INVESTMENT BANKING INTERVIEW GUIDE

Personality & Experiences Interview Questions

Q: Walk me through your resume (tell me about yourself)
My name is Jethro Jacinto; I was born and originally from Spain with a mixed background and
both my parents come from business and entrepreneurial backgrounds. I initially attended
LaGuardia Community College where I received my Associates Degree in Business
Administration. There, Ive found my deep passion and interest for the business world, specifically
the financial industry. After graduating from LaGuardia Community College, I decided to transfer
to Baruch College because I wanted to continue my studies in business. Currently, I am a
sophomore at Baruch College, majoring in Finance and Investments and minoring in
Communication Studies and Ive recently expanded my network by becoming part of the Finance
& Economics Society to learn more about the various financial markets and institutions. I have
decided to join the Finance & Economics Societys mentorship program to help me grow not only
as a business student but also as a person aspiring to be the best professional I can be in the
future with the help of my mentor and peers.
I have done a past internship in a marketing start-up company called Herematch and I am
currently interning at an appraising firm as a Research Analyst Intern. With my work and
leadership experience, I have developed the necessary leadership, quantitative and analytical
skills to multi-task and work well in a fast-paced environment without being micromanaged, which
led me to become extremely detailed-oriented, meticulous and organized.
My ultimate objective is to break into the Investment Banking industry and succeed in an exciting
environment of excellence, discipline, and growth within the financial industry. No matter where
Ive been, Ive produced topnotch work because Im dedicated to making sure each and every
piece stands out from the crowd. I consider myself as a productive worker with an outstanding
work ethic who exerts optimal effort in successfully completing various tasks.
When answering this question, the goal should be:
1. Display your personality and let the interviewer get to know you better.
2. Walk through your life decisions/accomplishments and how it has shaped you.
3. Convince your interviewer that you are truly interested in IB and you have the skills
necessary to be a successful analyst.
Q: Why should we hire you?
I believe you should hire me because as a diligent, organized, and goal-oriented person, I will
work hard in any task presented no matter how difficult or time consuming it might be. I always
strive to perform the best that I can. Schoolwork is a good example when assigned a task, I
organize myself and my materials in order to work efficiently, and then set to work on the task. I
perform the necessary research in order to ensure that no mistakes are made, and I check my
finished work repeatedly to ensure that it is high quality.
Q: What are your greatest strengths and weaknesses?
For my greatest weakness, one of my criticisms in my current internship is that I concentrate too
much on getting my work done too quickly without sometimes taking a step back and thinking
about the rationale behind everything. This can be advantageous for getting individual tasks
done, but I realize this limitation will hinder my professional development down the line, and it is
something I will need to improve as I gain more responsibility.

I have also found that I can easily waste time checking and rechecking all the work Ive done.
Now I am aware of what to look for in being such a pedant, so I am always making a conscious
effort to trust my quality focus and effort and myself more and not be so incredibly critical of my
work. I know that there is a limit to proofreading.
Also, I think networking is also a weakness is mine. Initially, I am soft-spoken with people. I like to
concentrate on my work; so much that it often hinders me from developing relationships. So Ive
decided to join networking events in Baruch as much as I can to develop my networking skills
with peers and professionals.
For my greatest strength, I have always prided in my ability to work well with others and leading
others to help them grow as a group of individuals. I like to describe myself as loyal, adaptable,
dynamic, and a very ambitious individual who take assertive actions that only a strong leader can
in helping others. At my previous internship last spring semester, my supervisor made me lead a
group of 5 people into different networking events to market our Herematch app to business
owners and professionals at the events and I overlooked the teams performance and I motivated
them to their full capacity, which ensured a successful networking event for our team.
Also, I have a positive attitude. I enjoy working with other people and am courteous and fun to be
around. Within investment banking, I know what Im getting myself into and know that the hours
are going to be tough, but Im definitely a person that doesnt complain and will be fun to work on
a deal team with.
Q: Give an example in which you encountered a difficult situation while working in a group
I worked in a group during my business communication class here at Baruch College. Each
student had a really busy schedule that consisted of work or internships, and I took the initiative
to help reprioritize everyones schedules and found areas to compromise. This helped to balance
workload and work quality for the group.
Q: Give an example of a time you had to work hard, and how you got through it.
During my freshman year of college, I was juggling schoolwork while essentially working full-time
and trying to balance this with internship recruiting, making phone calls, setting up meetings and
doing interviews. I was able to successfully balance all of this by keeping very organized priority
sheets and setting daily goals for items to be completed. It was a difficult process, but it enhanced
my overall sense of being able to do whatever was necessary to accomplish my goals.
Q: What serves as your biggest motivation?
My biggest motivation is earning the respect of my peers and boss. In my last internship at
Herematch, I was the sole intern responsible for other team members to make sure that they
were performing at their best during out networking events when marketing our Herematch app to
business owners at the events. My supervisor gave me the specifications and told me how were
things going with the group members. I wanted to make a strong and positive impression so I did
my best by motivating and ensuring that each of our team members gave their 100% to their
responsibilities. My supervisor respected me for doing such a great job motivating others, which
in result, motivated me as well, and earning that kind of respect is what keeps me going.
Q: Give an example of when you failed or made a mistake.
During my last internship I had to help out another intern. I taught him some concepts incorrectly
because I was rushed, and I made the incorrect assumption that he would figure it out. He didnt
and that friend had to quit the internship program. We were very close, and it was devastating. I
felt responsible. From that experience, I learned that I had to take being a leader much more

