Om Namah Shivaya

CA MONK’S

101 Investment Banking Interview

Questions & Answers
Complete Guide to crack an interview for Investment banking

By CA Shivam Palan (IIMI)

Reading Material for CA Monk Financial Modeling Course

Website: - www.camonk.com
 Investment Banking Interview Questions || CA Monk

Title: The 101 Investment Banking Interview Questions & Answers

Author’s Name: Shivam Palan

Published by: Shivam Palan

Publisher’s Address: CA Monk, Near Sri Shivam Hotel Ring Road Lohiya ward, Gondia-
MH- 441614 (Mobile No: +91 8767613647)

Publisher’s Details: CA Monk, Near Sri Shivam Hotel Ring Road Lohiya ward, Gondia-
MH- 441614 (Mobile No: +91 8767613647; email id: [email protected])

First Edition

ISBN No: (Application Reference numbers) Copyright: © CA Monk

Special Thanks to Ratan Palanki & Trishika Shetty for helping in doing research related to
interview questions.

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Basic requirements to get into the IB domain:

● Financial Modelling certification course (Preferred).
Check out camonk.com Financial Modeling Course.
● Prepare a financial model for an existing or new company (Attach the same along
with CV- Exudes the candidate's confidence).
● PPT skills: Presentation and soft skills will be tested.
● Bonus if the candidate has witnessed and been part of a live Merger/ acquisition.
● Should be familiar with financial ratios
● Should have an understanding of the financial statements- 3 Part financial statements.
Questions Frequently asked in Investment Banking Interviews:
Que 1: Why are you passionate about investment banking?
Or
What about investment banking gets you excited?
Or
What have you done in the past for you to get interested in investment banking?

Answer: It is a substitute to tell me about yourself.

The most important qualities of an investment banker:
Investment Banker Qualifications/Skills:
1. Strong communication
2. Analytical Skills
3. Interpersonal skills.
4. Ability to work in a fast-paced & dynamic environment.
(Note: Candidate must quote personal experience and real-life scenarios for the same)
Que 2: Tell me about a company or a recent deal you find interesting.
Or
Tell me a merger that is going on live as we speak.
Answer: -Elon Musk acquires twitter in October 2022 at a total cost of $ 44 Million.
-Air India returned to Tata group in Jan 2022 for a $2.4 billion bid. TATA Sons have
merged with Vistara and AirAsia to create a major entity in Indian Aviation.
-Adani Group led by Gautam Adani extended its reach in the media sector and currently
owns 37.45% of NDTV through subsidiary RRPR Holding Pvt. Ltd. and VCPL.
-PVR and INOX Leisure merged in 2022 to become the largest entertainment company in
the country.

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-Building a Financial giant – HDFC bank board eventually approved the amalgamation of
HDFC Investments and HDFC Holdings with HDFC Ltd. into HDFC bank.
-Adani enters the cement space, and Adani reportedly became the second-largest cement
maker in India after completing the acquisition of cement players. Ambuja Cements and
ACC from Swiss cement major Holicim. Adani acquired Holicim’s stake in the two
companies with a bid of around $10.5 billion.
-Broadcom proposed to acquire software firm Vmware in a cash and stock deal worth $61
Billion.
-Adobe acquired the web collaborative design platform Figma for approx. $20 Billion in
cash and stock in September 2022 in a deal that is expected close to 2023.
- Oracle paving further expansion into health care, June 2022 acquired Cerner, a health
information technology service supplier for $28.3 Billion.
Que 3. Discuss risks that you have taken in your life.
Answer: As an Investment Banker most of the time you should take tough decisions. Before
taking a decision you need to account for political changes and market trends. Therefore, you
need to show your ability to take calculated risks and demonstrate adequate analytical skills.
Here, you also need to highlight the logical assumptions made by you while taking any risky
decision. Investment Banking is more about “roughly right” instead of “precisely accurate.”
Que 4: If you had only had 1 statement and I wanted to review the overall health
of a company – which statement would I use and why?
Answer: You would use the Cash Flow Statement because it gives a true picture of how
much cash the company is generating, independent of all the non-cash expenses you might
have. And that’s the #1 thing you care about when analyzing the overall financial health of
any business – its cash flow.
Que 5. Let’s say I could only look at 2 statements to assess a company’s prospects
– which 2 would I use and why?
Answer: You would pick the Income Statement and Balance Sheet because you can create
the Cash Flow Statement from both of those (assuming, of course, that you have “before” and
“after” versions of the Balance Sheet that correspond to the same period the Income
statement is tracking).
Que 6. Walk me through how you create a revenue model for a company.
Answer: There are 2 ways you could do this: a bottoms-up build and a tops-down build.
• Bottoms-Up: Start with individual products/customers, estimate the average sale value or
customer value, and then the growth rate in sales and sale values to tie everything together.
• Tops-Down: Start with “big-picture” metrics like overall market size, then estimate the
company’s market share and how that will change in coming years, and multiply to get to
their revenue.

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Of these two methods, bottoms-up is more common and is taken more seriously because
estimating “big-picture” numbers is almost impossible.
Que 7. Let’s say we’re trying to create these models but don’t have enough
information or the company doesn’t tell us enough in its filings – what do we do?
Answer: Use estimates. For the revenue, if you don’t have enough information to look at
separate product lines or divisions of the company, you can just assume a simple growth rate
into future years.
For the expenses, if you don’t have employee-level information then you can just assume that
major expenses like selling, general and administrative expenses are a per cent of revenue
and carry that assumption forward.
Que 8. Walk me through what flows into Retained Earnings.
Answer:
Retained Earnings = Old Retained Earnings Balance + Net Income – Dividends Issued
If you’re calculating Retained Earnings for the current year, take last year’s Retained
Earnings number, add this year’s Net Income and subtract however much the company paid
out in dividends.
Que 9. Walk me through what flows into Additional Paid-In Capital (APIC).
Answer: APIC = Old APIC + Stock-Based Compensation + Value of Stock Created by
Option Exercises Take the balance from last year, add this year’s stock-based compensation
number, and then add in the value of new stock created by employees exercising options this
year.
Que 10. If Depreciation is a non-cash expense, why does it affect the cash
balance?
Answer: Although Depreciation is a non-cash expense, it is tax-deductible. Since taxes are a
cash expense, Depreciation affects cash by reducing the amount of taxes you pay.
Que 11. Why is the Income Statement not affected by changes in Inventory?
Answer: This is a common interview mistake – incorrectly stating that working capital
changes show up on the Income Statement. In the case of Inventory, the expense is only
recorded when the goods associated with it are sold – so if it’s just sitting in a warehouse, it
does not count as a Cost of Good Sold or Operating Expense until the company manufactures
it into a product and sells it.
Que 12. Walk me through the major items in Shareholders’ Equity.
Answer: Common items include:
• Common Stock – Simply the par value of however much stock the company has issued.
• Retained Earnings-How much of the company’s Net Income has “saved up” over time.

