50 Q&A Investment Banking Interview

1. What is the Price-to-Earnings (P/E) Ratio?

A: The P/E ratio compares a stock's price to its earnings per share (EPS). It helps investors determine if a stock is overvalued or undervalued.

2. What is a good P/E ratio?

A: A good P/E ratio varies by industry, but generally, a lower P/E ratio indicates undervaluation, while a higher P/E ratio indicates overvaluation.

3. What is the Debt-to-Equity Ratio?

A: The Debt-to-Equity ratio compares a company's total debt to its total shareholders' equity, indicating its leverage and financial risk.

4. What is a good Debt-to-Equity Ratio?

A: A good Debt-to-Equity ratio varies by industry, but generally, a lower ratio indicates lower leverage and financial risk.

5. What is Return on Equity (ROE)?

A: ROE measures a company's net income as a percentage of its shareholders' equity, indicating its profitability.

6. What is a good ROE?A:

A good ROE varies by industry, but generally, a higher ROE indicates higher profitability.

7. What is the Current Ratio?

A: The Current Ratio compares a company's current assets to its current liabilities, indicating its ability to meet short-term obligations.

8. What is a good Current Ratio?

A: A good Current Ratio is generally considered to be 2 or higher.

9. What is the Interest Coverage Ratio?

A: The Interest Coverage Ratio measures a company's ability to pay its interest expenses on its debt.

10. What is a good Interest Coverage Ratio?

A: A good Interest Coverage Ratio is generally considered to be 3 or higher.

11. What is Asset Turnover?

A: Asset Turnover measures a company's sales as a percentage of its total assets, indicating its asset utilization efficiency.

12. What is a good Asset Turnover ratio?

A: A good Asset Turnover ratio varies by industry, but generally, a higher ratio indicates higher efficiency.

13. What is Gross Margin Ratio?

A: Gross Margin Ratio measures a company's gross profit as a percentage of its sales, indicating its pricing strategy and cost structure.

14. What is a good Gross Margin Ratio?

A: A good Gross Margin Ratio varies by industry, but generally, a higher ratio indicates higher profitability.

15. What is the Dividend Yield?

A: Dividend Yield measures the ratio of a company's annual dividend payment to its stock price.

16. What is a good Dividend Yield?

A: A good Dividend Yield varies by industry, but generally, a higher yield indicates higher returns for shareholders.

17. What is Enterprise Value-to-EBITDA (EV/EBITDA)?

A: EV/EBITDA measures a company's value as a multiple of its earnings before interest, taxes, depreciation, and amortization (EBITDA).

18. What is a good EV/EBITDA ratio?

A: A good EV/EBITDA ratio varies by industry, but generally, a lower ratio indicates undervaluation.

19. What is the Cash Conversion Cycle?

A: The Cash Conversion Cycle measures the time it takes for a company to generate cash from sales and pay its suppliers.

20. What is the difference between Enterprise Value and Equity Value?

A: Enterprise Value (EV) represents the total value of a company, including debt and excluding cash, whereas Equity Value represents the value of the company available to shareholders, which is EV minus net debt.

21. What are the three financial statements?

A: The three financial statements are the Income Statement, the Balance Sheet, and the Cash Flow Statement.

22. How do the three financial statements link together?

A: Net income from the Income Statement flows into the Equity section of the Balance Sheet and the top line of the Cash Flow Statement. The changes in working capital from the Cash Flow Statement adjust the current assets and liabilities on the Balance Sheet. 

23. What is Discounted Cash Flow (DCF) analysis?

A: DCF analysis is a valuation method that estimates the value of an investment based on its expected future cash flows, which are discounted back to their present value using a discount rate.

24. What is the difference between LBO and DCF valuation methods?

A: LBO (Leveraged Buyout) valuation focuses on how much a private equity firm can pay for a company while achieving a target internal rate of return (IRR), using a significant amount of debt. DCF valuation estimates the value of a company based on its projected free cash flows discounted to their present value.

25. What is EBITDA and why is it important?

A: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company's overall financial performance and is used as an alternative to net income in some circumstances. It is important because it can be used to compare profitability between companies and industries by eliminating the effects of financing and accounting decisions.

26. What is working capital and how is it calculated?

A: Working capital is the difference between a company’s current assets and current liabilities. It is calculated as Current Assets minus Current Liabilities.