seriously, and that my example was crucial for others to succeed. I also learned that I must show
better attention to detail and not assume everything is running well without my input.
Q: Describe your ideal work environment?
My ideal workplace is one where everyone communicates well, works hard, and trusts each other
to get the job done right and on time and then the team is evaluated and rewarded based on
performance.
Q: What are your career goals and where do you see yourself five years from now?
Five years is a long way down the road, but I know that finance will always have a grip on me. I
could see myself in investment banking for the long-term, but that would have to depend on my
performance and my family situation. I would definitely like to stay in financial services, using the
skills Ive learned and continuing to build solid and meaningful professional relationships.
My careers goals are to obtain an Investment Banking Summer Analyst position and eventually
receive a full-time offer from a bulge investment bank while graduating from Baruch College with
a degree in Finance. I know I want to grow and develop my skills and be all I can be along the
way as long as I am part of the Finance & Economics Society. If you are looking at me for a
management position at that time, I would definitely be interested in it, but thats not necessarily
my end goal. What I really want out of this is to learn, grow, and to contribute in a meaningful
manner.
General Why Investment Banking? Questions
Q: What is Investment Banking?
The investment bank performs two basic critical functions: acting as an intermediary for raising
capital, and as an advisor on M&A transactions and other major corporate actions. As an
intermediary, it connects companies that need capital with investors who have capital to spend. It
facilitates this through debt and equity offerings. As an advisor, an investment bank counsels
companies on such corporate actions as mergers, acquisitions, spinoffs, and restructurings.
Q: What exactly do investment bankers do?
Investment banking is the business of raising capital for companies and providing advising
services on financing and merger activities. Thus, for example, a company will approach an
investment bank when it needs to raise capital or when it needs advice in negotiating and
structuring an acquisition of another company. Here are some examples of some of the different
functions a banker will perform:

Underwriting: an arrangement whereby investment bankers raise investment capital from

investors on behalf of corporations and governments who issue public securities (public
offering). These securities can come in the form of equity (IPO, secondary equity
issuance) or debt (high-grade debt, high yield bonds, government securities, etc.).
Investment banks make money by securing underwriting fees (% of the capital raise)
from the public offerings.
Financial Restructuring: provide advisory services including recommending the sale of
assets (corporate divestitures), potential bolt-on acquisitions and merger opportunities, or
even working with M&A bankers to sell the company entirely.
Investment Banking Job Hierarchy: Analysts Associates Vice Presidents (VP)
Directors Managing Directors (MDs)
General Pitch Book: Created by the bankers and used to guide introduction and
presentations during a sales pitch. Pitch Books contain general information and include a

