AUTUMN
LBS GUIDE TO INTERVIEWS IN
INVESTMENT BANKING
A practical guide to approaching I‐Bank recruiting in LBS
London Business School – Regent’s Park – NW1 4SA ‐ London
12
LBS guide to IB interviews
TABLE OF CONTENTS
1. INTRODUCTION
1.1. Target reader, what should be expected from this guide
1.2. Mindset - Process - Preparation
2. THE RIGHT MINDSET
2.1. So you were not a banker…
2.2. Know the economy, know the markets, know the deals, know the culture
2.3. The winners
3. WHAT IS INVESTMENT BANKING?
3.1. Overview of investment banking
3.2. Main players
3.3. Why a summer internship?
3.4. The life of an associate
3.5. Overview of the Roles in Banking
4. RECRUITING COMPONENTS
4.1. Process timetable (clarity on what to do, when)
4.2. Why networking is a necessary component of recruiting
4.3. How to be effective in the networking
4.4. On-campus presentations
4.5. Trading floor visits
4.6. Events by invitation only
4.7. Informational/mock interviews
4.8. Corporate Partners’ Week
4.9. Cover letter preparation (Career service material)
4.10.
PLP sessions
4.11.
CV preparation (Career service material)
4.12.
Simple words of advice which may save your life (dress code, timing,
professionalism, common sense)
5. INTERVIEW PREPARATION
5.1. What are the interviewers looking for?
5.2. Interview types (behavioural, fit, competency)
5.3. Know your story/pitch (before networking, CS materials and sessions)
5.4. Financial knowledge: use of core courses, training on campus and other
resources
5.5. Company research
5.6. Practice interviewing – find your study group
5.7. Final considerations
LBS guide to IB interviews
6. INTERVIEW QUESTIONS
6.1. IBD – Fit questions
6.2. IBD – Technical questions
6.3. Global Markets – Technical questions
6.4. Brainteasers and logic questions
7. ASIA RECRUITMENT
7.1. Networking and Presentations
7.2. CV and Cover Letter (October – Mid-November)
7.3. Application (Late November – Early December)
7.4. During the Hong Kong trek (Mid-December)
7.5. First round Interview (Late December/Early January)
7.6. Second round interview (Late January/Early February)
8. SOME ADVICE FROM PREVIOUS YEAR STUDENTS
This document is for LBS student use only. Any reference texts used for are
credited in the paper. Should you receive a copy of this document as a nonmember of the School Community please contact
Careerservices@london.edu immediately
Preface
The LBS guide to IB interviews has been put together by two MBA 2012’s, who
worked on it for 3 months in their free time (evening and weekends) to prepare
this guide for future MBA classes. They were both successful in their search for a
Finance internship for Summer 2011, and wanted to share what we have learnt
during the process to give you a better chance of succeeding.
The guide has been updated by MBA 2013 who secured IB internship offers in
IBD and Markets for Summer 2012 in EMEA and Asia Pac.
A serious amount of time and effort has gone into writing this book, and yet we
know it can always be improved. Therefore, we hope that future generations of
students will take up the challenge to update and improve this guide, in
conjunction with Career Services.
Meantime, if you are reading this book it means you are undertaking banking
recruiting, and we sincerely wish you GOOD LUCK!!!
Matteo & Tomasz (MBA 2012)
LBS guide to IB interviews
Serena , Zoe and Edward (MBA 2013)
“There is no favourable wind for he who knows not where he is heading”
Seneca
1 INTRODUCTION
1.1 Target Reader. What should be expected from this guide?
London Business School has an incredible reputation as a finance school. Not only
are the courses offered in Finance some of the best out there, but the placement
opportunities in the Investment Banking world are enormous. In addition, since
you managed to get your place on the LBS programme, you probably have a good
GMAT score and incredible work experience. As a consequence, an offer to join
Goldman Sachs as an Associate is just waiting for you. Right?
Maybe, but probably not… Unfortunately, the reality is different. But you are lucky
enough to have this guide. Read it and you will understand how to gain your
internship at one of the top investment banks.
LBS is a world full of opportunities for students looking to break into investment
banking. All of the Bulge Bracket banks come on campus to recruit associates in
IBD (i.e. M&A) and many recruit for Markets (Sales & Trading, Research). You do
not necessarily need to have an IB background. Indeed, every year a number of
students successfully manage to make extreme career changes. After all, this is
what most of us are, career changers.
Notwithstanding the recent ups (very few) and downs of financial firms, IB is still
a popular career choice for LBS students. The easy answer is that money is what
draws student attention. However, this is no longer necessarily true after the crisis,
but, at the end of the day, a career in IB gives you skills that are highly valued in
throughout finance world. An experience in IB may open doors in Private Equity
shops, Hedge Funds, Asset Managers and even in the corporate world as a CFO or
in the Business Development division. However, Banking is an intense career and
you won’t succeed in the job or in recruiting if you aren’t committed to a longterm career in banking. It should not be viewed as simply a stepping stone to
somewhere else.
