Q 1. What are the essential qualities to become Investment Bankers? To answers this question, you have to tell all the essential qualities that are required to become an investment banker.
Having good communication ability Able to think out of the box Able to manage multiple project deadlines Strong quantitative and analytical skills Positive and never give up attitude
Q 2. When should a company consider issuing debt instead of equity? A company should issue debt when the rate of taxation is high or there is a huge market and the company does not have enough capital to meet the demand.
Q 3. What makes a good financial model? Some of the features that make a good financial model are:
It describes all the functionality. Having clear inputs, working, output and results. The model is versatile. The model is well structured and easy to audit. The formula used in the model is most efficient.
Q 4. How do you calculate the cost of equity? The cost of equity is calculated by CAPM. CAPM stands for Capital Asset Pricing Model. Below is the formula used to calculate the cost of equity.
E(Ri) = R(f) + β[E(m) - R(f)]
where, β = Beta of the stock. E(m) = Market Rate of Return [E(m)-R(f)] = equity risk premium. R(f) = Risk -free Rate of Return.
NOTE: These are the most important questions to ask investment bankers during an interview.
Q 5. How would you calculate beta for a company? This is the formula to calculate beta for a company.
ΔSi=α+βi×ΔM+e
where: ΔSi =change in the price of stock i. α=intercept value of the regression. βi=beta of the I stock return. ΔM=change in the market price. e=residual error term.
Q 6. What is the appropriate numerator for a revenue multiple? The appropriate numerator for a revenue multiple is Enterprise Value.
Q 7. What is the meaning of goodwill? How is it calculated? A company that provides factors like a quality product, good services, and uniqueness and these factors helps to create good names and good reputation of the company in the minds of customers, bankers, and suppliers, etc when we try to value the good name and reputation of the business in terms of money then it is known as Goodwill.
Goodwill = P − (A+L)
Where, A = Fair market value of assets L = Fair market value of liabilities P = Purchase rate for the targeted company
Q 8. How would you value a company with negative historical cash flow? Investing in a company with a negative historical cash flow is generally a high risk. Cash expenditure on the equipment could be greater than the revenue coming in. By profit, and loss company you could value the company with its net profit.
Q 9. What is typically higher - the cost of debt or the cost of equity? The cost of equity is typically much higher than the cost of debt. As it makes you lose a part of the business to the equity investors. Debt is less expensive because its interest payment is considered as the expense.
Q 10. What is the difference between Commercial and Investment Banking?
Commercial Banking vs Investing Banking
Individual or small-sized companies. - Startups and companies. Provides services to the public. - Provides services to corporations, investors, and governments. A risk factor is low. - A risk factor is high. Take deposits. - Don't take deposits. Provides loans. - Don't provide loans.
Q 11. What is the formula to calculate Enterprise Value? Enterprise Value is described as the entire cost or market value of the company. Below is the formula used to calculate Enterprise Value
Enterprise Value = Market Capitalization + Debt + Minority shareholdings + Preference Shares - cash and cash equivalents.
Q 12. Which is cheaper debt or equity? Why? Dept is cheaper than equity because it is less expensive in terms of interest. Interest on debt is a tax-deductible expense making it an even more cost-effective form of financing. Both risk and potential return of debt and lower.
Q 13. List the main components of WACC & how do you calculate the WACC? The main components of WACC are the cost of debt and the cost of equity.
We can calculate the WACC as given below
WACC = [ Ve / Ve + Vd ] ke + [ Vd/ Ve + Vd ] kd ( 1- T)
Where, Ve = market value of the equity that is the value of share price ex-div X number of shares Vd = market value of debt which is the market value of debentures + loan amount ke = cost of equity kd = cost of debt T = company profit tax rate
NOTE: This is one of the most important investment banking technical questions.
Q 14. What are the three principal financial statements of a corporation? The balance sheet, income statement, and cash flow statement
Q 15. What factors would you need to consider in the merging of new data? If a company incurs $10 (pretax) of depreciation expense, how does that affect the three financial statements?
Q 16. What is the best method for startup valuation? Discounted Cash Flow (DCF). For most startups, especially those that have yet to start generating earnings—the bulk of the value rests on future potential.
Q 17. If you Could Use Only One Financial Statement to Evaluate the Financial State of a Company, Which Would You Choose? While no strict correct answer, the most logical answer will be the cash flow statement. As this allows you to see the company's abilities to meet its short term obligations.
Q 18. What is WACC and how do you calculate it? WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight by market value, and then adding the products together to determine the total.
Q 19. What methods are used to value a company? When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions.
Q 20. How many times revenue is a business worth? Typically, valuing of business is determined by one-times sales, within a given range, and two times the sales revenue.
The times-revenue method: Depending on the industry and the local business and economic environment, the multiple might be one to two times the actual revenues.
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