wide variety of selling points, such as an overview of the investment bank, including
details of its specific capabilities in research, corporate finance, and sales & trading, and
usually provides updates on industry/market and recommendations on the optimal capital
structure strategy for the company.
Deal-Specific Pitch Book: Highly customized depending on the situation; includes
valuations, comparable analyses, and industry analyses, as well as the banks reputation,
prominence and acumen of its research analysts, performance on past/similar work, and
information on rankings/expertise.
Q: Why do you want to be an investment banker?
Answer #1: I believe Investment Banking offers the best environment for growth and development
in the areas of finance, economics, and accounting all-important areas for business. Banking
offers a tremendous amount of training, a steep on-the-job learning curve, a competitive work
environment, and talented people to work with. As a result, I believe it offers the best opportunity
to enhance my skill set and apply it on a real-life and current basis. Furthermore, I enjoy
situations that involve analyzing strategies, environmental conditions, structure, and future
opportunities. There is no other industry that I know that offers a first-year graduate with the
amount of responsibility that investment banking offers. I cant think of a better way than to hit the
ground running right out of school.
Answer #2: The best advice my parents gave me way whatever you want to do, put yourself in a
position to succeed. And I think right out of college, investment banking offers the best
experience available for people who want to work in the corporate arena, hands down. I know the
work is going to be tough and the hours excruciating, but I enjoy the pressure and challenge to
deliver that seems to come up on a daily basis. Also, in my view, finance is unpredictable and
exciting; I enjoy the fact that there is never a typical day.
Answer #3: I think for me the work is rewarding. Nowhere else out of college will you get a better
corporate experience. The work will always be challenging and youre going to be working with
some of the brightest people. This fosters a competitive environment in which you are almost
forced to grow professionally on a daily basis. One of the great advantages working in New York
is the networking opportunity available with so many bright, hard-working young professionals
around.
Q: What qualities do you think would make you a successful investment banker?
I can be in successful in investment banking because I have a whatever it takes attitude. In
many ways it can be inconvenient and draining to do so, but its been ingrained in my head to
have an entrepreneurial mindset and to do whatever it takes to get the job done. I believe I can
be successful in investment banking because Im a grinder who will do whatever it takes,
whenever it takes.
Importantly, as I aspire to enter the investment banking industry, I know what I am getting myself
into. I know the grueling hours; I know what level of work is expected of me. I know banking will
be an invaluable experience that would help set me on the right course for professional success
in the future.
Other important qualities for a banking analyst:
Being a fast learner
Being energetic
Having a work hard/play hard attitude
Good attitude and a team player
Not being afraid to ask questions not to be wrong occasionally
Strong attention to detail

Q: What do you think an analyst does on a typical day?

I know analysts are expected to go through 2 years of intensive finance boot camp. I expect the
hours to be long, mostly doing financial modeling, making pitch books, doing due-diligence, and
having to reschedule plans with friends and family.
Q: Why is one concern you have about investment banking?
One major concern I have about investment banking is the balance between work life and family
life. Family and friends are very important of my life because they have shaped the person that I
am today. That is why my first priority is to stay here at New York. If Im going to be working 90100 hours a week, then I want to be as close to family as possible.
Q: What are 4-5 skills that you think are essential for banking?

Strong work ethic

Positive, courteous attitude
Strong attention to detail
Ability to learn quickly
Not afraid to ask questions when stuck

Q: What are the three main accounting statements and how are they connected?
1. The Income Statement, which shows the manufacturing and selling actions of the
company that results in profit or loss. Net income, the bottom line, flows from the Income
Statement to Retained Earnings on the Balance Sheet. It also becomes the first line of
Cash from Operations on the Cash Flow Statement. Income Statement is like a
cumulative record over a period of time.
2. The Balance Sheet records what the company owns and what it owes, including the
owners stake. Each statement views the enterprises financial health from a different and
necessary perspective. Like its name suggests, the Balance Sheet always balances. This
financial statement acts as a record for a firm's assets and all the claims against those
assets. The remaining value is called Stockholder's Equity. The Cash Balance, which is
the first line item under Current Assets at the top of the Balance Sheet, is taken from the
Ending Cash on the Cash Flow Statement. The Balance Sheet, unlike the Income
Statement, is not a cumulative record over time; it is a snapshot of one moment in time.
3. The Cash Flow Statement, which details the movements of cash into and out of the
company. The Cash Flow Statement connects the three financial statements together.
The statement begins with Net Income from the Income Statement and the Ending Cash
balance at the bottom Cash Flow Statement flows to Cash and Cash Equivalents at the
top of the Balance Sheet.
Q: What are the three ways to value a company (and explain when to use them)?
There are three basic techniques to value a company, which include: discounted cash flow
(DCF), relative valuation (multiples approach) and comparable company transactions.
Intrinsic value (DCF) is considered the more academically respected approach. The DCF says
that the value of a productive asset equals the present value of its cash flows. The answer should
run along the line of project free cash flows for 5-20 years, depending on the availability and
reliability of information, and then calculate a terminal value. Discount both the free cash flow
projections and terminal value by an appropriate cost of capital (weighted average cost of capital