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• Additional Paid in Capital-This keeps track of how much stock-based compensation has
been issued and how much new stock employees exercising options have created. It also
includes how much over-par value a company raises in an IPO or other equity offering.
• Treasury Stock–The dollar amount of shares that the company has bought back.
• Accumulated Other Comprehensive Income–This is a “catch-all” that includes other
items that don’t fit anywhere else, like the effect of foreign currency exchange rates
changing.
Que 13. How do you know if your DCF is too dependent on future assumptions?
Answer: The “standard” answer: if significantly more than 50% of the company’s Enterprise
Value comes from its Terminal Value, your DCF is probably too dependent on future
assumptions.
In reality, almost all DCFs are “too dependent on future assumptions” – it’s actually quite rare
to see a case where the Terminal Value is less than 50% of the Enterprise Value.
But when it gets to be in the 80-90% range, you know that you may need to re-think your
assumption.
Que 14. If cash collected is not recorded as revenue, what happens to it?
Answer: Usually, it goes into the Deferred Revenue balance on the Balance Sheet under
Liabilities.
Over time, as the services are performed, the Deferred Revenue balance becomes real
revenue on the Income Statement and the Deferred Revenue balance decreases.
Que 15. What’s the difference between accounts receivable and deferred
revenue?
Answer: Accounts receivable have not yet been collected in cash from customers, whereas
deferred revenue has been. Accounts receivable represents how much revenue the company is
waiting on, whereas deferred revenue represents how much it has already collected in cash
but is waiting to record as revenue.
Que 16. How do you calculate fully diluted shares?
Answer: Take the basic share count and add in the dilutive effect of stock options and any
other dilutive securities, such as warrants, convertible debt, or convertible preferred stock.
To calculate the dilutive effect of options, you use the Treasury Stock Method (detail on this
below).
Let’s say a company has 100 shares outstanding, at a share price of RS. 10 each. It also has
10 options outstanding at an exercise price of Rs.5 each – what is its fully diluted equity
value?
Its basic equity value is Rs.1,000 (100 * Rs.10 = Rs.1,000). To calculate the dilutive effect of
the options, first, you note that the options are all “in the money” – their exercise price is less

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than the current share price. When these options are exercised, there will be 10 new shares
created – so the share count is now 110 rather than 100.
However, that doesn’t tell the whole story. To exercise the options, we had to“pay” the
company Rs.5 for each option (the exercise price).
As a result, it now has Rs.50 in additional cash, which it now uses to buy back 5 of the new
shares we created.
So the fully diluted share count is 105, and the fully diluted equity value is Rs.1,050.
Que 17. Why do companies report both GAAP and non-GAAP (or “ProForma”)
earnings?
Answer: These days, many companies have “non-cash” charges such as Amortization of
Intangibles, Stock-Based Compensation, and Deferred Revenue Write-down in their Income
Statements. As a result, some argue that Income Statements under GAAP no longer reflect
how profitable most companies truly are. Non-GAAP earnings are almost always higher
because these expenses are excluded.
18. A company has had positive EBITDA for the past 10 years, but it recently
went bankrupt. How could this happen?
Answer: Several possibilities are there because of which the company can become bankrupt:
1. The company is spending too much on Capital Expenditures – these are not reflected
at all in EBITDA, but it could still be cash-flow negative.
2. The company has high-interest expenses and is no longer able to afford its debt.
3. The company’s debt all matures on one date and it is unable to refinance it due to a
“credit crunch” – and it runs out of cash completely when paying back the debt.
4. It has significant one-time charges (from litigation, for example) and those are high
enough to bankrupt the company.
Remember, EBITDA excludes investment in (and depreciation of) long-term assets, interest,
and one-time charges – and all of these could end up bankrupting the company.
Que 19. How do you value a company?
Answer: This question, or variations of it, should be answered by talking about primary
valuation methodologies:
1. Book Value
One of the most straightforward methods of valuing a company is to calculate its book value
using information from its balance sheet. Due to the simplicity of this method, however, it’s
notably unreliable. To calculate book value, start by subtracting the company’s liabilities
from its assets to determine owners’ equity. Then exclude any intangible assets. The figure
you’re left with represents the value of any tangible assets the company owns.
2. Discounted Cash Flows
Another method of valuing a company is with discounted cash flows. This technique is
highlighted in Leading with Finance as the gold standard of valuation.

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Discounted cash flow analysis is the process of estimating the value of a company or
investment based on the money, or cash flows, it’s expected to generate in the future.
Discounted cash flow analysis calculates the present value of future cash flows based on the
discount rate and period of analysis.
Discounted Cash Flow = Terminal Cash Flow / (1 + Cost of Capital) #of Years in the Future
The benefit of discounted cash flow analysis is that it reflects a company’s ability to generate
liquid assets. However, the challenge of this type of valuation is that its accuracy relies on the
terminal value, which can vary depending on the assumptions you make about future growth
and discount rates.
Example:
There is a privately held company X Pvt. Ltd that is operating in the retail space, and is now
scouting for angel investors. The details are pertinent to valuing X Pvt. Ltd are as follows –
The internal assessment of the rate of market return for the industry is 11%. The FCFs for the
next 3 years are as follows:

Year Y1 Y2 Y3
Future cash flow 100 120 150

What is the potential value to be placed on X Pvt? Ltd?

