Investment Banking Technical Guides

If you are starting with no experience, learn accounting first and then move into key vocabulary and definitions. Accounting is vital because it supports every other topic. Someone who does not know what EBITDA is, for instance, will struggle to understand why a DCF makes sense.

Study the concepts before diving into complex math. Once the foundation is in place, calculations and harder follow-ups become far easier to reason through, because you are extending something you already understand rather than memorizing a new formula.

Consistency beats cramming here. An hour a day over two months will leave you in much better shape than three frantic weekends in January, mostly because the material needs time to settle before you can recall it under pressure.

The fundamental questions in our database are a strong place to start because they help you build the base before moving into more advanced material.

There is no real shortcut other than practicing and genuinely learning the concepts. The time required depends heavily on your finance background, but the average finance student can usually understand the basics of each topic after a few focused hours.

When practicing, talk out loud regularly so you get used to walking another person through your thinking rather than just confirming the answer in your head. In the vast majority of interviews you are allowed to use pen and paper, though you may occasionally be told not to use a calculator.

For elite boutique interviews, get comfortable with large calculations and close approximations. Nobody expects a perfect decimal, and rounding sensibly while narrating what you are doing is usually the better answer.

If you genuinely get stuck, ask for a hint rather than going silent or giving up. Interviewers are generally fine nudging you along, and how you handle being stuck often tells them more than a clean answer would.

Middle Market Firms

At middle market firms such as RBC, Santander, and Raymond James, you need the concepts, the formulas, and basic to medium-difficulty calculations, like working through free cash flow. Paper LBOs and thorough accretion and dilution questions are less likely to appear, but the fundamentals still need to be airtight.

Bulge Bracket Firms

At bulge brackets such as Morgan Stanley, Goldman Sachs, and Citi, difficulty varies enormously. A UBS capital markets role may stay at mid-level technicals, while a Morgan Stanley Menlo Park interview will squash you. The safe approach is to prepare for advanced, in-depth questions across the core topics, including heavy calculations and multi-step accounting problems.

Elite Boutiques

Elite boutiques such as Centerview, Evercore, and Lazard are usually the hardest interviews to pass. These often stray from the common guides and can include multi-step questions with difficult mental math in unfamiliar territory. You should be ready for everything from fundamentals to niche elite boutique-style questions, all of which are included in our question bank.

Accounting

Walk me through the 3 financial statements.

You have the income statement, the balance sheet, and the cash flow statement. The income statement covers a period of time, running revenue down through expenses to arrive at net income. The balance sheet is a snapshot at a single point in time showing assets, liabilities, and shareholders' equity, and it has to balance because Assets = Liabilities + Shareholders' Equity. The cash flow statement begins with net income, adjusts for non-cash items and changes in working capital, and then adds cash flow from investing and financing to explain how the cash balance moved over the period. The three link together: net income carries from the bottom of the income statement to the top of the cash flow statement and into retained earnings on the balance sheet, and the ending cash figure on the cash flow statement becomes the cash line on the balance sheet.

If you could only choose one financial statement to analyze a company, which would you choose?

The cash flow statement, since it tells you how much cash the business is actually producing. The income statement carries non-cash items such as depreciation and can be shaped by accounting decisions, and the balance sheet only captures one moment in time. The cash flow statement bridges net income all the way down to the true change in cash, so it is the best single view of whether the company can sustain its operations, fund itself, and return capital to investors.

Walk me through the 3 financial statements when depreciation goes up by $10.

Assuming a 40% tax rate: on the income statement, the extra $10 of depreciation reduces operating income by $10, so pre-tax income drops $10, taxes drop $4, and net income drops $6. On the cash flow statement, you start with net income down $6 and add back the full $10 of depreciation because it is a non-cash expense, which leaves cash from operations and total cash up $4. On the balance sheet, cash is up $4 and PP&E is down $10, so assets fall by $6, while on the other side retained earnings falls by $6 from the lower net income. Both sides move down by $6, so the balance sheet still balances.

Enterprise Value and Equity Value

What is the difference between enterprise value and equity value?

Equity value is what the business is worth to common shareholders alone, calculated as share price times diluted shares outstanding, otherwise known as market capitalization. Enterprise value is what the entire core business is worth to every capital provider, debt and equity holders alike. Because enterprise value is capital-structure-neutral and does not move when a company raises debt or equity, it is the measure used for operational comparisons. To get from equity value to enterprise value, you add net debt and other claims and subtract cash.

Walk me through the bridge from equity value to enterprise value.

You begin with equity value, add total debt, preferred stock, and noncontrolling (minority) interest, then subtract cash and cash equivalents, so Enterprise Value = Equity Value + Total Debt + Preferred Stock + Noncontrolling Interest − Cash. The debt and other claims get added because an acquirer would have to assume or repay them, and cash gets subtracted because an acquirer could put the target's cash toward the purchase price, which effectively lowers the cost of the acquisition.

Why do you subtract cash when calculating enterprise value?

Cash is a non-operating asset, and enterprise value is meant to capture the value of the core business. An acquirer that buys the company also receives its cash, which can go straight toward the purchase price, so the effective cost of the acquisition is lower by that amount. Another way to frame it is netting cash against debt, where net debt equals debt minus cash. The same logic drives the pairing convention: enterprise value goes with metrics available to all investors, like revenue, EBIT, and EBITDA, while equity value goes with after-interest, after-tax metrics like net income and EPS.

Valuation

What are the main valuation methodologies?

