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Case Study 1  A company with a P/E of 12x is acquiring a company trading at 10x P/E in a 100% stock deal. At what premium to the current price would the deal be break-even (EPS neutral)? The Trap: Most candidates immediately say the deal is accretive because 10x is cheaper than 12x.  But that’s not always true  what actually matters is the purchase P/E, not the trading P/E. If the acquirer pays too big a premium, the deal can become neutral or even dilutive.  To find the break-even premium, we solve for the price that would imply a 12x purchase P/E — the same as the acquirer’s multiple. Let’s say the target earns $1/share and trades at $10 (implying a 10x P/E). Paying 12x means paying $12/share. That’s a 20% premium to the current price. 💵 So the break-even premium here is 20%. The deal is EPS  accretive if the premium is less than 20%, neutral at 20%, and dilutive above that. 💡 Key takeaway: It’s not about the trading multiple — it’s about the multiple you’re...

Introduction When preparing for investment banking interviews, many candidates fall into the trap of the brute force method—memorizing answers to hundreds of potential questions. While this approach might seem thorough, it can be overwhelming and inefficient. Instead, employing the "Rule of 3" can streamline your preparation, ensuring you cover essential areas without overloading your memory. Key Components of Investment Banking Interviews For entry-level investment banking positions, the interview process typically assesses four primary areas: Your Story : A concise narrative that explains your background, interests, and why you want to pursue a career in investment banking. Fit Questions : Behavioral or qualitative questions that assess your personality, strengths, weaknesses, and motivations. Deal Knowledge : An understanding of the bank's recent deals, a deal you've researched, or any deals you've been involved in. Technical Skills : Proficiency in accounting,...

The “Why Investment Banking?” question is a staple in the investment banking interview process, and it typically appears at the beginning of interviews. This question aims to gauge a candidate’s motivations and understanding of the industry. Given the competitive nature of investment banking, it’s crucial to prepare a unique and compelling response. Investment banking revolves around two primary functions: M&A advisory services and capital markets underwriting. M&A advisory involves providing strategic and financial advice to clients on mergers, acquisitions, and divestitures, while capital markets underwriting focuses on raising capital through equity or debt issuances. Understanding these core functions is essential when crafting your response. To effectively answer “Why Investment Banking?”, follow these guidelines: Personalize Your Response: Share a personal anecdote that sparked your interest in investment banking. Explain the steps you’ve taken to pursue this career and y...

A Superday represents the final step in the interview process for internships and entry-level analyst or associate roles in investment banking. This stage occurs right before offer letters are extended to candidates. What is Superday? Superday is an intensive interview day where candidates travel to the investment bank's office to undergo a series of interviews with various employees, ranging from analysts to senior bankers. This process is standard for roles such as: Summer Analysts MBA Summer Associates Analysts Associates For lateral hiring or more experienced roles, the process is generally less structured. Superday Interview Process During Superday, candidates typically face back-to-back interviews. The number of interviews can vary, sometimes exceeding ten, but each interview is usually brief. Occasionally, candidates may be interviewed by someone outside the specific group they are applying for, and two interviewers might conduct an interview simultaneously, especially in in...

1. What is the least preferred exit method in PE? The least common exit option is an IPO because of the time needed (often 6+ months from filing) and because the PE firm is often prevented from selling for 6 months post-IPO. With that said, PE firms do sometimes take companies public to exit, especially if public company valuations are very attractive. 2. What is an ‘effective’ multiple as opposed to an ‘optical’ multiple? An optical multiple shows the purchase price of a business relative to the stated profit (typically EBITDA) at the time of the acquisition. In contrast, to calculate an effective multiple, we look at purchase price relative to profit (again typically EBITDA) incorporating improvements in the business. In continuation to :  IB Interview Questions: Accounting IB Interview Questions: Accounting : Part -2 IB Interview Questions: Accounting : Part-3 IB Interview Questions: Accounting : Part-4 IB Interview Questions: Accounting : Part-5 IB Interview Questions: Level 2 ...

1. Walk me through an LBO? There are six major steps to answer this question: Calculate Purchase Price (or ‘Enterprise Value) Determine Debt and Equity Funding Project Cash Flows Calculate Exit Sale Value (or ‘Enterprise Value’) Work to Exit Owner Value (or ‘Equity Value’) Assess Investor Returns (IRR or MOIC) Remember to initially keep your answer high-level and let the interviewer pull you into the details. 2. If IRR is time-weighted, why do we use MOIC? IRR can be easily distorted by factors like an early exit. And at the end of the day, PE firms are paid based on absolute dollars returned to investors. So, PE firms look at the MOIC in conjunction with dollars invested to assess the absolute dollars returned for a deal. 3. How can you buy a company for $500M, then sell it for $500M 5 years later, but triple your investment? I can borrow $400M of the Purchase Price and invest $100M of Equity. Then I use the cash flows of the business to pay off $100M of debt. I exit with a $500M Sale...