Now let’s go to the bad news. Getting a place in IB is extremely hard. This is
because competition is extremely tough with banks becoming increasingly
LBS guide to IB interviews
selective. You have to realize that all your fellow students have amazing stories and
awesome personal experience. Moreover, you will suffer competition from US
schools. While LBS is a core recruiting school for all the major firms, they also
recruit heavily from Wharton, Chicago and the likes and thus you are competing
with those students as well. Finally, in market downturns, banks decrease their
summer associate class and thus are even more selective.
This guide is intended to be a reference guide to be used throughout the entire
recruiting process. However, you will need to do more than just reading this guide.
Career Services has some exceptional material that you must read. Use all the
interview preparation books that the library has. In addition, there are also some
very useful guides which can be used to get an edge over others (a small list is
available on page 160). Meet people, both students (as early on as possible to get
tips and guidance) and alumni and do some serious networking (can’t be
emphasised enough). These activities are key, and through this guide we hope to
give you some insider tips about this long and intense process.
1.2 Mindset – Process - Preparation
Before starting with the bulk of material, we want to give you a helicopter view of
the key things you need to do and what the recruiting process looks like. Believe
us, at some point during the Fall Term you will be overwhelmed. You will asking
yourself questions like “What am I doing?” or, our favourite, “Am I really
convinced that networking has any impact on the recruiting process?”. When this
happens, this single page may be your best friend. It will help you to see the big
picture, put things into perspective and ultimately land your IB job.
Preparation is the key. Do not think for a second that reading lots of finance
related material means preparation. Here we are talking about serious and detailed
preparation. You really do not want to take any chances. Our experience suggests
that if you are not prepared in one particular area, this is what at one point the
interviewer will ask. But what is it that you need to prepare? Three things:
1) Market knowledge. You not only need to be fully familiar with the overall
market conditions, but you also have to know the peculiarities of each the
major financial institutions, especially the one whose representative you are
meeting, as he/she is bound to ask you, “Why us?”, and you need to have a
relevant answer.
LBS guide to IB interviews
2) Your story. Career Service will make it clear that having a solid story is
crucial. Your CV, cover letter and networking activities will all help you in
developing a robust story on why you want to be a banker. And interviewers
will challenge you hard on this one (er, the correct answer is not money).
This is highly critical, beginning with what you were doing before coming to
LBS and then your decision of why you decided to do banking (especially in
the current scenario), and whether you are aware of the skill sets required to
come in, and how are you investing in developing those skill sets?
3) Technical skills. This includes both financial and interviewing skills. By the
time of the interviews, you should be pretty strong in your financial
knowledge. More important, you must be trained in pitching your story in
front of an interview, which is a stressful experience. Practice, practice, and
practice, in front of a mirror, with friends and during mock interviews with
fellow LBSers (via PLP) and with members of Career Services.
Developing the right mindset is also crucial. If you want to be a banker, act like a
banker. To find out how a banker thinks, networking is probably a good place to
start. While every person working in investment banking has their own personality,
there are some common traits. You’ll need to understand these traits because these
are what recruiters will look for in their future associates. Through these
conversations, you will learn to “talk the talk”. Pay attention to the words and
phrases the bankers use and emulate these in your recruiting conversations.
Finally, the process leading to interviews and offers extension is long, intense and
pretty stressful. It involves several moments of self-reflection and at times you will
be wondering why on earth you want to do all of this. But it is important that you
don’t give up. Every step in this process counts and the smallest mistake makes the
difference between having an offer or having someone wishing “good luck with
your future career” (this is the standard sentence for a “ding”).
LBS guide to IB interviews
2 THE RIGHT MINDSET
2.1 So you were not a banker… Advice for career changers
Key Takeaways: As a career changer, you are not at a disadvantage. However, you need to put
extra effort in developing your story, meeting people and learning about finance.
We do start the chapter on the right mind-set talking about career changers for a
reason. The majority of LBS students looking for a career in Finance are indeed
career changers. While being a career changer is not a problem per se, it remains
true that you may be at a disadvantage with respect to students with relevant work
experience. This is why it is crucial that, as a career changer, you develop the right
mind-set right from the beginning.
First of all, extra effort should be spent working on your story. You need to be
convincing when you explain to recruiters why you want to be a banker, why you
are leaving your previous career and what skills learnt in your previous job which
can be useful in a banking environment. Even though you were doing something
different, you still need to show that there is some relationship to finance. It is
imperative that you fully understand your drivers to have chosen banking; and also
the institution that you are interviewing with.