Finally, the future cash flows can be discounted at the WACC obtained above as under –

Year Y1 Y2 Y3
Future cash flow 100 120 150
Discount factor @11% 0.863 0.745 0.643
PV of cashflows 86.3 89.4 96.45

Value of the firm 272.15

3. Market Capitalization
Market capitalization is one of the simplest measures of a publicly traded company's value.
It’s calculated by multiplying the total number of shares by the current share price.
Market Capitalization = Share Price x Total Number of Shares
One of the shortcomings of market capitalization is that it only accounts for the value of
equity, while most companies are financed by a combination of debt and equity.
In this case, debt represents investments by banks or bond investors in the future of the
company; these liabilities are paid back with interest over time. Equity represents
shareholders who own stock in the company and hold a claim to future profits.

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Let's take a look at enterprise values—a more accurate measure of company value that takes
these differing capital structures into account.
4. Enterprise Value
The enterprise value is calculated by combining a company's debt and equity and then
subtracting the amount of cash not used to fund business operations.
Enterprise Value = Debt + Equity – Cash
EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest –
Cash and Equivalents
We reduce the cash while calculating EV since because it will reduce the acquiring costs of
the target company. It is assumed that the acquirer will use the cash immediately to pay off
a portion of the theoretical takeover price. Specifically, it would be immediately used to pay
a dividend or buy back debt.
Example:
The balance sheet of H K Ltd. is as follows:
Particulars Amount

Non-current assets 1000

Current assets
Trade receivables 500
Cash and cash equivalents 500
Total 2000

Shareholder's Funds 800

Long term debt 200
Current liabilities and provisions 1000
Total 2000

The shares are actively traded and the Current Market Price (CMP) is Rs. 12 per share.
Shareholder funds represent 70,000 shares of Rs.10 each and the rest is retained earnings.
Calculate the Enterprise Value of HK Ltd.

Particulars Amount
Shares Outstanding 70,000
CMP Rs 12
Market capitalisation 8,40,000
Add: Debt 2,00,000
Less: Cash and Cash
equivalents -5,00,000
Enterprise Value (EV) 5,40,000

It is not a bad idea to research an industry or two (the easiest way is to read an industry report
by a sell-side analyst) before the interview to anticipate a follow-up question like “tell me
about a particular industry you are interested in and the valuation multiples commonly used.”

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Que 20. What is typically higher – the cost of debt or the cost of equity?
Or
How do you estimate a discount rate for DCF?
Answer: The cost of equity is higher than the cost of debt because the cost associated with
borrowing debt (interest expense) is tax deductible, creating a tax shield.
Additionally, the cost of equity is typically higher because, unlike lenders, equity investors
are not guaranteed fixed payments, and are last in line at liquidation.
The Discount Rate should be the company's WACC. To calculate WACC, one multiples the
cost of equity by the % of equity in the company's capital structure, and adds to it the cost of
debt multiplied by the % of debt on the company's structure.
Que 21. How do you calculate the cost of equity?
Answer: Cost of Equity Formula
Cost of Equity (re) = Risk Free Rate (rf) + β x Market Risk Premium (rm-rf )
Que 22. What is the difference between enterprise value and equity value?
Answer: Enterprise Value: It is the value of the operations of a company attributable to all
providers of capital. It is also important to think of Enterprise value as the takeover value.
The main need for enterprise value is to create valuation ratios/metrics.
Equity Value: a component of enterprise value that represents only the proportion of value
attributable to shareholders.
Que 23. When should a company issue equity, rather than debt, to fund its
operations?
Answer: In the following situations company issue equity instead of Debt.
1. If the company feels that the stock price is inflated, It may raise a large amount of
capital relative to the percent of ownership sold.
2. If the company plan on investing in new projects it may not produce immediate or
consistent cash flows to make interest payments.
3. In this situation, when a company wants to adjust its capital structure or pay down
debt.
4. In the case, where the company’s owners want to sell off a portion of their ownership.
Que 24. What is DCF?
Answer: A discounted cash flow is short known as DCF. It is a valuation method used to
estimate the lucrativeness of an Investment opportunity. It can be performed by using free
cash flow projections and discounts to get present value. It is also used to evaluate the
potential for the specific Investment. If the value arrived using DCF analysis. Generally, it is
higher than the current cost of the Investment.

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Que 25. What is a leveraged buyout?

Answer: Leverage buyout is a term, which refers to the use of borrowed money to buy or
invest in another firm.
Que 26. Could you ever end up with negative shareholders’ equity? What does it
mean?
Answer: Yes. It is common to see this in 2 scenarios:
1. Leveraged Buyouts with dividend recapitalizations – it means that the owner of the
company has taken out a large portion of its equity (usually in the form of cash), which can
sometimes turn the number negative.
2. It can also happen if the company has been losing money consistently and therefore has a
declining Retained Earnings balance, which is a portion of Shareholders’ Equity.
It doesn’t “mean” anything in particular, but it can be a cause for concern and possibly
demonstrate that the company is struggling (in the second scenario).
Note: Shareholders’ equity never turns negative immediately after an LBO – it would only
happen following a dividend recap or continued net losses.
Que 27. Would an LBO or DCF give a higher valuation?
Answer: Technically it could go either way, but in most cases, the LBO will give you a lower
valuation.
Here’s the easiest way to think about it: with an LBO, you do not get any value from the cash
flows of a company between Year 1 and the final year – you’re only valuing it based on its
terminal value.
With a DCF, by contrast, you’re taking into account both the company’s cash flows in
between and its terminal value, so values tend to be higher.
Note: Unlike a DCF, an LBO model by itself does not give a specific valuation. Instead, you
set the desired IRR and determine how much you could pay for the company (the valuation)
based on that.
Que 28. Both M&A premiums analysis and precedent transactions involve
looking at previous M&A transactions. What’s the difference in how we select
them?
Answer:
● All the sellers in the M&A premiums analysis must be public.
● Usually we use a broader set of transactions for M&A premiums – we might use fewer
than 10 precedent transactions but we might have dozens of M&A premiums. The
industry and financial screens are usually less stringent.
● Aside from those, the screening criteria are similar – financial, industry, geography, and
date.

