Investment Banking Brain Teasers

A subject everyone asks is for me how to reply technical questions in the investment discussions bank. What should you foresee, how you keep your calm, and that you done to prepare in advance?

I think in fact that the people tend to converge too on the technical questions while preparing to discussions. Your crisis and your enthusiasm for the work are a lot more important ones.

That said, if you have preceding experience of finance or studied the economical science or the finance to the school, the it is important to obtain these questions to right.

There are 3 types of technical questions that you could be asked: 1) the Evaluation/Modelage Questions 2) Explaining Questions and 3) the Headaches.

Evaluation

You should know that the three principal methodologies of evaluation and can explain them to your interviewers.

Is first analyzes it comparable business - looks at businesses publiquesment of the exchanges and the multiples that they exchange to, applying then those to the business in the question. This depends a lot on "the market data" to estimate businesses, and the principal inconvenience is that sometimes there is not true comparable businesses to use.

The second is the analysis of preceding transaction - looks at which buyers paid salesmen in the similar industries and with the profiles and apply similar financial the multiples to your own business. Again, there is not often true comparable transactions. The preceding analysis of transaction also tends to produce the the highest evaluations because of the check premium demanded to obtain businesses.

At last, there is the Discounted cash-flow Analyzes - using the in cash foreseen flows of a business, the discount for the time value of money and of cost of capital and summarizes those to find the value of the present business. This is the manner the more "pure" to estimate a business since it depends only on his financial execution, but the inconvenience is that it heavily depends on the future projections, that tends to be not very reliable.

Know these methodologies and the various advantages and the disabilities of every one.

The modelage Questions

The financial modelage the most probable one questions will obtain will concern you the merger models (when a business obtains another business) and Used Purchase, or the models of LBO - when a business of private equity buys a business using equity and the debt.

Will the party more important of a model of merger is the growth/dilution - a business have a more top or lower gains by the party (EPS) after obtaining another business? A merger model is an exchange analysis between the type usage, the stock, or the debt to finance an acquisition. Any of these methods, or any combinations, will have for result a different EPS. Beyond just the impact of EPS, you must consider also how much the debt the buyer can allow itself, how much can take they have, and how much to stock they can distribute.

In a model of LBO, you try to resolve for the return of the business of private equity on the investment - the IRR. The this is very similar to the purchase of a house with a hypotha¨que - there is a personal provision (the party of equity of a LBO) and the hypotha¨que (the debt that is used to finance a LBO). The model measures how much the value of the business grows and how much the debt more is reimbursed of 3 to 5 years. The drivers more important are the purchase price, the exit price, the quantity of used debt, and the rate of growth of the business and profitability.

Accounting questions

To assure itself that you know the three financial states - the income declaration, the declaration of report and cash-flow - the link and can cross together how changes to one of them will affect the others.

A common question here how an increase of $10 in depreciation will affect all the declarations.

On the income declaration, depreciation is an expenditure working if income would decline by $10. With a rate of imposition of 40%, net income would diminish of $6.

On the cash-flow declaration, net income is down below by $6 but depreciation - one of the "addbacks" - the increases by $10, therefore operation cash-flow would increase by $4.

On the report, Net EPP would diminish by $10 because of depreciation, while the types would be in top by $4 of the economies of tax. The $6 decreases in net income would cause also withheld gains to diminish by $6, for that the report balances - the two active and passive one/l' equity of the shareholders is now more low by $6.

Headache

The it is hard to give a general general idea detailed of headache because the questions are of ordinary completely different ones. Usually, nevertheless, wants to keep you your calm and your home on your thought the process instead of obtaining the exactly just response. The headaches are really just the tests of tension, therefore to keep that present to the spirit as you cross discussions.