Second, technical knowledge should not be underestimated. Being a career
changer, you may hope that recruiters should not be too demanding.
Unfortunately, this is not entirely true. During interviews, especially in the final
rounds, technical knowledge will be tested. Therefore, a good strategy is to start
studying and reviewing finance from the beginning of the Autumn term, from this
guide as well as some of the sources given on page 160.
Finally, networking is crucial for career changers, this can’t be emphasised enough.
Whilst networking is important for everyone, it is especially important if you don’t
have a finance background. Meeting people is your opportunity to learn banker
lingo, practice your story and get some advice from someone with similar
backgrounds. In addition, meeting people before the recruiting season is your
chance to let them see how motivated you are in your next career move.
To conclude, there is some good news. Many career changers successfully manage
to land a job in investment banking. It is a tough journey, but developing the right
mind-set right from the start will flip the odds in your favour.
LBS guide to IB interviews
2.2 Know the Economy, know the markets, know the deals, and
know the culture
Key Takeaways: Read, at a minimum, the FT every day from September and form a view – do
not fall in the trap of reading the FT the week before the interview, it won’t help you. Do not fall
in the common “donkey” mistake, reading the FT but not understanding what it is really saying.
Understanding the culture is probably the hardest part to build (it takes time), and
it is almost as important as having a good story. Investment bankers are looking
for candidates that they believe will be able to perform the job. Therefore, they
want to understand if you share common ground with them, whether you could
potentially be a good banker.
The financial community in London has a common culture; they all read the same
newspapers and use the same databases, have a similar definition of
“professionalism” and are exposed to the same events/deals in the world. Do not
commit the mistake to be technically perfect but not having understood the mindset of your interviewer.
Therefore it is mandatory to read the Financial Times, (and the Financial News
and the Economist) every day from as soon as you arrive on campus.
• Financial Times: You can subscribe to the school service delivery for a
student price and get an online account which offers smartphone access.
• Financial News: You can find a weekly copy in the Taunton library, in
Career Services Reception and you can register for the online service
through the library.
• Economist: You can find a copy in the Taunton.
If you are interested in Sales & Trading, include an online subscription to Roubini
Global Economics, available from the library database provided by LBS.
Financial reading will improve your familiarity with the language of the financial
community and give you a good impression of what bankers are exposed to.
Remember that a critical part of Investment Banking is about clients’ interaction,
which is often heavily focused on what’s going on in the market (they want to
know your judgment, be prepared to have an opinion, otherwise why they should
pay you??? For example, why HP acquired 3Par? Was it overvalued?).
LBS guide to IB interviews
CAUTION: At the beginning you may feel a little bit overwhelmed by the amount
of information, especially if your background was in gardening or birdwatching,
but do not despair, you cannot imagine how much information will stick on your
brain just by reading the FT every day. You will slowly build your
financial/economic knowledge, and this is going to make a difference during your
networking and interviews. Also do not forget to test your views with your
classmates on every important event, you can also form a small group and
exchange views and opinions, you will be surprised of how useful can be.
2.3 The Winners
Key Takeaways: It’s a competitive process but don’t panic, it is just hard work and interpersonal
skills. Focus on polishing your story and establish relationships with bankers/alumni, and also
do everything else!
I guess there is no need to tell you this is a competitive process, in 2011 around 40
people got an IBD job, from an application pool of up to 120 (and remember,
these are all your fellow LBSers who are already high acheivers). So, unfortunately
we have to talk about who made it and who didn’t.
I know, now you are worried, however you are an LBS student, and this means you
are intelligent, hardworking and very well prepared. You probably hold yourself to
higher standards that other people do – and that’s the reason why you are a
success. Therefore be confident in yourself and be prepared to work hard in the
next months. LBS is going soon to submerge you with a combination of heavy
academic lifting, social events and a busy recruiting calendar.
Going through this journey you should keep in mind 7 very important things:
• Plan your time wisely: you soon will wish your day had an extra 12 hours;
prioritise and schedule strategically.
• Every day drink an espresso and read the FT – enter in the financial world
mind-set (industry knowledge).
• Join the Finance Club and attend all the networking events; use the club as a
way to get advice from 2nd years.
LBS guide to IB interviews
• Start networking with Alumni in October – many students wake up in late
November and start emailing the entire alumni directory, with poor results.
• All your classes are important, but in banking a lot of questions will involve
Corporate Finance and Accounting (be sure you get an A, at least).
• Find 2-3 classmates you like, who have similar goals and who are willing to
share information. You can divide up tasks such as bank research, preparing
technical questions as well as giving each other mock interviews. This can be
done closer to November, once you are also better prepared.
As you go through this period, remember to put particular emphasis on perfecting
your story and networking:
• Perfecting your story: why you want to move from deep-water drilling to
IB? This is the most important question, and the answer must be rationale
and convincing. You will keep telling your “what” and “why” with every
banker you meet, and they will judge you on the credibility and the rationale
of your story. Moreover, be a reactive learner and keep polishing your
presentation/story after meeting with any banker.
