How To Answer 4 Investment Banking Interview Questions

So you think you can survive the most rigorous investment banking interviews unscathed? Below are four of the most difficult questions (2 technical and 2 behavioral) you may encounter, as well as some sample responses to give you an idea of how to structure a great answer.

There are hundreds of variations of these difficult investment banking interview questions, so it’s important that you don’t just memorize scripted answers, but actually understand the concepts behind them.

1) When should a company issue equity, rather than debt, to fund its operations?

• If the company feels its stock price is inflated, it would raise a large amount of capital relative to the percentage of ownership sold.
• If new projects the company plans on investing in may not produce immediate or consistent cash flows to make interest payments
• If the company wants to adjust its capital structure, or pay down debt
• If the company’s owners want the ability to sell off a portion of their ownership and monetize their investment

Here's a sample answer:

There are several reasons for issuing stock rather than debt. First, if a company believes its stock price is inflated, issuing stock can raise a lot of capital relative to the ownership sold. Second, if the projects to be funded may not generate predictable cash flows in the immediate future, the company would want to avoid the obligation of consistent coupon payments required by the issuance of debt. Issuing stock is also an effective way to adjust the debt/equity ratio of a company’s capital structure or to monetize the owners’ investment.”

2) How would a $10 increase in depreciation expense affect the each of the three financial statements?

Note: There are many forms of this question. An interviewer could ask how the statements are affected by a $20 decrease in inventory, or a $50 million capital expenditure project. Since you will not be able to memorize each and every possible variation, you must know how the changes in line items flow through the financial statements.

Break this question down into pieces.

Start with the Income Statement.

• The $10 increase in depreciation is an expense, which therefore lowers operating profit by $10 and reduces taxes.
• Taxes decrease by $10 x Tax Rate and net income decreases by $10 x (1–Tax Rate).
• Assuming a 40% tax rate, the drop in net income will be $6 [$10 x (1–0.40)].

Next move to the Statement of Cash Flows.

• The $6 reduction in net income reduces cash from operations by $6.
• However, depreciation is a non-cash item, so it will increase cash from operations by $10 because you add back depreciation.
• Ending cash is therefore increased by $4.

Now to the Balance Sheet.

• Cash increases by $4.
• PP&E decreases by $10 because of depreciation.
• Overall assets fall by $6.
• This needs to balance with the other side of the Balance Sheet; therefore, retained earnings will fall by $6 due to the drop in net income.

Sample Response putting it All Together:

“Let’s start with the Income Statement. The $10 increase in depreciation will be an expense and will reduce net income by $10 times (1–the tax rate). Assuming a 40% tax rate, this will mean a reduction in net income of 60% or $6. So $6 flows to cash from operations, where net income will be reduced by $6 but depreciation will increase by $10, resulting in an increase of ending cash by $4. Cash then flows onto the Balance Sheet where it increases by $4, PP&E decreases by $10, and retained earnings decreases by $6, keeping everything in balance.”

Now onto a few of the trickiest behavioral investment banking interview questions.

3) What do you think is the most important characteristic for this job?

Choose one of the following (or something similar) and be ready to explain why it’s most important or how it makes a successful analyst.

• Positive attitude
• Drive and determination
• Willingness to learn
• Capacity for work
• Efficient time management
• Communication ability
• Teamwork skills
• Detail orientation

Finance is not rocket science at the junior levels. You will be doing relatively menial tasks that take a long time and can be boring. You will spend so much time staring at a computer screen that your vision will most likely deteriorate during your first year.</p<

Show that you will bring a positive attitude when you walk through the door every morning and will get the job done right with a smile on your face, no matter what.

Sample Response:

“There are a lot of traits that make a successful analyst, but the one that really stands out in my mind is positive attitude. According to the analysts I’ve talked to, the most difficult aspect of finance is the day-to-day grind and long hours. I think if I keep my head up and maintain a positive attitude while getting my work done, I will be successful. Most of the candidates you’re interviewing are probably smart enough to do a good job. What I think makes a great analyst is someone smart who can also stay positive when the job becomes demanding. A person with this mentality gets the job done and is going to be easier to work with in team situations, which seem to be common in finance.”

4) What is the most intellectually challenging thing you have done?

• Talk about a project or a thesis, or use a story that shows you as a problem solver, going above and beyond your assigned role, helping to add value to your company or group.

Sample Response:

“In my internship last year, I was responsible for aggregating data my company collected and summarizing it using Microsoft Excel. When I started, the analysts on the team had been doing the aggregating, manually collecting all the data, applying formulas, etc. It seemed like they were wasting a lot of time. I had a little bit of experience with VBA, and over the course of about a week, I taught myself to automate the entire process whenever new data became available. It was great that as a summer intern I was able to implement a system that is still saving time today.”

For behavioral questions like these, it is very helpful to have thoroughly prepared between 5 and 7 stories from your previous experiences (work, sports, extra-curricular, schoolwork, etc.) that you can draw from throughout the interview. This way, instead of simply claiming you are a hard worker, you can show the interviewers with an actual story that demonstrates this clearly. It is a very powerful technique that makes a much better impression.

We encourage you to thoroughly prepare so that you can walk into the interview room as confident as ever. If you have already broken into investment banking or management consulting and are looking to master LBO modeling and private equity interview questions, the same process applies. The only major difference is with PE interviews, you will be expected to navigate LBO modeling tests, speak about your deals at length and give your perspective as an investor.