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Practical Problems Case 1:

Shares of A Ltd. are being quoted at a price–earning ratio of 8 times. The company
retains ₹ 5 per share which is 45% of its Earning Per Share.
You are required to compute
(i) The cost of equity to the company if the market expects a growth rate of 15% p.a.
(ii) If the anticipated growth rate is 16% per annum, calculate the indicative market
price with the same cost of capital.
(iii) If the company's cost of capital is 20% p.a. & the anticipated growth rate is 19%
p.a., calculate the market price per share.
Solution:
(i) Cost of Capital
Retained earnings (45%) ₹ 5 per share
Dividend (55%) ₹ 6.11 per share
EPS (100%) ₹ 11.11 per share
P/E Ratio 8 times
Market price ₹ 11.11 x 8 = ₹ 88.88
Cost of equity capital
= (DivPrice×100)+Growth%= (₹6.11/₹88.88×100)+15%= 21.87%
(ii) Market Price =(DividendCost of Capital(%)(/Cost of capital−Growth Rate(%))
=₹ 6.11(21.87−16)%=₹104.08 per share
(iii) Market Price =₹ 6.11/(20−1𝟗)%= ₹611.00 per share
Practical Problems Case 2:
M/s X Ltd. has paid a dividend of ₹ 2.5 per share on a face value of ₹ 10 in the financial
year ending on 31st March 2009. The details are as follows:
The current market price of share=₹ is 60
The growth rate of earnings and dividends=10%
Beta of share=0.75
Average market return=15%
The risk-free rate of return=9%
Calculate the intrinsic value of the share.

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Solution:
Intrinsic Value P0=D1/k−g
Using CAPM
k = Rf+ β(Rm− Rf) R f = Risk Free Rate
β = Beta of Security
Rm = Market Return
=9%+0.75 (15% −9 %)=13.5%
P= 2.5×1.10/1.135−1.10
= ₹ 78.57
Que 27. When should you value a company using a revenue multiple vs.
EBITDA?
Answer: Companies with negative profits and EBITDA will have meaningless EBITDA
multiples. As a result, Revenue multiples are more insightful.
Que 28. How to calculate beta for a specific company?
Answer: Calculating betas for historical returns is a calculation of future beta because of
estimation errors. The betas of comparable companies are inaccurate because of different
rates of leverage.
For that you lever the betas of these comparable companies as such:
β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]
Then, you need to average the unlevered beta is calculated, re-levered this beta at the target
firm’s capital structure:
β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)]
Que 29. Would you expect a manufacturing company or a technology company to
have a higher Beta?
Answer: A technology company, because technology is viewed as a “riskier” industry than
manufacturing.
Que 30. What are the Innovative ways to finance a startup?
Answer:
1. Personal financing.
2. Family and friends.
3. Peer-to-peer lending.
4. Crowdfunding.
5. Microloans.
6. Vendor financing.

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7. Purchase order financing.

8. Factoring accounts receivables.
Que 31. What is a Pitch Presentation.
Answer: Pitch deck presentation is a short and brief presentation (not more than 20 minutes)
to investors explaining the prospects of the company and why they should invest in the
startup business.
1. Introduction: To start with, the first step is to give a brief account of yourself i.e. who
are you? What are you doing?
2. Team: The next step is to introduce the audience to the people behind the scenes.
3. Problem: Further, the promoter should be able to explain the problem he is going to
solve.
4. Solution: It is very important to describe in the pitch presentation how the company is
planning to solve the problem.
5. Marketing/Sales: The market size of the product must be communicated to the
investors. This can include profiles of target customers, but one should be prepared to
answer questions about how the promoter is planning to attract customers.
6. Projections or Milestones: Financial projections include three basic documents that
make up a business’s
a. financial statements.
b. Income statement
c. Cash flow statement
d. Balance sheet
7. Competition: Every business organization has competition even if the product or service
offered is new and unique. It is necessary to highlight in the pitch presentation how the
products or services are different from their competitors.
8. Business Model: The term business model is a wide term denoting core aspects of a
business including purpose, business process, target customers, offerings, strategies,
infrastructure, organizational structures, sourcing, trading practices, and operational
processes and policies including culture.
9. Financing: If a start-up business firm has raised money, it is preferable to talk about how
much money has already been raised, who invested money into the business and what
they did about it.
Que 32: What is IRR?
Ans: The Internal rate of return (IRR) is a financial metric used to assess the attractiveness
of a particular investment opportunity. When you calculate the IRR for an investment, you
are effectively estimating the rate of return of that investment after accounting for all of its
projected cash flows together with the time value of money. When selecting among several
alternative investments, the investor would then select the investment with the highest IRR,
provided it is above the investor's minimum threshold. The main drawback of IRR is that it
is heavily reliant on projections of future cash flows, which are notoriously difficult to
predict.

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● The ultimate goal of IRR is to identify the rate of discount, which makes the present
value of the sum of annual nominal cash inflows equal to the initial net cash outlay for
the investment.
● The internal rate of return (IRR) is the annual rate of growth that an investment is
expected to generate.
● IRR is calculated using the same concept as net present value (NPV), except it sets the
NPV equal to zero.
● The ultimate goal of IRR is to identify the rate of discount, which makes the present
value of the sum of annual nominal cash inflows equal to the initial net cash outlay for
the investment.
● IRR is ideal for analyzing capital budgeting projects to understand and compare potential
rates of annual return over time.
● In addition to being used by companies to determine which capital projects to use, IRR
can help investors determine the investment return of various assets.

Que 33: What is Relative Valuation method?

Answer: Relative valuation, also referred to as comparable valuation, is a very useful and
effective tool in valuing an asset. Relative valuation involves the use of similar, comparable
assets in valuing another asset. (also known as comparable valuation)
Que 34: What is Pre-money v/s Post-money valuation?
Answer: Pre-Money
● Pre-money valuation is a financial figure used to determine the overall value of a
company before any capital investments are made.
● This type of valuation is typically calculated by assessing factors such as assets,
liabilities, revenue, profits, and other relevant financial elements, which are often
dependent on the nature of the business and the sector of the economy in which it
operates.

