The 'why banking' questions
Banking is notoriously hard work. If you're an entry-level candidate, recruiters will therefore want to ensure that you know what you're letting yourself in for. When you're answering 'why banking' questions, you need to be original and specific. 'Avoid stating the generic' says Mergers and Inquisitions. It helps to reference bankers you've spoken to (especially if they work for the firm you're interviewing with) and the extent to which they inspired you. Talk about your passion for the industry. For example, explaining why you think banking is more rewarding than consulting.
When you're interviewing for a role in M&A in particular, you need to show that you're "super-committed," says Derek Walker, an independent careers consultant and a former director of campus recruitment at Barclays and of staffing for the investment bank at Merrill Lynch (before it was combined with BofA). "Corporate finance interviews don't want to hear that you're seeing their role as a means to something else," adds Walker. "If you go into corporate finance, you're going to have to work really, really hard and if you're not absolutely passionate about it you're not going to be willing to work long hours."
The 'why this bank' questions
Don't just regurgitate easy to find information in the public realm. Do make sure you do in-depth research - recruitment advisors suggest talking to existing employees so that you can use specific information about what it's like to work for that firm. We provide a list of other information sources here.
"Unfortunately, people don't always bother doing the most basic research on the company," says the head of recruitment at one international bank. "What's really needed here is something that explains why you think the bank you're applying for is different to and better than the rest." You'll need to research every bank you're interviewing with, he says. Your answers need to be specific: you need to find something that makes the bank stand out and to go with that. In the case of Nomura, for example, you might say you want to work for a bank with strong Asian connections so that you have exposure to the Asian market.
The 'why this job' questions
Rather than focusing on why you want the job in question, here you need to focus on what you can bring to it. What, specifically, have you done in the past that will suit you to performing well in this job in the future? Having said that, you need a detailed understanding of the requirements of the job in order to respond aptly.
Answering brainteaser questions is about method and attitude, says Mark Hatz, an ex-Goldman Sachs and Perella Weinberg associate who now offers advice on preparing for investment banking interviews. Banks want to hear your thought processes and to see that you’re flexible enough to attempt a solution. This is particularly the case for question 20 - where there is no hard answer.
You might think the snail climbs a net of two feet a day and so reaches the top of the 10 foot pole at the end of five days. This is wrong. On the morning of day five, the snail starts out at the eight foot mark after sliding down from the nine foot mark overnight. It reaches the top of the pole two thirds of the way through the fifth day and then stops, because there's nowhere else to go.
The answer is three. Two socks can be different, but the third sock must always match one of the first two.
The answer is 58 minutes.
The answer is two weighings. Click here to see the methodology.
The current market knowledge questions
Current market knowledge can't be prescriptive - by definition it changes all the time. Make sure you know current key market metrics and have opinions about market trends and a selection of investment ideas.
The past experience questions
Before you step into a finance interview, you need to know your CV inside out. Make sure you can answer detailed questions about any and every aspect (your choice of university and university course, your experiences as an intern, how you added value in a previous role) of your CV. Be prepared to use the S.T.A.R. technique to frame responses to questions about your past. You'll need some examples of situations you were in, tasks you were asked to perform, actions you took and results you achieved.
The technical investment banking questions
If you're interviewing for a junior job in IBD, Matan Feldman at Wall Street Prep says technical knowledge is becoming increasingly important. This is echoed by other finance interview preparation professionals: banks want people who know the basics, even if you haven't worked in finance (or studied finance) previously.
Beta tells you how much the price of a given security moves relative to movements in the overall market. A Beta of 1 means that if the market moves, the stock moves in unison with the market. A Beta < 1 means that if the market moves a certain amount, the stock will move less than that amount. A Beta >1 means that if the market moves a certain amount, the stock will move more than that amount.
CAPM is the capital asset pricing model, and it is a model designed to find the expected return on an investment and therefore the appropriate discount rate for a company’s cash flows. It provides the required rate of return given the riskiness of the asset.
WACC is the weighted average cost of capital. To calculate it, you need to multiply the cost of each capital component (common stock, preferred stock, bonds and any other long-term debt) by its proportional weight and take sum of the results. WACC shows the average rate of return a company needs to compensate all its different investors. Click here for advice on how to calculate it.
Accretion is asset growth through addition or expansion. Accretion can occur through a company’s internal development or by way of mergers and acquisitions. Dilution is a reduction in earnings per share of stock that occurs when additional shares are issued or the stock changes into convertible securities.
A DCF proposes that the value of a productive asset equals the present value of its cash flows. You’ll also need to talk about relative valuation multiples, in which you value a company similar to its peers based upon measures like enterprise value/revenue, enterprise value/EBITDA, and the price/earningsratio.
The three methods are DCF, public comparables (comparing other publicly traded companies) vs. transaction comparables (similar companies that have been involved in previous transactions). Each has its advantages: a DCF shows the maximum a company is worth - not just the value the markets assign to it. The transaction comparables take into account the synergies that can be expected to flow from a deal. For more information, see this tutorial from NYU Stern. Click here for more information oncompany valuations.
Click here for Wall Street Prep's suggested answer.
Working capital is the amount of liquid assets a company has on hand. It amounts to current assets and cash minus current liabilities.
Click here for Wall Street Prep's suggested answer.
DDM is the dividend discount model of valuing a company.
The cost of equity is almost always higher than the cost of debt. This is mostly because debt holders have less risk than equity holders of not getting their money back and are therefore willing to accept lower returns. - Debt is secured against a company's assets and is therefore less risky for the creditor, which can seize those assets if the company defaults. If a company goes bankrupt, debt holders receive proceeds of the liquidation ahead of equity holders. And debt holders receive interest on their investment in all situations (whereas equity holders are only paid dividends if the company is doing well). It helps too that debt s tax deductible.
Equity financing is less risky (you won't have to pay it back). You'll have more cash on hand. You won't have to channel profits into loan repayment. Your equity investors will have a longer term view. Your company will have more credibility. And you might get to tap your investors' network to help you develop the business.
A leveraged buyout (LBO) acquires when a company is acquired using predominantly debt funding. The acquirer is usually a private equity firm which will invest a small amount of equity and use debt to finance the rest of the acquisition. The private equity fund relies upon the company's cash flow and (or) asset sales to finance the debt. The value of the company is therefore the amount the private equity fund can afford to pay and still finance this debt. Click here for a good description of the process.
The key levers are: a lower purchase price, a higher exit price (when the company is sold on), increased leverage. improving the way the company operations, or getting cheap financing.
This is when a company's allowable tax deductions are greater than its income. An NOL can be carried backwards or forwards for accounting purposes.
A convertible bond is a bond that can be converted into a predetermined number of shares, at the option of the bond holder. Enterprise value is a company's market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. If the convertible bonds are in-the-money (ie the conversion price of the bonds is below the current share price), they count as additional dilution to the Equity Value; if they're out-of-the-money , just count the face value of the convertibles as debt.
The treasury stock method is used to calculate the net increase in shares outstanding if in-the-money options and warrants were to be exercised. Click here for a fuller description of how it works.
The technical markets questions:
Options derive their prices from the value of other assets and are contingent upon specific events. The value of the option will depend on factors including: the value of the underlying asset; the variance in the value of the underlying asset, the strike price at which the option comes into effect, the time to the option's expiration and the riskless interest rate relating to the option's life. Click here for a detailed guide.
The culture questions
"Banks are increasingly realising that excellence isn't just about making money," says Logan Naidu at recruitment firm Dartmouth Partners. "Expect to be asked questions relating to banks' own values and come with firm examples about how you’ve tackled ethical dilemmas."