Investment Banking Interview Questions
Real investment banking interview questions, organized the way the interviews actually run: accounting first, then valuation, DCF, LBO, M&A, and markets. Every question comes with the context interviewers are listening for and the mistakes that sink most answers. All of it comes from the IB Atlas curriculum, free to read.
125 questions across 8 topics
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- Explain the difference between maintenance and incurrence covenants, give one concrete example of each, and state which instrument each is typically found in.
- What is the difference between Term Loan A and Term Loan B in terms of buyer base, amortization, and covenant package?
- Define control premium and write the formula. Against which share price should it be measured, and why?
- Explain the difference between interest coverage and the fixed charge coverage ratio. Why can a company look safe on one and tight on the other?
- Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.
- What happens to the target's existing goodwill and its historical equity accounts on the pro forma balance sheet, and why?
- Walk me through the three financial statements: what does each one measure, and over what time frame?
- What is the difference between COGS and SG&A? Give two examples of costs that belong in each for a manufacturing company.
- Walk me through the balance sheet: what are the major sections and how are line items ordered within each?
- Walk me through the cash flow statement: what does each of the three sections capture, and what's the overall purpose of the statement?
- Explain the three hard linkages between the three financial statements.
- Why does cash increase, not decrease, when depreciation increases, assuming a positive tax rate?
- What is the cash conversion cycle, and how is it calculated from DSO, DIO, and DPO?
- What is deferred revenue, which side of the balance sheet does it sit on, and why?
- Explain FIFO and LIFO. In a period of rising prices, which method produces higher reported net income, and why?
- What is PP&E, and why must its cost be spread over time via depreciation rather than expensed immediately?
- Is goodwill amortized under current US GAAP/IFRS? How is it tested and adjusted over time?
- Explain the three general mechanics that every Module 1 topic reduces to: timing differences, asset consumption, and valuation write-downs. Give one example of each from this module.
- Why do you subtract cash when calculating enterprise value? Give both the practical (acquirer) reason and the conceptual (non-operating asset) reason.
- Why is minority interest added to enterprise value? Anchor your answer in consolidation accounting and the consistency of EV/EBITDA.
- Why is EV/EBITDA considered capital-structure neutral, while P/E is not?
- Why do you normalize a peer's EBITDA for one-time items before computing its multiple? Give two specific examples of items you'd adjust for.
- Define control premium and write the formula. Against which share price should it be measured, and why?
- Why is Equity Value/EBITDA never a valid multiple? Use the claimholder-matching logic to explain, not just 'it's not done.'
- Explain the economic difference between trading comps and precedent transactions, and why precedents typically imply a higher multiple for the same underlying business.
- Walk me through a DCF from start to finish in under two minutes.
- Why is interest expense excluded from unlevered free cash flow, and where in the DCF is the cost of debt (including its tax benefit) actually captured?
- Explain why beta measures only systematic risk and not total risk. Why is that the economically correct thing for CAPM to price?
- Explain why the cost of debt is tax-affected but the cost of equity is not.
- Describe the cross-check between the Gordon growth and exit multiple methods. Why is this considered a critical step rather than an optional nicety?
- Why does cash flow actually arrive throughout the year rather than as a lump sum, and how does mid-year convention approximate that reality?
- Explain why an LBO ability-to-pay analysis typically forms the floor of a football field. What two constraints cap the sponsor's price?
- Explain why debt paydown is a real source of equity value creation even when it requires no operational improvement to the business at all.
- Why must total sources equal total uses in an LBO, and is this an accounting identity or a real economic constraint? Explain the difference.
- What is the difference between Term Loan A and Term Loan B in terms of buyer base, amortization, and covenant package?
- Describe the mechanical flow of an LBO operating model from revenue down to levered free cash flow, naming each line item in order.
- Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.
- Define IRR and MoIC. Which is time-weighted, and why does a fund need to look at both?
- Using the MoIC-to-IRR approximation, roughly what IRR corresponds to a 2.5x MoIC over 5 years? A 2.0x MoIC over 3 years?
- Explain the difference between interest coverage and the fixed charge coverage ratio. Why can a company look safe on one and tight on the other?
- Explain why management rollover is classified as a source of funds rather than a use, and how it changes the sponsor's required equity check.
- Explain the difference between organic EBITDA growth, acquired EBITDA at cost, and multiple arbitrage, and why an LP would want a platform's return decomposed across all three.
- Explain why debt paydown increases equity value even though enterprise value is unchanged by it.
- Why is an LBO analysis described as the 'floor' of a valuation football field, and what does the analysis actually solve for?
- Why does IRR rise for the same MoIC when the hold period shortens? Use the 2.0x/5-year and 2.0x/3-year benchmarks in your answer.
- Explain why credit stats should be understood as forward-looking constraints on sponsor actions (recaps, add-ons) rather than purely backward-looking scorecard metrics.
- What is a tuck-in / bolt-on acquisition, and why does its value creation come primarily from multiple arbitrage and operating leverage rather than standalone growth?
- Why is 'this deal is accretive' not the same statement as 'this is a good deal'? Give a one-sentence explanation an MD would accept.
- Walk me through how each of the three financing sources (cash on hand, new debt, and new stock) affects pro forma EPS, and where each one shows up in the accretion/dilution build.
- What are 'costs to achieve,' what magnitude is typical relative to run-rate synergies, and why does ignoring them flatter year-one deal math?
- What happens to the target's existing goodwill and its historical equity accounts on the pro forma balance sheet, and why?
- Explain why a DTL is created in a stock acquisition but not in an asset acquisition (or a 338(h)(10)/336(e) election), in terms of book basis versus tax basis.