• Develop relationships: at the end of the day banking is a deeply personal
business. Getting a job in IB is more like asking someone for a date than
taking a final exam. The human side trumps all else and all your technical
knowledge will not help if you can’t clear the hurdle on the interpersonal
side. Moreover, your final interviewers may be with the same bankers you
met for a coffee in December, and if they liked you the interview may verge
on the last match of rugby you played (which actually happened to one of
our colleagues in a final round in US bulge bracket).
LBS guide to IB interviews
3 WHAT IS INVESTMENT BANKING?
3.1 Overview of Investment Banking
Investment banks act as an intermediary facilitating the transfer of capital from
providers of capital (lenders or investors) to users of capital (borrowers or issuers).
An investment bank is a financial institution that assists individuals, corporations
and governments in:
• Traditional Investment Banking:
- Strategic Advisory: (eg M&A) Restructuring, takeover defence, fairness
opinions. In the typical project bankers assist in negotiating and
structuring mergers between companies. If, for example, a company
wants to acquire another firm, an investment bank will help finalize the
purchase price, structure the deal, and generally ensure a smooth
transaction.
- Capital Raising: (eg Via Debt/Equity Capital Markets) Raising capital
by underwriting and/or acting as the client's agent in the issuance of
securities (equity, debt/fixed income, or hybrid). In particular, the
underwriting function involves the bank assuming the initial risk. For
example, in the case of a bond offering, the investment bank purchases
the entire bond offering and then starts looking for buyers in the
markets. This means that the investment bank assumes the risk of the
transaction not being able to re-sell the bond in the market.
• Sales & Trading:
- Sales: Institutional sales are responsible for nurturing and developing
business relationships with large institutional investors such as pension
funds, mutual funds, hedge funds, or large corporations. Their
compensations is a commission on trades made through their firms or
a percentage fee on their clients’ assets held by the firm.
- Trading: traders have two main functions: 1) Provide clients with the
ability to buy or sell a security on demand and also provide liquidity to
LBS guide to IB interviews
the equity/debt of an institution’s traded securities by acting as a
market maker 2) Proprietary trading: use the firm’s capital to make
directional bet on the public markets. Typically, the marketing-making
function and the proprietary trading function are performed by the
same trader for any given security.
• Research:
- Analysis and recommendation of stocks and bonds, including company
coverage and sector coverage. Research analysts follow stocks and
bonds and produce recommendations to investors on whether to buy,
sell, or hold those securities. They also forecast companies’ future
earnings.
• Structuring:
- Create tailored solutions, usually with the help of derivative products to
help clients to express a trade of hedge their liabilities in a way that
they would be unable to do trading “off the shelf”products alone.
LBS guide to IB interviews
Many banks also have a merchant banking (private equity arm) and a private
wealth management (HNWI private client service business) division.
Sell-side
Typical Investment Bank Structure
Investment Bank
Investment
Banking
Division
(IBD)
“Private” market = Corporate clients
Finance
Sales & Trading /
Markets /
Securities
ECM / DCM or
Financing
Operations
“Public” market = Investors
IT
Legal &
Compliance
Human
Resources
Risk & Corp
Advisory
IBD and the Markets divisions are heavily interrelated. A good example is a
company wishing to go public. The IBD team provides the valuation of the
company and facilitates the registration and execution of the process; the ECM
team helps the company during the roadshow and prices the deal; Markets then
takeover the process, with Sales placing the securities with end investors and
Trading providing secondary market liquidity by acting as market maker. Research
provides continuous coverage of the security and helps investor processing
information relating the company and its business.
Large investment banks usually organize their investment banking functions along
products lines (M&A, Leveraged finance, ECM, DCM), industry groups (Telecom,
Oil&Gas, Retail) and geographic coverage (UK, France, Italy). As these groups
focus on industries and relationships, they are able to become very close to the
clients and their needs. Therefore, it is not uncommon for M&A advisory work to
be undertaken across these groups.
LBS guide to IB interviews
Sell-side
Investment Banking Division (IBD)
Typical Investment Banking
Division
Product Focus
Geographic Coverage
ƒ Advisory, e.g.
– Mergers and
Acquisitions (M&A)
Industry Focus
ƒ Cover all products and
industries across a specific
region, e.g.
– UK
– Benelux
– Iberia
– Germany
ƒ Financing, e.g.
– Equity, IPOs
– Debt
– Lev Fin
ƒ Areas of expertise include:
– Consumer Products
– Financial
Institutions (FIG)
– TMT
– Natural Resources
– Real Estate
Sales & Trading functions usually include Sales (selling financial products of the
bank to clients), Trading, Specialised structuring of financial products and
Research.
