#1 most interesting technical investment banking interview question

In Uncategorized | 6 minutes read

It’s 15 minutes into the interview.

The kid sitting across from me has been crushing it.  He is a confident mother f**ker!!

Tell me your story…BANG!

Why do you want to do investment banking…BOOM!

I’m impressed.

The kid is basically through to the next round for me.

But now I want to CONFIRM my decision.  I want to make suuuuuure this kid has got the goods and is not going to embarrass me when it is my name that puts him through.

Do you know what question I’m going to pull out now?

I’m going to ask the most interesting technical question I know…the one that this candidate is going to LIVE or DIE on.

We’re talking of course about…

— How do you VALUE a company?  What are your OPTIONS? —

If you remember back to the other day, we showed you how a student would answer one of the most important technical questions, and then what we thought of it.

You got to see a real student answer and you got an insight into how bankers judge answers…you got the U-N-C-E-N-S-O-R-E-D version too.

Most readers love that insight, so today we’re going to run like that as well.

Ready for the student’s answer???

HERE WE GO…….step in peasant student!!

“I think your first step would be to identify what type of company it is you are valuing.  Assuming it’s an established business with fairly stable revenues, fairly stable cashflows, like a typical industrial business, you usually use DCF.  That would be your first port of call.

And so, that involves collating a bunch of data about that company’s operations.

If you were to break it down very simplistically, revenue and expenses, and you would get more and more granular depending on the amount of analysis you want to do.

But you would start with, presumably, historicals.

You would see how the company has performed in the past, how it makes its money, how it spends its money, and you would forecast that out based on – assuming you didn’t have management information forecasts for the future – you would be able to…from public documents piece together a forecast for 5 or 10 years of both revenue and expenses using some sort of high level growth, usually inflation or economic growth, adjusted for any competitive advantage they might have.

Then you would adjust for capital structure, which typically depending on how you want to value a company going forward, that would usually be incorporated in your discount rate or your weighted average cost of capital (WACC) you would use to discount your cash flows, which fall out of revenue and expenses.

And you would arrive at some sort of net present value.  And that’s how you do a typical industrial company.

And then there are variants of that.

For example if you were to do a real estate firm, it’s usually quite straight forward.

You value the assets of the company, so if its an asset rich company the value of those assets will typically be expressed as a yield based on the cash flows that those asset are generating.  So if the asset is generating $50M of revenue, and you think you are happy to pay a yield of 8 or 9% you’d just then capitalize it by that yield.

So they are the two sort of main methods, depending on the type of company.

And then there are shorthand methods, say for example comparables analysis, where you look at the multiples of a company, and say, well, look at the EV to EBITDA, which adjusts for capital structure, or you could look at PE ratios and distribution ratios of other companies and just apply them to the company that you are looking at, and that would give you a fairly shorthand way of analyzing how much a company is worth.

OUR FEEDBACK to the student’s answer…remember, this is served straight f**king up!!

Okay, so first of all it is a great answer overall.

The student hit all the main checkpoints, covering DCF, assets, comparables etc.  Nothing major left out.

And this brings up an important point…

If you can hit ALL the major points with your answer then you are already ahead of 80% of students.

That’s why it’s really important to prep for your interviews by writing out dot point answers to interview questions instead of word for word answers (ie you’ll remember the main points so much more easily).

Okay, WHAT ELSE did we like about the student’s answer?

The comfort with which the student addressed DCF…amazing.  Sounds like a first year analyst!!

Eg “And so that involves collating…”.

When you can talk about these things with that sense of familiarity (but without arrogance) you really distinguish yourself form the textbook touting 4.0 GPA students who’ve neeeeeever picked up a copy of the WSJ, let alone ventured outside the classroom.

But what was most EXCITING about his answer was when he touched on the realities of DCF…

He mentioned the “typical industrial” for example.

He then went on to mention real estate firms, and distinguished the valuation method used, along with justifications.

That is a verrrrrrrry very savvy answer.

If you too can go from just hitting the major points, to fleshing out the finer distinguishing points, whilst also bringing in real world references when asked “How do you value a company” you will truly rock it.  (And especially if you can do it all in only a few minutes or less)

So what didn’t we like about his answer here?

It could have been structured better and explained with more clarity.

This can be a tough ask in an interview because naturally a student is being asked on the spot and is under some serious pressure.  But it’s not a hard thing to achieve if you have your dot point answers prepared for these questions.

You could even do the famous STEVE JOBS thing and say;

“There are 4 major valuation methodologies, being…” and then go on to talk about “So the first one…”.

‘Signposting’ like this at the start of your answer makes life so much easier for both you and the interviewer.  And it sounds so so so much more professional.

Bankers will be saying to themselves “This kid has his shit together”.

Finally on his closing comments RE alternative methodologies – you may have noticed he did not give much time to them.  Which is fine. DCF is the bad boy here and the 80-20 rule applies.

Also, what will often happen after the student answers this question is bankers will respond with something like “Which is your favorite?” or “Tell us the pros and cons of each” etc, which will allow time for an extended answer about these alternative valuation methodologies.

P.S. This lesson was extracted straight from our very popular Inside Investment Banking Course.  If you’re serious about breaking into banking, check it out now.

Screw financial modeling…you only need 6 skills to break into banking

If you’re an over excited wannabe Excel Monkey then you’ve probably tried just about everything to break in…from studying financial modeling till 3am to trying to memorize 100s of complicated technical interview questions.

But here’s the thing…

You’re wasting your time!  If you want to learn how to impress bankers, get interviews and land job offers straight out of college you simply need 6 skills.