Overcoming tough investment banking interview questions

Wall Street interviews aren't easy, so how do you tackle the questions and make your way into the investment banking sector?

If you want an investment banking job, it is necessary to be able to answer their interview questions in way that shows the value of your skills as a potential employee. No matter who you are – fresh-faced college graduate or wizened financial veteran – make sure you are prepared for any questions that come your way. Check out the advice below, on questions both technical and general, for what you may hear in an investment banking interview:

1. How does a comparable company analysis work?
This is a relative valuation technique that compares a company's valuation to that of its peers. The first step involves finding a firm that is similar to the one in question. You will have to search for a company in the same industry, and of a similar size. Factors that should be comparable include operational, growth, risk and return on capital. While you will be hard-pressed to find two companies that are indistinguishable, you should find two institutions that are as similar as they possibly can be. You should be able to run a thorough analysis of each company in order to determine valuations. Using factors such as earnings per share, market cap and more, compare the two firms. 

2. So why are you interested in investment banking?
This is a delicate question that you will have to answer properly. You may be starting out in investment banking with high hopes of moving further in the industry, quickly. Don't lie, but don't share everything either. You may eventually want to move on to hedge funds, but for now you will have to convince the interviewer that you are totally committed to the industry. Both of you may know that you plan on leaving in a couple years, but don't make that obvious, or reveal all your intentions just yet. 

3. What is the appropriate numerator for a revenue multiple?
The correct answer to this question is enterprise value. This question is asked by interviewers in order to determine whether you understand the difference between equity value and enterprise value, and how they relate to multiples. The difference between the two is that equity value is enterprise value minus the net debt. EBIT, EBITDA, and revenue multiples each have enterprise value as the numerator since the denominator is a pre-debt calculation of profitability. Equity value serves as the numerator for EPS, after-tax cash flows, and book value of equity because the denominator is post-debt. 

4. What do you look for in a good LBO candidate?
There are a variety of characteristics to look for in an ideal leveraged buyout candidate. You will need to search for a company that is mature and consistent. Strong cash flows must be present as well, in order to pay down acquisition debt. In addition, a company being considered for an LBO should provide established services, and be well positioned within its industry. Other important characteristics of an LBO candidate include a firm that is under-valued or has fallen out-of-favor, an institution with a capable management team and a realistic exit strategy. 

5. Usually, we hire job candidates with a higher GPA, why you?
Many companies will have a threshold they don't intend to drop below in terms of employees' college GPA. While there are a number of young professionals who will love to hear this question, there are also a lot who dread the GPA question. Investment banking jobs require intelligent people, and so interviewers will be apprehensive about a low GPA, but this can be overcome. Take assurance in the fact that your GPA wasn't low enough to get you tossed from the resume screening process. If your GPA dropped for a reason such as family issues during a semester, that distracted you from your academic work, make sure you explain this to the interviewer. When answering, own your GPA but explain it in a way that demonstrates your other valuable characteristics. 

These are just a few examples of tough questions that interviewers may choose to ask you. These questions that probe your background and seek to determine your exact investment expertise can be difficult, but they are possible to overcome. Investment banking jobs are out there for people who can handle the interview process. If you think you're ready for interviewing, start searching for opportunities and send in those applications!