Sell-side
Sales and Trading / Markets
Typical Markets Division
Trading
Sales
ƒ
Sell financial products to
investors
ƒ
Specialize by:
product
geography
industry
ƒ
Provide liquidity for
investors (flow
trading/market making)
and/or trade the bank’s
money (proprietary or
“prop”)
Structuring
ƒ
Develop bespoke
financial products/
derivatives to meet a
client’s specific risk
management or
investment needs
Research
ƒ
Provide trade ideas for
salespeople and traders
and provide independent
research to investors
ƒ
ie Rates, equity RV or
Macro (“strategy”)
LBS guide to IB interviews
However, every bank is different. For example, some banks include ECM and
DCM in investment banking while others have these functions in Markets. You
should learn about the structure of each bank you are talking to as well as the
acronyms they use.
A note on the way to do business: the primary output of investment bankers are
usually “discussion materials” or “pitchbooks”. These highlight the issue at hand,
the suggested solutions and the bank’s credentials and the preparation of these
materials will take up most of your time as a IBD banker, especially at a junior
level. Usually these services are free and are a way of putting a foot in the client’s
door and developing a relationship, in the hope that it will eventually lead to feegenerating business. Once a client has engaged a bank, the project moves from
pitch to deal as the bank works to execute the deal (whether is a merger,
acquisition, equity offering, restructuring, or debt).
LBS guide to IB interviews
3.2 Major Players
Major players in investment banking can be classified into two main types:
• Universal Banks
• Specialised players/boutiques
Universal banks recruiting on campus include Morgan Stanley, Bank of America
Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs, Barclays, J.P. Morgan,
HSBC, Deutsche Bank and Nomura. These players offer a variety of services and
even have corporate lending and retail operations.
This raises a very important distinction in the world of investment banking. A
number of firms have remained “pure” investment banks (Goldman Sachs,
Morgan Stanley), while others have commercial banking arms (JPMorgan,
Citigroup, Bank of America). Historically, the two models were completely
separate entities; while the investment bank would provide M&A and other
strategic financial advice to companies, the commercial bank would mainly lend
capital (often for the same transaction).
However, as firms evolved, many banks decided to provide both services (“one
stop shop” for the clients), providing capital and advice.
Sell-side
“Bulge” Bracket
Bank of America Merrill Lynch
Barclays Capital
Citi
Credit Suisse
Middle Market
Lazard
Rothschild
Jefferies
Moelis
Deutsche Bank
Goldman Sachs
HSBC
JP Morgan
Groupo Santander
RBC
Societe Generale
RBS
Nomura
Morgan Stanley
UBS
“Regional”
Commerzbank
Lloyds
BNP Paribas
BBVA
Standard Bank
RBS
Standard Chartered
VTB
Boutiques
Product
Hamilton Ventures
(M+A Real Estate)
Stormharbour (Trading)
Industry
Fox Pitt Kelton (financial services)
Delta Partners (TMT)
Geography
Frontier secs (Mongolia)
Cavendish (UK)
EFG Hermes (Middle East)
LBS guide to IB interviews
There are many ways to measure the quality of investment banks. You might
examine a bank’s expertise/track record in a certain segment of investment
banking or the growth of its revenues and net income. Many also pay attention to
“league tables,” which are rankings of investment banks in several categories (e.g.,
equity underwriting or M&A advisory). However, it’s quite easy to manipulate
league tables and this is not going to be a perfect predictor of your internship
experience.
The truth is that your experience (and your career) is going to depend from the
quality of the people you are working with. Therefore, spend time to meet alumni
and network with bankers in order to understand in which bank you may fit the
most.
LBS guide to IB interviews
3.3 Why a summer internship?
Key Takeaways: The summer internship is a 10-week interview; it’s a chance for recruiters to
understand if they would like to work with you permanently. And don’t forget, it is also your
chance to understand if this is what you want to do for the long term.
That’s simple; bankers want to test the field of the best candidates they could find
in the market. The summer internship is a 10 week interview in which you are
thrown right in the middle of the game.
The entire point of the recruiting process for banks is to find people who will excel
in the role of the summer associate and demonstrate the potential eventually to
grow into a more senior position and take the lead in creating external
relationships and ultimately, generating business.
However, different banks will have different internships structures. They may staff
you directly in one industry or product team or in a generalist pool in which
summer associates sit together and are staffed on a project basis or work a
rotational programme.
Which is the best option? It depends on your background and your expectations.
A pool may be effective if you do not want to specialise too early, but may not be
the best option if you have a very specialised/industry focused background. For
example if you have been working in healthcare for the last 5 years it may be a
good idea to leverage your knowledge within the healthcare group, to demonstrate
how valuable you would be to that team, thus winning a full time offer.
