculating enterprise value?

Because cash is a non-operating asset and enterprise value is meant to capture the value of the core business. When an acquirer buys a company it also gets the company's cash, which it can use to pay down the purchase price, so the effective cost of the acquisition is lower by the amount of cash. You can think of it as netting cash against debt, where net debt equals debt minus cash. For the same reason, you pair enterprise value with metrics available to all investors, like revenue, EBIT, and EBITDA, and equity value with after-interest, after-tax metrics like net income and EPS.