Introduction

In an investment banking interview, technical questions are designed to evaluate your understanding of the key financial concepts and your ability to apply this knowledge in practical scenarios. Interviewers will use these questions to determine if you have the analytical skills and technical expertise required for the job. They will also try to judge how quickly you can grasp financial concepts that you might not be so comfortable with. Learning fast is one of the main traits they look for in candidates when making new hires.

You can expect questions ranging from basic accounting principles to complex valuation scenarios. It’s essential to be well-prepared to handle questions at varying levels of difficulty.

Key Topics

Technical questions during interviews aim to test your knowledge across several key areas. These can be categorized into the following categories:

1. Accounting Questions
2. Equity Value to Enterprise Value Questions
3. Valuation Questions
4. DCF-Specific Questions
5. LBO-Specific Questions
6. Merger Model Questions

Accounting Questions

Fully understanding the three financial statements is fundamental. Be prepared to explain the purpose and components of the income statement, balance sheet, and cash flow statement. You should also be able to discuss how these statements are interconnected, and any how a change in a certain line item e.g., Depreciation, affects them.

Example Questions:

• Walk me through the three financial statements.

• How does a £10 increase in depreciation affects the three financial statements?

Expert Tip: Take advantage of our free resources. Check out the our "Accounting" post for a detailed overview of this topic.

Equity Value to Enterprise Value Questions

When it comes to basic concepts, the difference between equity value and enterprise value is one of the most important ones. Ensure you understand them perfectly, as well as the key the components that bridge one to the other are some of the most commonly tested topics during interviews.

Example Questions:

• How do you calculate enterprise value?

• Why is cash subtracted when calculating enterprise value?

Expert Tip: Take advantage of our free resources. Check out the our "Equity Value to Enterprise Value" post for a detailed overview of this topic.

Valuation Questions

Valuation is what investment banking is all about after all. You are expected to be extremely comfortable with the main various valuation methods, including the discounted cash flow (DCF) analysis, comparable companies, comparable transactions, and at least be aware of some of the other common valuation methodologies e.g., LBO, DDM, Sum-of-the-Parts, among others.

Example Questions:

• How do you value a company?

• What are the different valuation methods , and when would you use each?

Expert Tip: Take advantage of our free resources. Check out the our "Valuation" post for a detailed overview of this topic.

DCF-Specific Questions

DCF are one of interviewers´ favourite interview topics. Make sure, you understand the mechanics of building a DCF model, including forecasting free cash flows, selecting an appropriate discount rate (typically the weighted average cost of capital or WACC), and calculating the terminal value.

Example Questions:

• Walk me through a DCF analysis.

• How do you calculate the terminal value in a DCF model?

Expert Tip: Take advantage of our free resources. Check out the our "DCF" post for a detailed overview of this topic.

LBO-Specific Questions

LBO questions are considered a more advanced topic and more common for private equity roles. However, you should still understand the mechanics of LBOs, the structure of financing, and how to build an LBO model.

Example Questions:

• What is an LBO, and why is it used?

• Walk me through a basic LBO model.

Expert Tip: Take advantage of our free resources. Check out the our "LBO" post for a detailed overview of this topic.

Merger Model Questions

M&A questions test your understanding of the entire deal process, from initial consideration to post-merger integration. Be familiar with concepts like accretion/dilution, synergies, and the rationale behind mergers.

Example Questions:

• What is the difference between a merger and an acquisition?

• How do you evaluate whether a merger is accretive or dilutive?

Expert Tip: Take advantage of our free resources. Check out the our "Merger Model" post for a detailed overview of this topic.

General Tips

For almost every technical interview question, certain general principles can guide your approach:

1. Keep it short
2. Stay focused
3. Don't stress out

Keep It Short

Providing clear and succinct answers is essential in an interview setting. For example, when interviewers ask you “What are the main key valuation methodologies?”. This question is broad and can be discussed in great detail, but an interview is not the place for an exhaustive lecture.

When asked a broad technical question, start with a concise answer that hits the main points. provide clear and succinct answers. If asked an expansive question, it’s absolutely fine to wrap up with, “Would you like to go into anything in more detail?”. This shows your willingness to elaborate without overwhelming the interviewer initially.

However, while many candidates struggle with brevity, others may not provide enough detail. As a rough guideline, answers to questions without clear numerical or concrete answers should last at least one minute. This indicates that you are taking the time to think and formulate thoughtful responses.

Expert Tip: For any given question, you should be able to explain concepts clearly and concisely. Typically, your answers should take around 2-3 minutes max.

Stay Focused

Stay focused on the question asked. Prolonged answers increase the risk of being asked follow-up questions on topics you may not fully understand. Keep answers within your comfort zone to avoid giving interviewers reasons to probe deeper.

When answering a question, stick to what you know well. For instance, if you're familiar with basic financial modelling but you have never done one from scratch, explain the fundamental aspects confidently and avoid delving into complex details that might expose gaps in your knowledge. This approach shows you are aware of your expertise and limitations, which is preferable to overreaching and making mistakes.

Expert Tip: Focus on delivering a concise response. It’s better to give a solid answer on what you know well than to provide a detailed but potentially flawed explanation.

Don't stress out

If you encounter a question you don’t know, remain composed. It's important to handle uncertainty professionally.

Depending on what you know, approach your answer strategically:

• If you know part of the answer: Explain what you understand and admit where your knowledge is lacking. For example, “I’m familiar with the basic principles of discounted cash flow analysis, but I haven’t applied it extensively in practice. Here’s what I know...”.

• If the question is unclear: Ask for clarification. This not only buys you a bit of time but also ensures that you understand what is being asked. You might say, “Could you please clarify if you are asking about the overall process or a specific aspect of it?”.

• If you don’t know the answer at all: Admit it honestly and express your intent to learn more about the topic. For example, “I haven’t encountered that concept in detail yet, but I’m eager to learn more about it and will definitely look it up after this interview.”.

Staying calm under pressure demonstrates maturity and the ability to handle the unexpected, qualities highly valued in investment banking.

Expert Tip: Practice as many mock interviews as you can to learn how to handle tough questions. This will help reduce anxiety and improve your ability to think on your feet during the actual interview.

Conclusion

Acing the technical part of the interview is a must to get to the next round. These questions assess your ability to apply financial concepts and analytical skills in practical scenarios. By thoroughly understanding each of the technical topics, you will be well-prepared to tackle any technical questions that come your way. Keep practising and stay updated with financial news to continuously improve your skills.