3.4 The life of a Summer Associate: IBD
Key Takeaways: The associate is the pillar of the execution; he drives the analysts and the daily
workflow of the team according to seniors’ directions and his own business judgment. However, 10
weeks is a short time, and no one is expecting you to be up and running from day 1.
Before going into the details of what to expect during the summer internship, it is
essential that you fully understand this section as you will be asked during your
interviews, what your understanding is of what will be expected from an Associate
and you are required to have a fair idea, which you articulate well.
The Associate is the second most junior member of the team, but not in the
summer. Yes, you may have your MBA and your perfect DCF skills, but the
LBS guide to IB interviews
analyst will still call the shots and drive the work during the summer. Do not be
patronizing. You need to win over the analysts in the team every bit as much as
you are trying to charm the senior bankers.
The Associate is the quarterback of the team, acting as the project manager and the
analytical overseer for the daily work of the team. Senior colleagues give directions
and Associates are in charge for the execution.
The best associates:
• Get the number rights and are technically very prepared
• Successfully mentor, lead and coordinate with Analysts
• Have business judgment (it’s that sparkle that will make you shine)
• Have commercial skills when facing a client
Here is a simple schedule of the main responsibilities of an Associate:
:
Associate Responsibilities
Valuation and Analysis
Roles
ƒ Choose appropriate
valuation techniques
ƒ Error check of analysts’
models
ƒ More sophisticated
modelling
ƒ Being “independent”
Tasks
ƒ Broad view, ranging from
knowing how to read
financial statements to
assessing competitive
positioning and
macroeconomic conditions
ƒ Accretion/dilution analysis
ƒ All valuation methods
Communication and
Materials
Roles
ƒ Communicate with senior
bankers for constant
feedback
ƒ Take charge of analysis
and presentations
ƒ Coordinate with other
teams of the bank
ƒ Lead analysts work
ƒ Find and read all important
sources of company’s
information
Tasks
ƒ Pitch Books
ƒ Information Memorandum
and Management
presentations
ƒ Clients’ presentations
Meetings
Roles
ƒ Coordinate meetings
logistics and agenda
ƒ Take notes during the
meeting
ƒ Prepare the meeting with
all the relevant analyses
ƒ Be ready to answer to
questions
Tasks
ƒ Making it happen
ƒ Attend meetings (internal
and external)
LBS guide to IB interviews
3.5 Overview of Roles in IBD
Key takeaways: The associates and the analysts are the core of the “execution team” responsible
for the execution of the team workflow. A good Associate that can work semi-independently is
considered a “blessing” from MDs and VPs (improves dramatically the quality of their life).
• Analysts (3years)
- Everything falls on them
- Barely time to sleep, will work most week-ends
- Very analytical, financial modelling, public comps, deal comps, DCF
- Document preparation
- Sometimes do not fully understand the big picture (no time for
thinking)
• Associates (3-5years)
- May work slightly less than analysts, but will need to think more, so
even if you aren’t in the office, you are thinking about your work
- Manage and assist in the execution of transactions
- Responsible in front of the MD and the VP of the analyst’s output
(investment books and modelling). If an analyst makes a mistake, it’s
you who looks bad, not the analyst.
- Discuss details and numbers involved in deals with VPs and MDs
- Expected to contribute to team discussion and clients’ meetings
- Interact with different areas of the Firm in order to bring the breadth
of Firm’s resources to bear for the benefit of the client
- Provide rapid and accurate market judgements
- Prepare and deliver clients’ presentations in a compelling manner
- Act as a mentor and role model to Analysts
- Can work “semi-independently”
• Vice-Presidents and Directors
- Responsible for deal execution, manage associates and analysts
- Expected to be able to carry on a deal almost independently from the
MD
- Start having important client interaction and generating business
- Lifestyle becomes somewhat more manageable
- Travelling increases significantly, as do responsibilities
LBS guide to IB interviews
• Managing Directors
- The origination of business depends completely on them. MDs spend
most of their time visiting clients and proposing new business ideas
- Have the final accountability of the strategic deal decisions and
execution
- Support and guide the client in the deal’s negotiations
- Remunerated on the amount of fees generated
LBS guide to IB interviews
4 RECRUITING
COMPONENTS
4.1 Recruiting process timetable
Recruiting in banking is a marathon. Many times you may feel overwhelmed by all
the events and the networking, but do not despair, it’s simply part of the process
and if you are diligent and effective, you will tilt the balance in your favour.
Your goals:
• All your preliminary work has one goal in mind, to win a 1st round interview
slot. Many banks will receive hundreds of applications and will be able to
interview only a small fraction.