(WACC) for unlevered DCF and cost of equity for levered DCF). In an unlevered DCF (the more
common approach) this will yield the companys enterprise value (firm and transaction value),
from which we need to subtract net debt to arrive at equity value. Divide equity value by diluted
shares outstanding to arrive at equity value per share.
Relative valuation (Multiples): The second approach involves determining a comparable peer
group companies that are in the same industry with similar operational, growth, risk, and return
on capital characteristics. Truly identical companies of course do not exist, but you should
attempt to find as close to comparable companies as possible. Calculate appropriate industry
multiples. Apply the median of these multiples on the relevant operating metric of the target
company to arrive at a valuation. Common multiples are EV/Revenue, EV/EBITDA, and P/E.
Lastly, the last valuation method is the comparable transactions, which is the main approach of
the method and is used to look at similar transactions where the acquisition target has a similar
business model and similar client base to the company being evaluated. This approach is
fundamentally different from that of DCF valuation method, which calculates intrinsic value.
Q: Walk me through a discounted cash flow (DCF).
A DCF involves first forecasting the free cash flows of the business for a certain period of time, for
example five years. After this period of time, we must calculate a terminal value. This represents
our estimate of the value at year five of all future cash flows of the business. Finally, we need to
turn all these future cash flows into a present value. To do this we discount all cash flows at the
weighted average cost of capital.
There are 3 essential parts to a DCF:
(1) Companys Free Cash Flow (FCF)
(2) Terminal Value of a Company
(3) The Weighted Average Cost of Capital (WACC)
Free Cash Flow = Operating Cash Flow Capital Expenditures Change in Net Working Capital
Terminal Value of the Company two methods: EBITDA Multiple or Perpetuity Growth
WACC two components: Cost of Equity (CAPM) and the after tax cost of debt
Q: Why would a company issue stock vs. debt?
A company issues stock because companies need to raise money. To do this, companies can
either borrow it from somebody or raise it by selling part of the company, which is known as
issuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. Both
methods fit under the process of debt financing.
On the other hand, issuing stock is called equity financing. Issuing stock is advantageous for the
company because it does not require the company to pay back the money or make interest
payments along the way. All that the shareholders get in return for their money is the hope that
the shares will someday be worth more than what they paid for them. The first sale of a stock,
which is issued by the private company itself, is called the initial public offering (IPO).
Q: Tell me about a merger or acquisition that has recently occurred. What are some
possible synergies between the two companies?
Recently, it was announced that Heinz Inc. and Kraft Foods Group would merge. The merger
created the 3rd largest food and beverage organization in North America and the 5th largest food
and beverage organization in the world.