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● Moreover, the analysis will likely include an evaluation of the company's business plan
and marketing strategy, the relevant market, competitors in the space, and other external
economic factors that will ultimately affect the company's ability to expand and succeed.
● This assessment is based on the company's standing before any fundraising rounds take
place.
Post-Money Valuation
● Post-money valuation looks at the value of a business after the investment of capital,
often through some form of fundraising.
● With a post-money valuation, an investor offers a sum of money based on a stated
post-money valuation.
● Of course, this means that there is also an implied pre-money valuation amount inherent
in that offer.
● The value of the shares before the investment is simply the pre-money valuation divided
by the number of outstanding shares.
● However, to receive the investor’s capital, new shares must be issued.
● This means that the overall number of shares increases, which then dilutes the original
shareholder’s portion of the pie.
Que 35. What are the modes of Financing for startups?
Answer: (i) Bootstrapping: When an individual attempts to found and build a company
from personal finances or the operating revenues of the new company are called Boot
Strapping.
(ii) Angel Investors: Angel investors invest in small startups or entrepreneurs. Often, angel
investors are among an entrepreneur’s family and friends. The capital angel investors provide
may be a one-time investment to help the business grow or an ongoing injection of money to
support and carry the company through its difficult early stages.
(iii) Venture Capital Funds: Venture capital funds are investment funds that manage the
money of investors seeking to invest in start-ups and small- to medium-sized enterprises with
strong growth potential. These investments are generally characterized as
high-risk/high-return opportunities.
Que 36. What the the important Financial Ratios:
● Quick ratio=(Current Assets – Inventory)/Current Liabilities
● Current ratio= Current Assets / Current Liabilities
● Days Working Capital = ((Current Assets - Current Liabilities) x 365) / Revenue from
Sales
● Debt to equity ratio = (Long-Term Debt + Short Term Debt + Leases) / Shareholders’
Equity
● Debt to total assets= Total Debt / Total Assets
● Profit Margin Ratio = Net Income / Net Sales
● Return on Assets = Net Income / Average Total Assets
● Return on Equity = Net Income / Shareholders’ Equity

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● Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

● Receivables Turnover = Net Annual Credit Sales / Average Accounts Receivable
Que 37. 5 Stepts needed while calculating DCF?
1. Forecasting free cash flow.
2. Forecasting the terminal value.
3. Estimating the weighted average cost of capital (WACC).
4. Discounting the projected cash flows and terminal value.
5. Running sensitivity analysis.
Que 38. What is non controlling interest?
The balance sheet’s non controlling interest reflects the percentage of the book value of a
majority, but not wholly owned subsidiary that a company does not own.
Que 39. Why do you subtract cash in the enterprise value formula?
Cash gets subtracted when calculating enterprise value because cash is considered a
nonoperating asset and because cash is already implicitly accounted for within equity value.
Que 40. What are some examples of commonly used valuation multiples?
Probably the most common valuation metric used in banking is EV/EBITDA. Some others
include EV/sales, EV/EBIT, price to earnings (P/E), and price to book value (P/BV).
Que 41. What is the advantage & disadvantage of comparable company method?
An advantage of the comparable company methodology is that it uses current market values
to conclude value. Assuming there are good comparable companies, it is usually the most
important method when valuing a company and is indeed the way in which the public market
does typically value publicly traded companies.
However, it is less useful if there are few or no good comparable companies, or if you are
valuing a company that has no revenue or EBITDA or net income.
Que 42. What are the advantages and disadvantages of precedent transaction
method?
An advantage of the precedent transaction methodology is that it reflects the value that buyers
were actually willing to pay for companies. Remember that at the end of the day, value is
what someone is willing to pay. It can also be the most useful methodology when there are
many very recent and very relevant transactions. However, a large disadvantage is that
valuation multiples are highly sensitive to market conditions, and often precedent transactions
will reflect deals that occurred over many years and over different types of market conditions.
Plus, deal dynamics can play an important role in determining the purchase price of a
transaction, and these deal dynamics may have a material impact on valuation multiples for a
particular deal that may make that deal less relevant. Finally, valuation multiples for this
methodology tend to show a wider range of values than do the comparable company
methodology.

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Que 43. What are the advantages and disadvantages of discounted cash flow?
An advantage of the discounted cash flow methodology is that it can be performed for any
type of company, even a pre revenue company. Because it is so variable to the forecasts and
other impacts, it is also easy to conclude a wide range of values from the DCF, which is
helpful when you need to match a preconceived notion of value. Finally, it is theoretically the
correct way to value a company. A very large disadvantage of the DCF is that it is very
sensitive to the cash flow forecasts, WACC, and terminal multiple or perpetuity growth
factor, which makes it very unreliable.
Que 44. How do investment bankers value companies?
Investment bankers value companies using three primary methodologies: comparable
company analysis, precedent transaction analysis, and discounted cash flow (DCF) analysis.
Que 45. What is wrong with using a multiple such as EV/earnings or price/
EBITDA?
Enterprise value (EV) equals the value of the operations of the company attributable to all
providers of capital. That is to say, because enterprise value incorporates both debt and
equity, it is not dependent on the choice of capital structure (i.e., the percentage of debt and
equity). If we use enterprise value in the numerator of our valuation metric, to be consistent
(apples-to-apples) we must use an operating or capital structure neutral (unlevered) metric in
the denominator, such as sales, EBIT, or EBITDA. These metrics are also not dependent on
capital structure because they do not include interest expense. Operating metrics such as
earnings do include interest and so are considered leveraged or capital structure dependent
metrics. Therefore EV/earnings is an apples-to-oranges comparison and is considered
inconsistent. Similarly price/ EBITDA is inconsistent because price (or equity value) is
dependent on capital structure (levered) while EBITDA is unlevered (again, apples-
to-oranges). Price/earnings is fine (apples-to-apples) because they are both levered.
Que 46. What are some factors to consider when picking comps?
Some factors to consider when picking comps include finding companies that are in the same
industry with the same type of business model, operate in the same or similar geographies,
are of similar size, and have similar growth and risk characteristics.
Que 47. How do you calculate free cash flow?
Free cash flow equals EBIT less taxes plus D&A less capital expenditures less the change in
working capital.
Que 48. Why do you use unlevered free cash flow?
You use unlevered free cash flow because we want the DCF value concluded to be enterprise
value.
Que 49. What is the terminal value and how do you calculate it?
Terminal value is the value of the company beyond the projection period. We can use one of
two methods for calculating terminal value: either the perpetuity growth (also called the
Gordon growth) method or the terminal multiple method. To use the perpetuity growth