1. What is an LBO? LBO stands for ‘Leveraged’ Buyout which is an acquisition of a company in which a meaningful portion of the deal funding comes from Debt. 2. Why do PE firms acquire with Debt as opposed to purchasing outright with equity? By using leverage, Private firms can increase the return on the money they invest by putting less money upfront, while still capturing the cash flow and appreciation of the business over time. 3. What are the underlying value creation drivers in an LBO? The primary value creation drivers are Purchase Price, EBITDA growth, and Cash Flow. Secondary drivers include the level of Debt at purchase, the interest rate on the Debt, and the Exit multiple. The latter group are secondary as they are all typically not within the control of the PE firm. 4. What is the difference between a levered and unlevered return? The Unlevered return on any asset reflects the pure profit (ideally Cash Flow), excluding the impact of Debt, generated by the Asset relative to th...

1. What is the P/E of Cash and Debt? The P/E of Cash and Debt reflects the inverted after-tax cost of Cash and Debt in an M&A deal. 2. Does an Asset or Stock deal typically create a Deferred Tax Liability? A Stock Deal typically creates a Deferred Tax Liability because in a Stock Deal there isn’t a step-up in basis for Tax purposes, which creates a disconnect between GAAP and IRS Tax Expense. 3. Is Goodwill amortization tax-deductible in an Asset Sale? Stock Sale? Goodwill amortization is tax-deductible in Asset Sale but not in a Stock Sale . 4. Do buyers generally prefer asset sales or stock sales? Why? Buyers often prefer Asset Sale structures because the Asset sale structure creates a step-up in basis. The increase in basis creates to tax savings via increased Depreciation and Amortization expense over time, which arises from the Purchase Price Allocation process. In continuation to :  IB Interview Questions: Accounting IB Interview Questions: Accounting : Part -2 IB Intervi...

1. If a company with a PE of 13x buys a company with a PE of 10x in an all-stock deal, is the deal accretive or dilutive? The deal will be Accretive for the acquiring company because the value of its stock per dollar of earning is greater than that of the target company. As a result, it will need to issue fewer proportional shares per dollar of earnings to buy out the Target company’s stock. This is a question that many people simply memorize the answer to but can’t explain the ‘why’ behind the question. The short story here is that the combined share counts of the company shrink in this type of deal (because the Acquirer’s stock is more valuable), but Net Income remains the same, so as a result, Earnings Per Share increases. 2. What are the typical structures for an M&A deal? The three typical structures are asset acquisition, stock purchase, and merger. 3. What is an Acquihire? An Acquihire is an acquisition of a target company with the primary goal of bringing in the target comp...

1. Why do companies merge? While are many reasons that companies merge the underlying driver of most M&A deals to expedite growth and/or generate cost savings to create value for the owners of the business. When people say that M&A is an ‘art’ and a ‘science’, what does that mean? The science refers to the mechanical valuation methods (Comps, DCF, etc.), but the art is in making a judgment call on valuation based on the outputs of the various valuation methodologies. 2. Who can pay more when buying a company: a Financial buyer or Strategic buyer? Why? Strategic (i.e. corporate) buyers can typically pay more than Financial (i.e. Private Equity) buyers because strategic buyers typically have overlapping operations that can be removed post-merger to generate cost savings (i.e. Synergies). 3. When are sponsors and corporate buyers on equal footing? When a Financial buyer already owns a competing asset, they can generate synergies (which justifies a higher price) and thus are on mor...

1. On some occasions, Preferred Stock is included in the WACC formula. Why is that the case? The goal of WACC is to blend the cost of capital (i.e. the expected returns) of all of our capital providers. So if a company has Preferred Stock, we have to include the proportional costs of the Preferred Stock as well as regular Debt and Equity. 2. How do we incorporate Minority Interests into the Enterprise Value and Equity Value formulas? Why do we need to include Minority Interests in the first place? When working from Enterprise Value to Equity Value, we subtract the value of Minority Interests. When working from Equity Value to Enterprise Value, we add the value of Minority Interests. Minority interests reflect a separate ownership claim on the equity of a business and thus must be accounted for. 3. EV is Equity + Net Debt. A business has a $100 EV, $40 of Debt, and $10 of cash and generates an extra $2 of cash, what’s the EV? The overall purchase price of the business should remain the ...

1. How do you value a business that is losing money? For comparables analysis, you could use EV/Revenue multiples. For a Discounted Cash Flow analysis, you’d have to project out until the business makes money and ultimately hits a steady-state level of growth. Explanation: This is a variant of, what multiple would you use to value a money-losing/early-stage business. It also tests whether you understand the overarching goal/process of building out a DCF analysis. 2. When would you use EV/Revenue as opposed to EV/EBITDA? You generally use EV/Revenue when a company doesn’t have EBITDA (i.e. EBITDA is negative) and/or hasn’t when the business hasn’t fully matured. EV/EBITDA is used when a business is near or at maturity with stable earnings. First, if you have negative EBITDA, the multiple is meaningless, so interviewers want to see if you understand that. Second, a common follow-up here is…What would you use if a company just became profitable? The answer is that you’d probably still use...