• Therefore your first task is to establish meaningful connections at the firms
you are interested in. Bankers who were impressed by you will pass your
name to HR and improve your chances to getting on the interview list. Also,
in certain banks, there is a book of CVs and is sent around to associates and
VPs, and the CVs that get the maximum ticks get interview calls. Be very
careful to make a good impression. Establishing a connection in a bad way
will ensure you are not placed on that interview list.
• Most firms have teams focused on recruiting at LBS, usually made up of
Alumni. Use both the portal directory and the banks’ presentations to enter
in contact with them but be careful about bothering them too much.
Illustrative Bulge Bracket Investment Bank Recruiter 2010
Applications (Approx)
100
65
1st Round Interviews
2nd Round Interviews
23 (23%)
20 (31%)
Hires
13 (13%)
11 (17%)
4 (4%)
3 (5%)
65
65
100
2200
23
11
13
3
11
4
4
What, Who, How Finance?: Presentation to MBA 2012, 7 September, 2010
Blue = Markets
Red = IBD
Page 7
LBS guide to IB interviews
Time Table
September - October
ƒ Work on your CV
ƒ Meet 2nd years
ƒ Attend employer
presentations with the
Finance Club
ƒ Begin networking
November - December
ƒ Employer presentations
ƒ Closed list events
ƒ Cover letter and resume
refining
ƒ Interview preparation
ƒ Networking
ƒ Form interview prep
teams
January - December
ƒ Interview prep
ƒ Corporate week
September:
• Think about your story: potential employers want to know why you want to
be a banker and why you would be a good one. Your story should highlight
all the steps that brought you here and be consistent with your resume. Why
September? You will soon notice that, in every coffee chat you have with
bankers, you will need to focus firstly on who you are and why you are
interested in banking. Use each conversation to refine your story further.
• Finalise your CV, take inspiration from the 2nd years who were successful (us
the Summer Internship Directory to find out who interned where, use
Career Services resources, they have lots of “best practice” examples to
work with, and think of it as your primary piece of marketing material.
• Ask 2nd-year MBAs for referrals to other contacts in investment banking.
• Read this book (you are on a good path, keep going) and familiarize with all
Career Service resources.
• Read the financial press and know what deals are happening, the rationale
behind the deals and the associated multiples, how they are in line with the
industry multiples and your opinion on the deal. You must do this
throughout the entire process.
LBS guide to IB interviews
October:
• Participate in all Finance Club activities and attend every presentation. It’s
critical to make contacts in the banks and follow up initial meetings with
short emails and phone calls. Note that it can be hard to have a good
conversation with the recruiting team when surrounded by dozens of your
classmates. Try to get two or three bankers’ business card and follow-up
with a concise email and meaningful questions. You should assume that
bankers are going to keep your emails.
• Additionally, try to get the contact of the school captain and try to get a
good impression on him/her. This person will be heavily involved in
choosing CVs for first round.
• Networking: reach out to alumni working for the firms you are interested in
working for. Invite them to lunch or for a quick coffee near their offices.
Some of the MBA 2012’s and 2013’s worked in small groups which saved
the alumni some time. Dress like a banker and sell yourself.
• Form an “IBD Study Group” for interview prep, M&A deal review.
• Meet with 2nd-year MBAs who worked in IBD
• Start to draft cover letters.
• Continue to refine your CV as you learn more.
• Run a league table of M&A deals in the Library and research these with
Capital IQ.
November:
• Attend banks presentations and all events organized by Career Services.
• Keep in touch with your contacts and establish new ones, focus your work
on the alumni network. You may also ask to HR at presentations to put you
in contact with alumni in the departments you are interested in.
By the end of November you should have met a minimum of 2-3 people
from each of your target banks, focusing on making connections in your
preferred sector when possible.
• Research firms you are interested in (news, deals, financials, etc).
• Begin to review possible interview questions.
• Take part in the mock interviews provided by Career Services, prepare for
them as if the real deal, the more you put in, the more you will get out of the
session.
LBS guide to IB interviews
• Sign up for PLP sessions for extra practice
• Weekly prep sessions with IBD Study Group.
• Refine CV and cover letters even more. Career Services hold finance drop
ins, you can turn up as often as you like to have your new version checked
and critiqued.
December:
• Finalize cover letters and your CV, send Holiday wishes, submit your
applications. Remember that if you are a career changer you should apply to
as many banks as possible because you will probably not get shortlisted for
all of them.
• Review possible interview questions and follow up with practice.
• Take part in mock interviews with friends, 2nd years and Career Service.
Practice will significantly improve your interviewing skills.
• Use holidays to rest properly; you’ll need your energy. Also, if you haven’t
already, start thinking about what your Plan B and C might be in case you
are not successful in banking interviews. Hope for the best, but prepare for
the worst.
January - February:
• Corporate Partner week is the first week of January and all the Corp Partner
Banks will come to campus to present and hold a networking event. You
will have met the company reps before, many of your fellow students will
not have and it is a bit of a scrum. This is a time to confirm your
commitment, you won’t have much time to build relationships by this stage.