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method, we must choose an appropriate rate by which the company can grow forever. This
growth rate should be modest (for example, average long term expected GDP growth or
inflation). To calculate terminal value we multiply the last year’s free cash flow (year 5) by
one plus the chosen growth rate, and then divide by the discount rate less growth rate. The
second method, the terminal multiple method, is the one that is more often used in banking.
Here we take an operating metric for the last projected period (year 5) and multiply it by an
appropriate valuation multiple. The most common metric to use is EBITDA. We typically
select the appropriate EBITDA multiple by taking what we concluded for our comparable
company analysis on a last twelve months (LTM) basis.
Que 50. Why do you present value the cash flows?
You present value the cash flows because we want to calculate the enterprise value of the
company at today’s value. Since money today is worth more than money tomorrow, we need
to discount or present value all of the cash flows and the terminal value.
Que 51. How would you value a biotechnology startup with one potential
blockbuster drug that is currently in clinical trials?
To value a biotechnology startup without current revenue you would probably need to run a
DCF assuming the drug passes clinical trials and goes to market. However, you would
probability weight the DCF value based on the likelihood that the drug does indeed pass
trials.
Que 52. Of the three main valuation methodologies, which ones would you expect
to give you higher or lower value?
First, the precedent transactions methodology is likely to give a higher valuation than the
comparable company methodology. This is because when companies are purchased, the
target’s shareholders are typically paid a price that is higher than the target’s current stock
price. Technically speaking, the purchase price includes a control premium. Valuing
companies based on M&A transactions (a control-based valuation methodology) will include
this control premium and therefore likely result in a higher valuation than a public market
valuation (minority interest based valuation methodology). The discounted cash flow (DCF)
analysis will also likely result in a higher valuation than the comparable company analysis
because DCF is also a control-based methodology and because most projections tend to be
pretty optimistic. Whether DCF will be higher than precedent transactions is debatable, but it
is fair to say that DCF valuations tend to be more variable because the DCF is so sensitive to
a multitude of inputs or assumptions.
Que 53. How might you forecast revenue for a retailer?
You might forecast revenue for a retailer simply by growing last period’s revenue by some
growth rate. You might also forecast revenue by multiplying the number of stores or store
square footage by some appropriate metric for sales per store or sales per square footage. In a
very detailed model, you might forecast revenue by aggregating the revenue forecast for each
store or even for each product sold by the company.

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Que 54. How might you forecast revenue for a telecommunications company?
You might forecast revenue for a telecommunications company simply by growing last
period’s revenue by some growth rate. You might also forecast revenue by multiplying
average revenue per user by the number of users. You might forecast the number of users
each period by adding last period’s users plus new users less churn.
Que 55. Why might one company want to acquire another company?
There are a variety of reasons why companies make acquisitions, including both the stated
and unstated reasons. One reason is that the buyer’s own organic growth has slowed or
stalled, and needs to grow in other ways (via acquiring other companies) in order to satisfy
the growth expectations of markets. Another prominent reason is that the buyer expects the
deal to result in significant synergies. The buyer may also view the target as undervalued, or
view its own stock as overvalued. Or, the CEO of the buyer wants to be CEO of a larger
company, either because of ego or legacy, or because he or she will get paid more and have a
higher profile. Other reasons include diversification or to prevent a competitor from making
the acquisition.
Que 56. What are some of the differences between a merger and a tender offer?
A merger can be used for friendly deals, while a tender offer can be used for friendly or
hostile/unsolicited deals. In a merger, the buyer and seller negotiate the terms of the
transaction and then the transaction is put up for a vote from the seller’s shareholders. In a
tender offer, the buyer makes an offer directly to the target’s shareholders. A successful
merger will typically result in 100 percent of the shares being acquired, while a tender offer
typically will not. In a tender offer, the buyer will typically have to effectuate a second
transaction to acquire all 100 percent of shares. Tender offers are also generally quicker to
effectuate if the purchase consideration is cash, while mergers are more likely if the
consideration is stock or if there are significant regulatory issues anticipated.
Que 57. Do buyers generally prefer stock or asset deals?
Buyers tend to prefer deals structured as asset purchases even though they tend to take longer
to complete because of the step-up of the tax basis, and because of the ability to pick and
choose assets and leave certain liabilities behind.
Que 58. Walk me through a sell-side M&A process?
In a typical sell-side M&A transaction, known as a two stage auction process, the investment
bank representing the seller first sends out a teaser to prospective buyers along with a
confidentially agreement. The investment bank will then send out a Confidential Information
Memorandum (CIM) to parties that are interested and have signed the confidentially
agreement. Buyers will then be expected to submit first round non-binding bids. The bank
and the client will then select which buyers get invited into the second round of bidding.
Second round buyers will get invited to management presentations and are given the
opportunity to do due diligence and use the data room. Binding final-round bids are then
submitted, and the sell-side investment bank and its client will decide who wins the auction.
Following any further negotiations and due diligence, the contracts will be signed and,
following any regulatory or other approval processes, the deal will close.

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Que 59. Would an investment bank prefer to be on the sell side of an M&A deal
or the buy side?
An investment bank would generally prefer to be on the sell side of an M&A deal because the
sell-side adviser is much more likely to receive a success fee/transaction fee for the deal
being completed.
Que 60. If a company with a low P/E acquires a company with a high P/E in an
all stock deal, will the deal likely be accretive or dilutive?
Other things being equal, if the price to earnings ratio (P/E) of the acquiring company is
lower than the P/E of the target, then the deal will be dilutive to the acquirer’s earnings per
share (EPS). This is because the acquirer has to pay more for each dollar of earnings than the
market values its own earnings. Hence, the acquirer will have to issue proportionally more
shares in the transaction. Mechanically, pro forma earnings, which equals the acquirer’s
earnings plus the target’s earnings (the numerator in EPS), will increase less than the pro
forma share count (the denominator), causing EPS to decline.
Que 61. What is an LBO?
A leveraged buyout is an acquisition of a company or division of a company by a private
equity firm using debt for a substantial percentage of the acquisition financing.
Que 62. In a period of inflation (rising prices), which method of inventory (LIFO
or FIFO) would likely result in a higher level of inventories on the balance sheet?
In a period of inflation, the FIFO method of inventory will likely result in a higher level of
inventories on the balance sheet because older inventory at lower prices will be used first,
leaving the value of newer inventory at higher prices on the balance sheet.
Que 63. What is a deferred tax asset or liability?
A deferred tax asset or deferred tax liability is a balance sheet item reflecting the difference
between taxes reported on financial statements and taxes actually paid to the government,
mostly resulting from timing differences.

