Investment banking is one of the most sought-after career paths in finance. It offers lucrative opportunities but demands strong technical knowledge, analytical skills, and a clear understanding of financial markets. For aspirants preparing for investment banking interviews, mastering the frequently asked questions and their concepts is critical.

This article covers key interview questions commonly asked in the investment banking domain, explains their relevance, and provides insights to help you answer confidently and accurately.

1. Differentiating Investment Banking and Commercial Banking

A foundational question in most interviews is:

Q: How would you differentiate between investment banking and commercial banking?

Answer:
Investment banking primarily deals with helping companies and governments raise capital through equity or debt issuance. It also involves advisory services for mergers and acquisitions (M&A), restructuring, and underwriting securities.

In contrast, commercial banking provides retail and corporate banking services like accepting deposits, giving loans, and facilitating payments.

The core difference is that investment banks act as intermediaries for capital markets, while commercial banks handle day-to-day financial services for individuals and businesses.

2. Equity vs Debt: Best Ways to Raise Funds

Q: What do you think is the best way to raise funds — equity or debt?

Answer:
The choice depends on a company’s financial position, market conditions, and growth prospects.

• Equity financing does not require repayment and does not create fixed obligations, but it dilutes ownership and might be costlier in the long run.
• Debt financing involves interest payments and repayment but retains ownership. Debt also provides a tax shield due to interest expense deductions.

Typically, companies with stable cash flows may prefer debt to leverage tax benefits, while high-growth or risky firms might opt for equity to avoid fixed costs.

3. Valuation Multiples Unique to Real Estate Companies

Q: Give one unique valuation multiple that helps in valuing a real estate company like DLF Ltd.

Answer:
A relevant multiple is Price per Square Foot or Net Asset Value (NAV) per share. Unlike manufacturing firms, real estate companies’ assets are tangible land and properties, making NAV a better indicator of intrinsic value.

Another useful multiple is Funds From Operations (FFO), which adjusts net income for non-cash items like depreciation and gains/losses from property sales.

4. Hostile Takeover Defence Advice (Case Study)

Q: Indigo recently acquired a stake in SpiceJet, and SpiceJet’s management fears a hostile takeover. As an investment banker, what advice would you give?

Answer:
Defending against hostile takeovers involves several strategies:

• Poison Pill: Issue rights to existing shareholders to buy more shares at a discount, diluting the acquirer’s stake.
• White Knight: Find a friendly company to acquire a controlling stake.
• Share Buybacks: Increase share price by buying back shares.
• Staggered Board: Structure the board so that only a fraction of directors are elected each year.
• Negotiation: Engage in discussions with Indigo to reach a mutually agreeable arrangement.

Each defence has pros and cons; choice depends on SpiceJet’s specific circumstances.

5. PEG Ratio vs PE Ratio for Growth Stocks

Q: Is the PEG ratio better than the PE ratio to value growth stocks?

Answer:
Yes. The PEG (Price/Earnings to Growth) ratio adjusts the PE ratio by the company’s earnings growth rate. It provides a more complete picture for growth stocks by factoring expected growth into valuation.

While PE ratio shows current valuation based on earnings, PEG indicates whether the stock is overvalued or undervalued relative to growth. A PEG ratio close to 1 suggests fair valuation.

6. Valuing a Private Company Using DCF Without Projections

Q: You need to value a private company using DCF, but management has provided no projections. How would you find Free Cash Flows (FCF)?

Answer:
In such cases, you start with historical financial statements:

• Calculate NOPAT (Net Operating Profit After Tax) from past income statements.
• Adjust for non-cash expenses like depreciation.
• Estimate working capital changes based on historical trends.
• Assess capital expenditure needs from past investment cash flows.
• Forecast cash flows using conservative assumptions aligned with industry trends.

Since private companies lack market data, assumptions should be realistic and sensitivity analysis is crucial.

7. Presentation Preparation for IPO Client

Q: The CEO of a fast-food chain wants a 6-slide presentation on current store performance for an IPO pitch. Which six areas of data would you request?

Answer:
Recommended data areas include:

1. Sales Revenue by Store – Understand top-performing locations.
2. Same-Store Sales Growth – Measure organic growth.
3. Customer Footfall or Transactions – Indicate customer interest.
4. Average Transaction Size – Assess sales per customer.
5. Operating Costs per Store – Identify efficiency.
6. Regional Performance Comparison – Understand geographical trends.