1. What is the Enterprise Value Formula? Enterprise Value = Equity Value (or ‘Market Capitalization’) + Debt – Cash + Minority Interests 2. What is the Equity Value Formula? Equity Value = Enterprise Value – Debt + Cash – Minority Interests 3. A business has an EV of $100, Debt of $40, and Cash of $10. What is the company’s Equity Value? Enterprise Value of $100 – $40 of Debt + $10 of Cash = $70 Equity Value 4. I read somewhere that cash is a “non-operating asset”. What does that mean? Cash is an output of a business and not a part of the business. In contrast, Assets like Account Receiveable and Inventory are employed directly in the business and thus are ‘Operating Assets.’ In continuation to :  IB Interview Questions: Accounting IB Interview Questions: Accounting : Part -2 IB Interview Questions: Accounting : Part-3 IB Interview Questions: Accounting : Part-4 IB Interview Questions: Accounting : Part-5 IB Interview Questions: Level 2 Accounting Questions Part - 2 IB Interview : ...

1. Walk me through a DCF analysis The steps to walk through a DCF analysis are: Project future Cash Flow until the business reaches maturity (usually 5-10 years). Calculate Terminal Value. Discount the Projected Cash Flows and Terminal Value using WACC. Work from Enterprise Value to Equity Value by subtracting Debt and adding Cash. Calculate Price per Share by dividing Equity Value by the Number of Shares. Remember to keep it high-level! 2. All else equal, which comp method (trading or transaction) will result in a higher valuation? Why? Precedent Transactions analysis typically results in a higher valuation because you have to pay a ‘Control Premium’ to acquire an entire business vs buying a smaller stake. 3. Why is the LBO valuation generally referred to as a “floor” valuation? An LBO firm typically doesn’t own a competing asset to a target company it acquires and thus can’t generate Synergies. This typically results in the lowest purchase price (vs Corporate Acquirers). To explain f...

1. What is a Discount Rate? A rate of return that is used to value future cash flows in terms of today’s dollars. The rate of return used should be proportional to the riskiness of the Cash Flows that are being valued. 2. What is WACC in plain English? The Weighted Average Cost of Capital (WACC) shows us the overall cost of capital for a business by blending the costs (i.e. expected returns) of all sources of capital (e.g. Equity, Debt, etc.). 3. What is the Cost of Equity Formula? The Cost of Equity formula reflects the expected return for investors in a business. The formula for the Cost of Equity is: Risk Free Rate + Beta * Equity (or Market) Premium. The formula begins with the Risk-Free Rate (usually the 10 Year US Treasury). This gives us a baseline for the Minimum Return we should expect if we’re taking zero risk. We then add a reward for taking incremental Risk in the form of Beta (which characterizes the volatility/riskiness of an individual stock) and multiply Beta by the Equ...

1. What are Stage 1 and Stage 2 within a DCF analysis? Stage 1 reflects the Explicit Projection Period in which we construction detailed cash flow projections. Stage 2 (also called ‘Terminal Value’) reflects all value beyond Stage 1. During this phase, we make simplifying assumptions around the long-term performance of the business to value all Cash Flows beyond Stage 1. 2. For how many years do you project into the future in your Stage 1? Typically, you project out 5-10 years or until the business reaches maturity…or a ‘steady-state’. Most candidates memorize the ‘5-10 years’ answer. Interviewers ask this to see if you understand that the real goal is to project until the business hits a ‘steady-state’, from which you can make simplifying assumptions about long-term growth. 3. What is Terminal Value? Reflects the discounted value of all Cash Flow beyond the explicit projection project period (Stage 1) for a DCF analysis. 4. How do we calculate Free Cash Flow in a DCF? Unless you’re ex...

Level 1 Valuation Questions Valuation Big Picture 1. What are the three most common valuation methods? There are three primary valuation methods. The first is Discounted Cash Flow Analysis (DCF) in which we value the Cash Flows of the Business. Next, we could look at the valuations of similar Publicly Traded Businesses, which is called Trading Comparables (or ‘Trading Comps’). The final primary approach is Transaction Comparables (or ‘Precedent Transactions’) where we look at the valuations of similar businesses that have been sold in the past. 2. Which of the primary valuation methods are ‘Intrinsic’ vs ‘Relative/Market-Based?’ The DCF approach is an ‘Intrinsic’ valuation because we’re looking at the value of underlying Cash Flow. Both of the Comparables Analyses (Trading and Precedent Transactions) use peer valuations and thus are considered Relative or Market-based Valuations. 3. When we say we “triangulate” to a value, what does that mean? What methods might we use? When valuing a ...