Que 64. Why do we depreciate fixed assets?

Fixed assets are depreciated so as to try to match the cost of the fixed assets with the benefits
of using them (i.e., to generate revenues).
Que 65. Explain how the three financial statements are integrated.
The three financial statements are integrated in a number of ways. For example, everything
contained in the income statement will affect net income, and net income affects retained
earnings on the balance sheet and is also the first line of the cash flow from operations
section of the cash flow statement. Similarly, every change on the balance sheet must be
reflected as a use or source of cash on the cash flow statement and will affect cash. Moreover,
the cash flow statement can be thought of as a “bridge” between the income statement and the
balance sheet.

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Que 66. What is a discount rate?

A discount rate, also referred to as an investor’s opportunity cost of capital, is the return
required by investors to invest in a project of a specified level of risk for a specified time
period. The discount rate is also the rate used to present value cash flows.
Que 67. How do you estimate a discount rate?
Conceptually, you can estimate a discount rate by taking the risk free rate for the appropriate
time period and adding the expected inflation rate and an appropriate risk premium for an
investment at that level of risk.
Que 68. How should companies decide whether or not to invest in a project?
In theory at least, companies should decide whether or not to invest in a project if the
project’s internal rate of return (IRR) is greater than the project’s discount rate or hurdle rate,
or if the net present value (NPV) of the project is greater than zero.
Que 69. What kinds of things should companies include in cash flow when
analyzing NPV or IRR?
When analyzing NPV or IRR, cash flow should include all of the cash flows that directly
relate to the project, including the initial investment as well as ongoing costs and capital
expenditures, working capital requirements, and revenues and profits.
Que 70. Under what circumstances will the net present value equal zero?
Net present value will equal zero when a project’s IRR is exactly equal to the discount
rate used in the NPV formula.
Que 71. Why does adding more debt to the capital structure raise the cost of
debt?
Adding more debt to a company’s capital structure raises the cost of debt because it raises the
risk of distress and bankruptcy, which results in a significant loss of value, and therefore
makes all of the company’s debt riskier.
Que 72. What are some advantages and disadvantages to issuing debt?
Some advantages to issuing debt include a lower cost of capital than equity, given it is less
risky to investors and because interest is tax deductible. Some disadvantages to issuing debt
include an increased risk of financial distress or bankruptcy; mandatory payment of interest
expense, which reduces the flexibility of management; and covenants, which may restrict the
company’s ability to issue more debt and penalize the company if it does not maintain certain
operating performance and/or leverage.
Que 73. What are some advantages and disadvantages to issuing stock?
Some advantages to issuing stock include no mandatory dividend payments, the least
risk-adverse investor class, and currency that can be used for acquisitions. Some
disadvantages to issuing stock include the highest cost of capital of any type of funds, the
highest transaction costs to raise the funds, and vulnerability from activist investors.

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Que 74. What are some different ways in which a company can return money to
investors?
A company can return money to investors by paying back or retiring its debt, by issuing
dividends to stockholders, and by buying back its stock.
Que 75. What is yield to maturity, and how do you calculate it?
Yield to maturity represents an investor’s average return earned on a bond that is held to
maturity. You can calculate yield to maturity by using the IRR formula. Specifically, set the
bond’s price equal to the sum of each period’s cash flow (coupons and principle payment)
divided by one plus the YTM to appropriate time period and solve for the YTM.
Que 76. If interest rates rise, what will happen to the price of a bond?
If interest rates rise, the price of a bond will fall.
Que 77. What is duration and why is it important?
Duration reflects the average maturity of a bond or, equivalently, the average amount of time
to each cash flow (the coupon payments and the principal payment). Duration is important
because it helps measure a bond’s sensitivity to interest rate changes and helps institutional
investors match their investment income with their expected liabilities.
Que 78. What are the key assumptions of the Black-Scholes formula for pricing
options?
The key assumptions of the Black Scholes formula used for pricing options are the risk free
interest rate, the underlying stock price, the exercise price, the stock’s expected volatility, and
the time until maturity.
Que 79. What are the differences between an option and a warrant?
An option does not result in new shares being issued and therefore does not cause dilution to
existing shareholders, whereas warrants are issued by the company and result in new shares
being issued.
Que 80. Which is better for a company, higher days sales of inventory or lower,
and why?
It is better for a company to have a lower value for days sales of inventory because it reflects
less money tied up financing inventory. However, if the inventory levels gets too low it may
introduce risk into the company’s production.
Que 81. Which is better for a company, higher accounts receivable days or lower,
and why?
It is better for a company to a have a lower accounts receivable days because the company’s
customers are paying the company faster and that money can be used for other purposes.

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Que 82.Which is better for a company, higher accounts payable days or lower,
and why?
It is better for a company to have a higher value of accounts payable days because the
company’s vendors are helping to finance the company’s operations. However, too high a
value can indicate financial distress and can result in suppliers stopping selling to the
customer.
Que 83. What are some indications that a company might be financially
distressed?
Some indications that a company might be financially distressed include low-interest
coverage ratios or high leverage ratios, poor revenue, cash flow or profitability, escalating
accounts payable days, and declining levels of cash on the balance sheet.
Que 84: Tell me something about finance or the economy that is affecting
markets today?
Research the news of that day and try to answer the question.
Que 85: Talk about a company or a stock that you follow or recommend?
Answer based on the stock price analysis which we have done in class and also remember
that you have done a detailed analysis of that industry as well.
(Brainteasers question from 86 to 90)
Que 86: What is the angle between the hour-hand and minute-hand of a clock at
3:15?
The obvious answer is a zero angle between the hour hand and minute hand at 3:15. But of
course, the obvious answer is wrong. At quarter past the hour, the minute hand is exactly at 3
but the hour hand has moved one fourth of the way between 3 and 4. Since there are 12 hours
on a clock, the difference between the two hands is 1/48th (1/4 times 1/12). And since there
are 360 degrees in a circle, the angle between the two hands is 360 divided by 48, or 7.5
degrees.
Que 87: You are given a three-gallon jug and a five-gallon jug. How do you use
them to get four gallons of liquid?
There is more than one way to answer the question, but here is one solution. Fill the
five-gallon jug completely. Pour the contents of the five-gallon jug into the three-gallon jug,
leaving two gallons of liquid in the five-gallon jug. Next, dump out the contents of the
three-gallon jug and pour the contents of the five-gallon jug into the three-gallon jug. At this
point, there are two gallons in the three-gallon jug. Fill the five-gallon jug and then pour the
contents of the five-gallon jug into the three-gallon jug until the three-gallon jug is full. You
will have poured one gallon, leaving four gallons in the five-gallon jug.
Que 88: A car travels a distance of 60 miles at an average speed of 30 mph. How
fast would the car have to travel the same 60-mile distance home to average 60
mph over the entire trip?