The significant synergy potential in this particular merger included an estimated $1.5 billion in
annual cost savings implemented by the end of 2017. With stock and cash transaction, Kraft
shareholders will receive a special cash dividend of $16.50 per share upon closing and stock in
the combined company representing a 49% stake in the new company. Berkshire Hathaway and
3G Capital will invest an additional $10 billion in The Kraft Heinz Company; existing Heinz
shareholders will collectively own 51% of the new company. Synergy opportunities include a
strong platform for organic growth in North America, as well as global expansion, by combining
Krafts brands with Heinzs international platform.
Synergies will come from the increased scale of the new organization, the sharing of best
practices and cost reductions. The combination of these iconic food companies joins together two
portfolios of beloved brands, including Heinz, Kraft, Oscar Mayer, Ore-Ida and Philadelphia.
Together the new company will have eight $1B+ brands and five brands between $500 million
and $1 billion. The complementary nature of the two brand portfolios presents substantial
opportunity for synergies, which will result in increased investments in marketing and innovation.
Q: Talk to me about the U.S. dollar and its recent position in the economy. How does it
affect you as a student in New York City throughout everyday life?
The dollar's rise is a direct result of America's strong economy while other parts of the world
continues to struggle. The surging value of the U.S. dollar promises new bargains for American
consumers and travelers but also presents big threats to the U.S. economy in a trend that is
shaping up to be one of the most unexpected and significant factors driving the global economy
this year. Europe is enacting a new stimulus program to revive its economy, and Japan is also in
stimulus mode.
Personally, for someone who loves to travel all over the world, the strong surge of the U.S. dollar
would greatly benefit me because I can buy more goods internationally because the U.S. dollar is
much stronger right now compared to other international currencies. Travelers are familiar with
exchange rates and how they can impact the cost of goods. But the strong dollar's impact goes
well beyond travel. It affects everything from gas prices at the pump to the profits of America's big
businesses that sell things overseas.
Q: Give me your outlook on oil.
I predict that the benchmark price for crude oil, which fell from $98 per barrel in December 2013
to $59 in December 2014, will average $61 per barrel at the end of the year and $69 per barrel in
December 2016. Just three months ago, the group forecast that oil would spike to $85 per barrel
by December 2015.
Traders, investors and companies that consume a lot of energy think airlines, shipping
companies and manufacturers have to make some assumption about future prices, as do
consumers planning to purchase a car that might average 20 miles per gallon, or 30. The safest
assumption, however, may be that nobody really knows where oil prices are headed. We may not
know what oil will cost in a year, but we dont have to be surprised by big moves in either
direction.
Q: Do you think the market is overvalued?
The stock markets recent performance often is attributed to the unconventional monetary policies
that many central banks have been pursuing. These policies, by design, lowered the return on
sovereign bonds; forcing investors to seek yield in markets for higher-risk assets like equities,
lower-rated bonds, and foreign securities.
According to the standard formulation, stock prices tend to revert toward the present value of
estimated future earnings (including growth in those earnings), discounted at the so-called risk-

free rate, augmented by an equity risk premium. More precisely, the forward earnings yield
that is, the inverse of the P/E ratio is equal to the risk-free rate plus the equity premium, minus
the growth rate of earnings.
Monetary policy may have bolstered stock prices in two ways, either lowering the discount rate by
compressing the equity risk premium, or simply reducing risk-free rates for long enough to raise
the present value of stocks. In either case, equity prices should level off at some point, allowing
earnings to catch up, or even correct downward.
A key factor is earnings growth. In the long run, it is reasonable to expect that revenue growth
would be broadly consistent with economic growth and, as it stands, there is little acceleration
on this front. Earnings can grow faster than revenues for a prolonged (though not indefinite)
period, if companies cut costs or reduce investment a trend that would, over time, lower
depreciation charges. In theory, corporate-tax cuts could have the same effect.
Furthermore, the economys equilibrium conditions could change, so that aggregate earnings
would capture a larger share of national income. There is some evidence that this is now
occurring in advanced economies, with the proliferation of laborsaving digital technologies and
the globalization of supply chains suppressing income growth.
Q: What information is important when reading stock price quotes on Google Finance or
Yahoo Finance? What are some of the metrics you want to pay attention to? Describe what
they mean in relations to the companys stock.
Information that is crucial when looking and reading into a stock price quotes on Google Finance
or Yahoo Finance are:

P/E Ratio The price to earnings ratio reflects the relationship between the price per
share and the income earned per share by the company in which the shares are held. A
higher P/E points to a more expensive stock, relatively speaking, because an investor
pays more per unit of income.

Market Capitalization Market capitalization estimates the total dollar value of the
company whos stock is being traded. Its determined by multiplying the total number of
shares by the last trade.

52-week range The 52-week range is practically the same as the days range: its just
the range of prices a stock has sold for over the course of the last year. In a volatile
market like were in now, the days range can actually offer better information than the 52
week range because drops and rallies can make it harder to tell what a realistic range for
a given stock looks like.

