Investment Banking Operations interview questions
So you think you can survive the most rigorous investment banking interviews unscathed? Below are four of the most difficult questions (2 technical and 2 behavioral) you may encounter, as well as some sample responses to give you an idea of how to structure a great answer.
1) When should a company issue equity, rather than debt, to fund its operations?
- If the company feels its stock price is inflated, it would raise a large amount of capital relative to the percentage of ownership sold.
- If new projects the company plans on investing in may not produce immediate or consistent cash flows to make interest payments
- If the company wants to adjust its capital structure, or pay down debt
- If the company’s owners want the ability to sell off a portion of their ownership and monetize their investment
Here's a sample answer:
There are several reasons for issuing stock rather than debt. First, if a company believes its stock price is inflated, issuing stock can raise a lot of capital relative to the ownership sold. Second, if the projects to be funded may not generate predictable cash flows in the immediate future, the company would want to avoid the obligation of consistent coupon payments required by the issuance of debt. Issuing stock is also an effective way to adjust the debt/equity ratio of a company’s capital structure or to monetize the owners’ investment.”
2) How would a $10 increase in depreciation expense affect the each of the three financial statements?
Note: There are many forms of this question. An interviewer could ask how the statements are affected by a $20 decrease in inventory, or a $50 million capital expenditure project. Since you will not be able to memorize each and every possible variation, you must know how the changes in line items flow through the financial statements.
Break this question down into pieces.
Start with the Income Statement.
- The $10 increase in depreciation is an expense, which therefore lowers operating profit by $10 and reduces taxes.
- Taxes decrease by $10 x Tax Rate and net income decreases by $10 x (1–Tax Rate).
- Assuming a 40% tax rate, the drop in net income will be $6 [$10 x (1–0.40)].