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Here, the obvious answer is 90 mph, but of course, that is not right. This is actually a trick
question! The first leg of the trip covers 60 miles at an average speed of 30 mph. So, this
means the car travelled for two hours (60/30). In order for the car to average 60 mph over 120
miles, it would have to travel for exactly two hours (120/60). Since the car has already
travelled for two hours, it is impossible for it to average 60 mph over the entire trip.
Que 89: You have a 10 × 10 × 10 cube made up of 1 × 1 × 1 smaller cubes. The
outside of the larger cube is completely painted red. On how many of the smaller
cubes is there any red paint?
First, note that the larger cube is made up of 1,000 smaller cubes. The easiest way to think
about this is: How many cubes are not painted? The 8 × 8 × 8 inner cubes are not painted,
which equals 512 cubes. Therefore, 1,000 – 512 = 488 cubes that have some paint.
Alternatively, we can calculate this by saying that two 10 × 10 sides are painted (200) plus
two 10 × 8 sides (160) plus two 8 × 8 sides (128): 200 + 160 + 128 = 488.
Que 90: What is the sum of numbers from 1 to 100?
Remember that brainteasers are not usually designed to test your math ability, so there must
be a shortcut to this type of question. Indeed there is. The trick here is to know that the sum
of numbers from 1 to 100 is made up of exactly 50 pairs of numbers that each total to 101
(i.e., 1 + 100, 2 + 99, 3 + 98). Hence, 50 multiplied by 101 equals 5,050.
Que 91: What are some of the marketing documents that bankers create when
working on a sell-side M&A transaction?
Some of the marketing documents created by bankers when working on a sell-side M&A
transaction include the teaser, confidential information memorandum (CIM), and
management presentation.
Que 92: What are some of the pros and cons of a stock versus asset purchase?
The advantages of a stock purchase are that it can generally be executed faster than an asset
purchase, and is generally used for acquisitions or public companies. Another advantage of
stock purchases is that the seller is not double taxed and in certain circumstances can put off
all taxes. The disadvantages of a stock transaction are that the buyer does not get a step-up of
tax basis, and cannot pick and choose assets to acquire and/or liabilities to leave behind. An
advantage of an asset purchase is that buyers can pick and choose assets to acquire, and leave
behind liabilities and contingent liabilities that it does not want. Another advantage is that
buyers get a step-up in tax basis. A disadvantage is that there is a double layer of taxes to the
seller. Another disadvantage is that transactions often take longer as each asset needs to be
valued and transferred.
Que 93: Why is it important to spread historical financials when building
models?
It is important to spread historical financials when building models for several reasons. First,
you will calculate certain ratios and statistics based on the historical financial statements that
you can use to help select your model drivers and assumptions. Second, the historical balance
sheet is the beginning balance sheet for your forecast model. Third, it is important to compare
historical financial statements with projected financial statements to determine the

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reasonableness of your forecasts, and to help spot modelling mistakes and/or poorly chosen
assumptions.
Que 94. What is the difference between basic and fully diluted shares?
Basic shares represent the number of common shares that are outstanding today (or as of the
reporting date). Fully diluted shares equal basic shares plus the potentially dilutive effect
from any outstanding stock options, warrants, convertible preferred stock, or convertible
debt.
Que 95. What are some important examples of credit ratios?
Some examples of credit ratios include debt to equity ratio, debt to total capitalization ratio,
leverage ratios, and interest coverage ratios.
Que 96. Which return ratio is best to use when comparing companies that have
different capital structures?
Return on invested capital (ROIC) would be the best return ratio to use when comparing
companies that have different capital structures because ROIC is neutral of capital structure.
Que 97. What are the different return ratios used by bankers?
Some of the return ratios used by bankers include return on assets (ROA), return on equity
(ROE), and return on invested capital (ROIC).
Que 98. Why might one company have higher net income margin than another?
One company might have higher net income margin than another if it has higher EBIT
margins, lower interest expense, or a lower effective tax rate.
Que 99. What are some key ratios that we use to analyze financial statements?
Some of the key ratios used to analyze financial statements include growth statistics, such as
revenue growth; profitably ratios, such as gross margin, EBIT margin, and net income
margin; return ratios such as ROA, ROE, and ROIC; credit ratios, such as leverage ratios and
interest coverage ratios; and activity ratios, such as days sales of inventory and accounts
receivable days.
Que 100. Why is money today worth more than money tomorrow?
Money today is worth more than money tomorrow for at least three reasons. First, there is
risk associated with receiving and being able to use the money the longer out in the future
you go. Second, in an inflationary environment, money has less purchasing power in the
future. Third, money today could be invested and earn some return.

Que 101. How to apply for interviews in the Investment banking domain?
1. Off-campus – Should be applied by constantly tracing Equity Research/Venture
Capital firms and companies hiring in this domain.
2. Personal Hunt- Most PE/ VC/ IB are located in Mumbai, Delhi, and Pune..
3. Aggressive approach is needed.
4. Sending cold mail can take you a long way.

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5. Follow the list of Investment banking firm which is shared with you in course.
6. Find our Reference it will help you to lend to investment banking firm.
7. Visit camonk job portal i.e. jobs.camonk.com

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