The presentation should focus on high-level insights with charts or tables for clarity.

8. Economic Profit Valuation

Q: What is economic profit valuation, and how do you calculate economic profit? Is it better than accounting profit?

Answer:
Economic profit measures value creation by subtracting the cost of capital from net operating profit.

Formula:
Economic Profit = NOPAT – (Capital Employed × WACC)

It reflects whether the firm generates returns above its cost of capital.

Compared to accounting profit, economic profit accounts for opportunity costs and risk, providing a better assessment of shareholder value creation.

9. Adjusting DCF for Risk

Q: While valuing a company using DCF, how would you adjust valuation for risk?

Answer:
Risk can be accounted for in two ways:

• Adjusting Cash Flows: Use risk-adjusted cash flows, reducing projected cash flows based on uncertainty.
• Adjusting Discount Rate: More commonly, increase the discount rate (WACC) to reflect higher risk.

Adjusting the discount rate is preferred as it captures both timing and risk, keeping cash flows consistent for better comparability.

10. When to Use Asset-Based Valuation

Q: In what case is an asset-based valuation approach suitable?

Answer:
Asset-based valuation is suitable when:

• The company is asset-heavy (real estate, manufacturing).
• Earnings are volatile or unreliable.
• The firm is under liquidation or bankruptcy.
• Intangible assets are minimal or hard to value.

This method values a firm based on its net asset value (total assets minus liabilities).

11. Goodwill Impairment

Q: When does a company check for goodwill impairment?

Answer:
Goodwill impairment is tested annually or when a triggering event occurs (poor performance, market downturn, regulatory changes).

If the carrying value of goodwill exceeds its recoverable amount (fair value), impairment loss is recognized, affecting the income statement and balance sheet.

12. Cash Flow Pattern Analysis

Q: A company has negative Operating Cash Flow, positive Financing Cash Flow, and negative Investing Cash Flow. Is this a good situation?

Answer:

• Negative Operating Cash Flow indicates the core business is not generating cash, which is a concern if prolonged.
• Positive Financing Cash Flow suggests raising funds via debt or equity.
• Negative Investing Cash Flow reflects capital expenditure or acquisitions.

In early growth stages, this might be acceptable, but long-term negative operating cash flow is risky.

13. Asset Class with Negative Beta

Q: Which asset class might have a negative beta with equity markets? Bonds or Gold?

Answer:
Gold often has a negative beta because it tends to perform well when equity markets fall, acting as a safe haven.

Certain bonds can also have low or negative beta, especially government bonds in turbulent times.

14. Best Efforts vs Firm Commitment Underwriting

Q: What is the difference between the Best Efforts method and Firm Commitment underwriting?

Answer:

• Best Efforts: Underwriter sells as much stock as possible but does not guarantee the full amount. Risk lies with the issuer.
• Firm Commitment: Underwriter buys the entire issue upfront, guaranteeing proceeds, then resells to the market. Risk lies with underwriter.

Firm commitment usually commands a higher underwriting fee due to risk.

15. Conflict of Interest in Firm Commitment

Q: Can a firm commitment create conflict of interest for banks?

Answer:
Yes. Since the underwriter holds the securities before selling, there may be incentives to manipulate pricing or sales strategy, potentially conflicting with issuer’s interests.

Regulatory frameworks and disclosures aim to reduce such conflicts.

16. Why Companies Merge

Q: Why would two companies merge?

Answer:
Common reasons include:

• Synergies: Cost savings and revenue enhancements.
• Market Expansion: Access to new geographies or customer segments.
• Diversification: Reduce business risk.
• Technology Acquisition: Gain new capabilities.
• Economies of Scale: Lower costs per unit.

17. Calculating Beta for a Company

Q: How do you calculate beta for a specific company?

Answer:
Beta is calculated via regression analysis of the company’s stock returns against market returns over a specific period.

Formulaically, Beta = Covariance (Company returns, Market returns) / Variance (Market returns)

You can also use levered/unlevered beta adjustments for capital structure differences.

18. Enterprise Value vs Equity Value

Q: What is the difference between enterprise value and equity value?

Answer:

• Equity Value: Market capitalization = Share price × Number of shares.
• Enterprise Value (EV): Total firm value = Equity Value + Debt + Minority Interest + Preferred Stock – Cash.