Volume - A stocks volume reflects the total number of shares of that stock that have
been traded throughout a single day. If a stock is particularly active, its worth checking
into why: bad news could have lead investors to unload a particular stock, while good
news could send every investor looking for a few shares.

Average volume The average volume over the past three months of a stock is often
fairly similar to the stocks volume over the past day. Knowing the average volume can
help you decide when the daily volume is active enough to warrant notice.

Earnings per share (EPS) - Earnings per share is the amount of money that you would
have earned if you purchased a share of this stock last quarter and sold it today. Right
now, many stocks EPS are looking grim: its a useful indicator of how a stock will do if
you plan to sell it in the short term, but if youre planning to hold it long-term, the EPS is
less of a concern.

Dividend & Yield - If youre looking to turn a profit on stocks, the dividend and yield are
probably the first places you look. The dividend is the payment the company pays to
shareholders based on its profits. The yield is the dividend expressed as a percentage of
the price per share. And while a high dividend is good, an extremely high yield definitely
isnt: extremely high yields can point to a company in some financial trouble.

Q: What is high frequency trading?

High frequency trading (HFT) is a primary form of algorithmic trading in finance that uses powerful
computers to transact a large number of orders at very fast speeds. High frequency trading uses
complex algorithms to analyze multiple markets and execute orders based on market conditions.
Specifically, it is the use of sophisticated technological tools and computer algorithms to rapidly
trade securities. As of 2009, HFT accounted for 60-73% of all US equity trading volume, with that
number falling to approximately 50% in 2012. High-frequency traders move in and out of shortterm positions at high volumes aiming to capture sometimes a fraction of a cent in profit on every
trade. High-frequency traders typically compete against other HFTs, rather than long-term
investors. HFT firms make up the low margins with incredibly high volumes of trades, frequently
numbering in the millions.
Q: What is your opinion on Europes economy? Do you think there are any solutions to
their economic problems?
The European Central Bank's (ECB) quantitative easing (QE) program have created a state of
euphoria among global investors, but it will do very little to fix Europe's economic problems. QE is
not the way out for Europe's economic woes. The ECB's plan to purchase public-sector bonds in
an attempt to bring inflation up to a target and boost Europe's economy is completely misguided.
All that it may accomplish is create asset bubbles and new distortions in the real economy.
The euro crisis has had a devastating impact especially on the Eurozone countries which include
Greece, Portugal, Ireland, Spain, Italy and Cyprus, producing massive unemployment and
increasing substantially the debt-to-GDP ratio, mainly due to the policies that were implemented
in the midst of an economic recession as part of the bailout plans.
The public debt ratio has exploded for all of these countries, leaving them in a state of debt and
from which they are unlikely to escape any time soon. What Europe's economy needs are fiscal
policies that can stimulate real growth and generate jobs. Large-scale direct stimulus spending by
governments will boost the real economy by increasing aggregate demand and will help to cause
wages to rise.
Q: What questions do you have for us?

Can you tell me more about the Analyst training program?

What would be my day-to-day responsibilities as an Investment Banking analyst?
What is the culture of the Investment Banking team like at?
What differentiates a good Analyst from a great Analyst?
Can you describe some of the assignments that the IB analysts worked in?
How would my performance be evaluated?
What are the most important things I should accomplish in the first 60 days?
What is the next step in the process?