27. What is a leveraged buyout (LBO)?

A: An LBO is the acquisition of a company using a significant amount of borrowed money (debt) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans.

28. What is a merger and what is an acquisition?

A: A merger is the combination of two companies to form a new company, whereas an acquisition is the purchase of one company by another, with no new company being formed.

29. What is a leveraged recapitalization?

A: A leveraged recapitalization is a corporate finance transaction in which a company takes on significant additional debt to pay a large dividend or buy back shares.

30. What is Free Cash Flow (FCF)?

A: Free Cash Flow is the cash generated by a company after accounting for capital expenditures needed to maintain or expand its asset base. It is calculated as Operating Cash Flow minus Capital Expenditures.

31. What is the difference between operating leases and capital leases?

A: Operating leases are treated as rental expenses and do not appear on the balance sheet, whereas capital leases are treated as an acquisition of an asset and a corresponding liability and appear on the balance sheet.

32. What is the cost of debt?

A: The cost of debt is the effective interest rate that a company pays on its borrowed funds.

33. What is the cost of equity?

A: The cost of equity is the return that investors require on their investment in the company. It can be estimated using the Capital Asset Pricing Model (CAPM).

34. What is the Capital Asset Pricing Model (CAPM)?

A: CAPM is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. It is used to estimate the cost of equity.

35. What is Beta in finance?

A: Beta is a measure of a stock's volatility in relation to the overall market. A Beta greater than 1 indicates the stock is more volatile than the market, while a Beta less than 1 indicates it is less volatile.

36. What are the primary valuation methodologies?

A: The primary valuation methodologies are Discounted Cash Flow (DCF) analysis, Comparable Company Analysis, and Precedent Transactions Analysis.

37. What is goodwill and how is it accounted for?

A: Goodwill is an intangible asset that arises when a company is acquired for more than the fair value of its net identifiable assets. It is tested annually for impairment and is not amortized.

38. What is a hostile takeover?

A: A hostile takeover is an acquisition attempt by a company or individual that is strongly resisted by the target company's management and board of directors.

39. What is a poison pill?

A: A poison pill is a defensive strategy a target company uses to prevent or discourage a hostile takeover. It allows existing shareholders to purchase additional shares at a discount, diluting the ownership interest of a new, hostile party.

40. What is the difference between primary and secondary markets?

A: The primary market is where securities are created and sold for the first time, such as in an Initial Public Offering (IPO). In the secondary market, investors buy and sell securities they already own, like the stock exchange.

41. What is a covenant in a loan agreement?

A: A covenant is a condition in a loan agreement that requires the borrower to fulfill certain conditions or forbids the borrower from undertaking certain actions. It is a form of protection for the lender.

42. What is market capitalization?

A: Market capitalization is the total market value of a company's outstanding shares of stock. It is calculated as the current share price multiplied by the total number of outstanding shares.

43. What is the difference between an IPO and a follow-on offering?

A: An IPO (Initial Public Offering) is the first sale of a company's shares to the public. A follow-on offering, also known as a secondary offering, is an issuance of stock after the company's IPO.

44. What is a roadshow in the context of an IPO?

A: A roadshow is a series of presentations made by the senior management of a company that is planning an IPO. The purpose is to attract potential investors.

45. What is quantitative easing?

A: Quantitative easing is a monetary policy where a central bank buys government securities or other securities from the market to increase the money supply and encourage lending and investment.

46. What is a credit default swap (CDS)?

A: A CDS is a financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor. For example, if a lender is concerned that a borrower might default on a loan, the lender could use a CDS to offset that risk.

47. What is a capital market?

A: Capital markets are financial markets for buying and selling equity and debt instruments. They are crucial for economic growth as they facilitate the transfer of funds from savers to borrowers.

48. What is sovereign debt?

A: Sovereign debt is the amount of money that a country's government has borrowed. It can be in the form of bonds or other financial instruments.

49. What is a spin-off?

A: A spin-off is a type of corporate restructuring in which a company creates a new independent company by selling or distributing new shares of its existing business. This allows the parent company to focus on its core operations while allowing the new company to pursue its growth strategies.

50. What is a rights issue?

A: A rights issue is a method by which a company raises additional capital by offering its existing shareholders the right to purchase additional shares at a discounted price, usually in proportion to their existing holdings. This allows the company to raise funds while allowing current shareholders to maintain their ownership percentage.