The three you see most often are comparable company analysis (trading comps), precedent transaction analysis (deal comps), and the discounted cash flow (DCF). Trading comps value a business off the multiples that similar public companies trade at, such as EV/EBITDA or P/E. Precedent transactions value it off the multiples paid in past M&A deals for similar companies, which typically embed a control premium. The DCF values a company as the present value of its projected future free cash flows. Beyond those, there is the LBO analysis, which sets a floor based on what a financial sponsor could afford to pay, and the sum-of-the-parts analysis.

Which methodology gives the highest and lowest valuation?

There is no rule that always holds, but precedent transactions generally come in above trading comps, because acquirers pay a control premium and often build synergies into the price, whereas trading comps reflect the current minority-stake trading price with no premium attached. A DCF can land at either end depending on your assumptions, since it responds sharply to inputs like the discount rate and terminal growth rate. Best practice is to run several methods together and triangulate a valuation range rather than leaning on any single one.

When would you use trading comps versus precedent transactions?

Trading comps show how the public market values similar businesses today on a standalone, minority basis. Precedent transactions show what buyers have actually paid to acquire similar companies, control premium included. That makes precedents especially relevant in an M&A context, since they reflect real acquisition prices, while comps fit better for a standalone or IPO context. Both are relative valuation methods, so either one is only as good as the comparability of the companies or deals you pick.

DCF

Walk me through a DCF.

A DCF values a company as the present value of its future free cash flows. You start by projecting unlevered free cash flow, typically over five to ten years, where unlevered free cash flow is EBIT times (1 minus the tax rate), plus depreciation and amortization, minus capital expenditures, minus the increase in net working capital. Those cash flows then get discounted back to today at the weighted average cost of capital (WACC). Next you calculate a terminal value to capture everything past the projection window, using either the perpetuity growth method or the exit multiple method, and discount that back as well. The present value of the projected cash flows plus the present value of the terminal value gives you enterprise value, and subtracting net debt bridges you to equity value.

How do you calculate WACC?

WACC is the blended, after-tax cost of a company's capital, weighted by how much debt and equity sit in the capital structure. The formula is WACC = (E/V) × cost of equity + (D/V) × cost of debt × (1 − tax rate), where E is the market value of equity, D is the market value of debt, and V is the sum of the two. Cost of equity typically comes from the Capital Asset Pricing Model: the risk-free rate plus beta times the equity risk premium. Cost of debt comes from the company's current borrowing rate or the yield on its existing debt, and it is tax-affected because interest is tax-deductible.

What are the two ways to calculate terminal value?

The perpetuity growth (Gordon Growth) method and the exit multiple method. Perpetuity growth assumes free cash flow keeps growing at a constant modest rate forever, giving terminal value as the final year's free cash flow times (1 + g), divided by (WACC − g). The exit multiple method applies a valuation multiple, usually EV/EBITDA, to the company's final-year metric based on where comparable companies trade. In practice you run both and use one to sanity-check the other, for example by backing out the growth rate implied by the exit multiple.

LBO

Walk me through a basic LBO.

In a leveraged buyout, a private equity firm acquires a company using a large amount of debt and a comparatively small equity check. First you set the purchase price and lay out the sources and uses of funds, which determines how much of the deal debt funds versus equity. Over the holding period, typically three to seven years, the company applies its free cash flow to paying down that debt. At the end the firm exits by selling the company or taking it public, usually at a similar or higher multiple. Because the debt has been paid down and ideally EBITDA has grown, the equity value at exit is much larger than the initial equity investment, and that spread is the return. You measure it with IRR and the multiple on invested capital (MOIC).

What drives returns in an LBO?

Three main levers. First, debt paydown: using the company's cash flow to reduce the debt balance means equity makes up more of the value over time. Second, EBITDA growth: rising revenue and improving margins increase the company's earnings. Third, multiple expansion: exiting above the entry multiple, which is the least dependable of the three because it hinges on the market. Leverage magnifies all three, which is why firms use so much debt, but it raises the risk in the same proportion.

What makes a good LBO candidate?

You want stable, predictable cash flows that can service and pay down significant debt, a low existing debt balance, and a defensible market position with steady demand. Ideally the business also has low capital expenditure needs, room for operational improvement or margin expansion, capable management, and a clear exit path. Being undervalued helps, as do hard assets that can serve as collateral. In short, you are looking for a company that can safely carry leverage and throw off enough cash to deleverage.

Merger Analysis

Walk me through a basic merger model (accretion / dilution).

A merger model combines the acquirer and the target to see the effect on the acquirer's earnings per share. You start with the purchase price and the financing mix of cash, debt, and stock. Then you combine the two income statements: add the target's pre-tax income, subtract the new interest expense on any acquisition debt along with the foregone interest on cash used, and account for new shares issued if stock is part of the consideration. That produces combined, or pro forma, net income. Divide pro forma net income by the new pro forma share count to get combined EPS. If combined EPS exceeds the acquirer's standalone EPS, the deal is accretive; if it falls short, the deal is dilutive.

How do you tell if a deal is accretive or dilutive?

You compare pro forma EPS after the deal against the acquirer's standalone EPS: higher means accretive, lower means dilutive. A useful shortcut is to weigh the after-tax yield of what the acquirer gives up against the yield of what it receives. In an all-stock deal specifically, you can just compare the two companies' P/E ratios: an acquirer P/E above the target's generally means accretion, and one below it means dilution.

How does the form of financing affect accretion or dilution?

Cash is generally the cheapest, because the foregone interest on cash or the interest on new debt usually carries a lower after-tax cost than issuing equity, which makes cash and debt deals more likely to be accretive. Stock is typically the most expensive since equity carries a higher cost, so stock deals lean dilutive unless the acquirer's P/E sits well above the target's. The rule of thumb is to compare the after-tax cost of each financing source to the target's earnings yield, the inverse of the P/E it is being acquired at: if the yield you get exceeds the cost of that source, the deal is accretive.