- Explain why the target's historical equity accounts are eliminated on the pro forma balance sheet rather than combined with the acquirer's.
- State the intuitive P/E-arbitrage rule for when an all-stock deal is accretive versus dilutive to the acquirer's EPS, with no synergies assumed.
- Walk me through a two-stage sell-side auction process from engagement to closing, naming the key documents at each stage.
- Explain how a poison pill (shareholder rights plan) actually works mechanically: what triggers it and what happens to the acquiring shareholder's stake.
- What is the accretion/dilution formula, and what changes between a cash-financed deal and a stock-financed deal in the pro forma share count and pro forma net income?
- Explain why signing and closing are separate events, and name at least three things that can change in a model's assumptions between them.
- Explain the difference between a normal, flat, and inverted yield curve, and what each shape typically implies about market expectations.
- Explain why higher interest rates compress valuations not just for leveraged buyers but for strategic acquirers and public equities as well.
- Explain the difference between maintenance and incurrence covenants, give one concrete example of each, and state which instrument each is typically found in.
- Walk me through the IPO process from mandate to first trade, naming each major milestone in order and the purpose of each.
- Why would a company issue investment-grade bonds instead of (a) drawing a bank term loan or (b) issuing equity? Give the key tradeoffs for each comparison.
- Compare Chapter 7 and Chapter 11. What is the automatic stay, what is a debtor-in-possession, and why do most large corporate cases file Chapter 11 rather than Chapter 7?
- Why do valuation conventions differ by sector? Match the right multiple to each of: a pre-profit SaaS company, a mature industrial, a commercial bank, an airline, and an E&P energy company. Explain why EV/EBITDA is wrong for the bank.
- Explain why a short thesis is harder to pitch well than a long. Address the payoff asymmetry, borrow costs, and why a short needs a dated catalyst even more than a long does.
- Walk me through the five components of a strong two-minute deal discussion, in order, and explain what each one is demonstrating to the interviewer.
- Why does the equity of a deeply distressed company still trade above zero even when the firm's debt clearly exceeds the value of its assets?
- Walk me through EBITDA mechanically from net income, then explain why 'Adjusted EBITDA' exists and why it's a non-GAAP number with no fixed rulebook.
- What is an earn-out and why do buyers and sellers use them? Connect the earn-out to the problem of paying for unrealized synergies or growth, and to keeping selling-shareholder management motivated.
- Explain what beta measures and why an observed equity (levered) beta blends business risk and financial risk. Why can't you directly compare the levered betas of two companies with different capital structures?
- Explain the difference between a normal and an inverted yield curve, what each signals about the economy, and how the Fed influences the short end versus how the long end gets set. Why has an inverted curve historically preceded recessions?
- Walk me through the three financial statements and, in one sentence each, how they connect.
- Walk me through an LBO in under a minute: what happens, why leverage amplifies returns, and the three drivers of the sponsor's return.
- Walk me through the critical path of a timed LBO build: the order in which you'd construct the model to guarantee you reach a returns number before time runs out.
- Why must synergies, new interest expense, and foregone interest on cash all be tax-affected before they hit pro-forma net income? Give the after-tax value of $60M of pre-tax synergies at a 25% rate.
- Answer 'why a boutique instead of a bulge bracket' with three concrete, structural reasons (not culture buzzwords) that could not be recited at a large financing-driven bank.
- Explain why re-reading your notes builds recognition but not recall, and describe the specific test that proves a weak spot is actually remediated (not just familiar).
- Why must you use market-value D/E rather than book D/E when re-levering beta?
- The 10-year Treasury yield rises from 4% to 5%. In one causal chain, connect that move to M&A and LBO deal volume.
- 'Why our boutique specifically, and not a bulge bracket?' What are the substantive, non-generic points a strong answer hits?
- A company enters Chapter 11 with a $50 million superpriority DIP facility (unsecured), $10 million in other administrative claims, $200 million of pre‑petition first‑lien secured debt (collateral valued at $250 million), and $100 million of general unsecured claims. If the enterprise value is $280 million, compute recoveries for every class and state which class is the fulcrum.
- A debtor in possession seeks approval of a $120 million DIP facility that will prime the pre‑petition first‑lien lender’s $300 million claim. The first‑lien lender objects, arguing adequate protection is impossible because the collateral is worth only $250 million. What must the debtor demonstrate to obtain the priming lien, and how can it structure the DIP to overcome the objection?
- Compare a pre‑packaged Chapter 11 filing to a traditional free‑fall Chapter 11. Under what circumstances is a pre‑pack infeasible, forcing a company into a contested Chapter 11 proceeding?
- The Second Circuit’s *Momentive* decision addressed the enforceability of make‑whole premiums in bankruptcy. What is the general rule regarding make‑whole premiums when a debtor repays debt ahead of schedule in Chapter 11, and why do creditors often lose their claim to such premiums?
- In a Chapter 11 case, a debtor proposes to sell substantially all assets under Section 363. A stalking‑horse bidder has agreed to pay $500 million in cash, and the secured lender plans to credit bid its $450 million claim. How does a credit bid work, and what protections exist for other bidders and creditors? What are the risks for unsecured creditors?
- A distressed company is considering an out‑of‑court exchange but runs into the holdout problem: the indenture requires 100% consent to change payment terms, and holdouts could sue. Analyze the trade‑offs between initiating a pre‑packaged Chapter 11 and proceeding with a pure out‑of‑court exchange with exit consents. Assume the company has NOLs that would be limited under Section 382 if an ownership change occurs.