Financial Knowledge
The Basics
Q: What is the difference between investment banking and commercial banking?
An investment bank offers advisory services in M&A and other corporate transactions, and also
acts as an intermediary between investors and companies in need of capital. Commercial banks
work more on the monetary/transactional side, where they take deposits from clients and lend
money to individuals and institutions.
Q: What is the Glass-Steagall Act?
The Glass-Steagall Act was a law that separated commercial from an investment banks because
of the belief that the two businesses created conflicts of interest. Banks were essentially blamed
for the Stock Crash of 1929 and the start of the Great Depression.
Q: What is a Fairness Opinion?
A fairness opinion is an independent assessment issued from an investment bank regarding the
price offered in a merger or acquisition. It is provided for a fixed fee, typically by an institution not
involved in the transaction.
Basic knowledge of financial statements and a general understanding of how the balance sheet,
income statement and cash flow statement are interrelated is another common technical skilltesting question of the Investment Banking interview.
Example:
Assuming a tax rate of 30%, if depreciation increases by $100 and pretax income decreases by
$100, taxes will decrease by $30 ($100 x 30%), net income (NI) will decrease by $70 ($100 x (130%)) and cash flow from operations will increase by the amount of the tax deduction. This
causes a $30 increase of cash on the balance sheet, a $100 reduction in PP&E due to the
depreciation and a $70 reduction in retained earnings.
Corporate Valuation DCF (walk me through a DCF)
There are three basic techniques to value a company: discounted cash flows (DCF), the multiples
approach and comparable transactions. Only the first two are likely to be discussed.
Discounted cash flows, involves creating a forecast of the free cash flows (FCF) of a company
and then discounting them by the weighted average cost of capital (WACC). Free cash flows are
calculated as:
EBIT x (1- tax rate) + D&A Capital Expenditures Increases in NWC (memorize formula)
WACC is calculated by taking the percentage of debt, equity and preferred shares of total firm
value and multiplying the individual components by the required rate of return on that security.
The terminal value of the project must also be determined and discounted accordingly.
The WACC DCF approach assumes that the firm is levered, with the cost of debt being reflected
in the denominator of the calculation. The adjusted present value (APV) approach of valuation is
somewhat similar, but calculates the value of an all-equity (unlevered) firm and then adds the
effects of debt at the end. This type of methodology is implemented when the company adopts a
complex debt structure such as a leveraged buyout (LBO), or when the financing conditions
change through the life of the project.

First, cash flows are discounted by the cost of equity, followed by determining the tax benefits of
debt by discounting the after-tax interest payments by the fixed income required rate of return.
NPV = Value of All-Equity Firm + Present Value of Financing Effects
Corporate Valuation Multiples
The multiples method involves metrics similar to the P/E ratio. Basically, to perform a multiples
valuation, you have to determine the average multiples for the specific industry and multiply this
value by the denominator for the company under consideration. Using the P/E ratio as an
example, if an investment banker is trying to perform a valuation of a firm in the grocery store
business, the first step would be to determine the average P/E ratio in that sector.
Next, the average value should be multiplied by the companys EPS. If the average price-toearnings ratio in the sector is 12, and the EPS for the particular company is $2, then the shares
are worth $24 each. Taking the product of this value and the total number of shares outstanding
provides the firms market capitalization.
The preceding example used the P/E ratio to illustrate the general premise because most people
are familiar with such measure. However, using this ratio to perform the valuation is actually
incorrect; the resulting figure gives the value of the equity of the firm, ignoring debt. Although
different sectors have industry specific multiples, which should be researched prior to the
interview, one of the most common multiples is the enterprise multiple (EV/EBITDA)
Enterprise value is calculated as:
Market Cap + Debt + Minority Interests + Preferred Shares Total Cash & Cash Equivalents
This value reflects the entire value of the firm. Since the acquirer in a merger would assume the
debt and other financial positions of the target, EV captures the full comprehensive value of the
corporation. Furthermore, EBITDA is used in the calculation rather than just earnings for similar
reasons. EV/EBITDA provides a comprehensive measure of the real value of the entire firm,
which P/E fails to capture. However, it should be noted that revenue multiples are usually not a
preferred method of valuation, because revenue can often be easily manipulated through
accounting practices.
Debt or Equity
Since investment banking involves helping companies issue equity and debt, familiarity
with these concepts is fairly important.
Increasing the level of debt in a firms capital structure presents many benefits. Most importantly,
since interest payments are tax deductible, debt is considered the cheaper form of financing (you
should commit this to memory). Issuing bonds has further advantages in that the equity position
of current shareholders does not become diluted and because debt holders have first dibs on the
firms assets in case of bankruptcy. This is also why bondholders require a smaller return on their
investments.
On the other hand, increasing the amount of leverage entails higher interest payments, which
could push the company toward bankruptcy during poor economic times. In contrast to dividends,
which are not guaranteed, corporations are required to meet their debt agreements.