EV represents the total cost to acquire the company, including debt obligations.

19. Choosing Financial Statements for Viability Assessment

Q: If you have to evaluate a company’s financial viability, which statement would you choose and why?

Answer:
Cash flow statement is preferred as it shows actual inflows and outflows of cash, unlike profit figures which include non-cash items.

Operating cash flow reflects the company’s ability to sustain operations without external funding.

20. Buy-Side M&A Process

Q: Briefly explain the buy-side M&A process.

Answer:

• Target Identification: Screening for suitable companies.
• Due Diligence: Financial, legal, operational review.
• Valuation: Applying multiples, DCF, comparable transactions.
• Negotiation: Price and deal terms.
• Financing: Arranging debt/equity.
• Closing: Final legal formalities and ownership transfer.

21. Accretive vs Dilutive Acquisition in Stock Deals

Q: If a company with low PE acquires a company with high PE in an all-stock deal, will it be accretive or dilutive?

Answer:
Usually dilutive, as the low PE company is issuing shares that are less valuable relative to the high PE company’s earnings, reducing earnings per share (EPS).

22. Benefits of Listing on an Exchange

Q: What are the benefits of a company getting listed on an exchange?

Answer:

• Access to capital markets.
• Increased liquidity.
• Enhanced public profile and credibility.
• Better valuation.
• Ability to use shares for acquisitions.

23. What is a Pitch Book?

Q: What is in a pitch book?

Answer:
A pitch book is a sales document prepared by investment bankers to showcase:

• Company overview.
• Market analysis.
• Valuation.
• Deal structure.
• Recommendations.

It is used to win new business or sell ideas.

24. Why Private Equity Uses Leverage

Q: When buying a company, why do private equity firms use leverage?

Answer:
Leverage increases returns on equity by using debt to finance a portion of the purchase price, amplifying gains if the investment performs well.

25. Common Financial Ratios for Analysis

Q: What are the most common ratios used to analyse a company?

Answer:

• Profitability: ROE, ROA, Net Margin.
• Liquidity: Current Ratio, Quick Ratio.
• Leverage: Debt-to-Equity.
• Efficiency: Inventory Turnover.
• Valuation: PE, EV/EBITDA.

26. Financial Modelling and Equity Research

Q: What is financial modelling, and how is it useful in equity research?

Answer:
Financial modelling is building a quantitative representation of a company’s financials to forecast performance and valuation.

In equity research, it helps predict future earnings, cash flows, and intrinsic value.

27. Discounted Cash Flow (DCF) Analysis

Q: How do you do a discounted cash flow analysis in equity research?

Answer:

• Forecast free cash flows over 5-10 years.
• Estimate terminal value.
• Calculate discount rate (WACC).
• Discount future cash flows to present value.
• Sum to get intrinsic company value.

28. Free Cash Flow to Firm (FCFF) vs Free Cash Flow to Equity (FCFE)

Q: What is Free Cash Flow to Firm and Free Cash Flow to Equity?

Answer:

• FCFF: Cash flow available to all capital providers (debt + equity).
• FCFE: Cash flow available only to equity shareholders after debt servicing.

29. Earnings Season

Q: What is earnings season?

Answer:
Earnings season is the period when most companies release their quarterly financial results, impacting stock prices and market sentiment.

30. Sensitivity Analysis in Equity Research

Q: How do you do sensitivity analysis in equity research?

Answer:
By varying key assumptions (growth rates, discount rates, margins) to test impact on valuation, helping understand risk and valuation range.

31. Common Valuation Multiples

Q: What are the most common multiples used in valuation?

Answer:

• PE ratio.
• EV/EBITDA.
• Price/Sales.
• Price/Book.

32. Trailing PE vs Forward PE

Q: What is the difference between Trailing PE and Forward PE?

Answer:

• Trailing PE: Based on past 12 months earnings.
• Forward PE: Based on projected future earnings.

Forward PE is forward-looking and often preferred for growth companies.

Conclusion

Preparing for an investment banking interview requires not only memorising answers but understanding concepts deeply. The questions above cover valuation, financial analysis, capital markets, mergers and acquisitions, and practical case scenarios. Being able to articulate these clearly and confidently will set you apart in the competitive recruitment process.

Focus on building strong fundamentals, keep up with market developments, and practice case studies and presentations. With thorough preparation, you will be ready to impress interviewers and take a strong step into your investment banking career.