• Spend the first two weeks of January preparing for interviews, keep
rehearsing and polishing your story.
• Interviews period! Be confident and enthusiastic. Banks will come to the
Taunton and make first rounds (approx. 2 weeks). You’ll sign up through
Career Service (Career Central).
• Establish what part of the day you are at your best and try to schedule your
interviews accordingly.
• Manage schedules with location in mind.
• Follow-up good interviews with thank you emails.
LBS guide to IB interviews
• Second Rounds come hot on the heels of the first. They tend to take place
at the Bank’s office and some can take up several hours of your day. If you
have been lucky enough to win through to multiple banks, you might have
to contend with interview clashes. The quickest way to resolve these is to
manage it yourself, by speaking to both Banks. If this option fails then let
Career Services know and they will work to resolve on your behalf.
• One important input here is that if you have been lucky to bag multiple
second round interviews, you will definitely get the chance to mention it to
the second round interviewers as they will ask you who else you are
interviewing with, don’t hold back. If other banks want you, then this bank
will also want you, but don’t lie as HRs at various banks are networked.
4.2 Why networking is a necessary component of recruiting
Key Takeaways: Networking will be your key to interviews; successful relationships may help you
unexpectedly during the recruitment.
No other topic creates so much confusion – so let’s dive right into it and see how
you use networking to break into the industry.
Each year banks receive hundreds of equally outstanding applications from LBS,
but they can call only 30-40 of them at the first round. Networking is how
recruiting teams (often alumni) select those candidates.
Moreover, having favourably impressed a recruiter during the networking period
may help you shine during the interviews.
4.3 How to be
framework)
effective
with
networking
(Connect.Me
Key Takeaways: Career Service offers a very interesting presentation every year on how to network
effectively. Be sure not to miss it. We will provide a brief summary in this chapter. Plan it wisely
and execute it smoothly.
People typically approach relationship building in a fairly unstructured, haphazard
and opportunistic way. While this may work if you are lucky, the great likelihood is
that you will fail.
The Connect Me framework is based on research that Career Service
commissioned to a third party company. The goal of the research was to identify
LBS guide to IB interviews
the main characteristics of successful networkers. LBS students and alumni who
were regarded as successful networkers and had successful careers were
interviewed and asked how they approached networking. The results showed that
they all used a methodical approach.
Essentially there are three primary sets of activities: Planning, Execution and
Management.
Planning:
• Objectives: Determine the banks you are interested in and research the
alumni you want to contact. Make a file excel will all the details.
Usually, you will have to contact 10 alumni for every positive response.
• Timeline: Set a clear timeline for meeting your goals (September November).
LBS guide to IB interviews
• Collateral: Develop marketing material to support your message (email),
prepare your story, especially why banking and why you are a good fit.
Execution:
• Research: Ensure you understand your target audience (bank’s culture, deals,
banker background).
• Tactics:
- Email each of your contacts and ask for a 15-minute informational
chat. Keep your email to 5 sentences at the most, and introduce
yourself by giving school name, explaining how you found them, and
summarizing your work experience. Then propose 2-3 specific dates.
- Prepare some questions: start by asking about the person’s
background and interests (always keep the conversation focused on
them). They may “test” you but never pre-empt this by bragging
about your accomplishments or showing off on how smart you are.
Remember that the burden will fall on you to lead the conversation.
Don’t assume the banker will provide the content. Follow up with a
thank you note and leave your business card.
• Soft skills: Banking is a deeply personal business. You can’t win just by
studying the practice exam. The human element trumps all else. All the
industry knowledge and technical mastery in the world will be inadequate if
you can’t clear the hurdle on the interpersonal side.
Management:
• Data management: Manage your contacts; keep track of the development.
• Managing priorities: Identify/manage your most important contacts. If
you’ve made a good first impression, they will advocate your cause.
Otherwise, don’t dwell on it – focus on the bankers who are most helpful.
Follow-up when you actually have something to say. If someone wasn’t
helpful or if you have better contacts, don’t feel pressured to stay in touch
with everyone all the time.
LBS guide to IB interviews
4.4 On Campus presentations
Key Takeaways: Attend all of them, focus on the bankers with the fewest students surrounding
them, chat for a few minutes, collect business cards, and then thank them and go to meet the other
bankers.
Banks make their first official contact with students through on campus
presentations in January but in the Autumn there are plenty of
educational/informational events, either arranged via the Finance club or by
Career Services. Alumni and representatives from divisions seeking to hire summer
associates will be at the presentations.
Your goal is to establish business contacts in the firm and learn about its particular
culture and strengths. It’s an opportunity to find out how to respond when asked
“why do you want to work with us?”.
Do not misinterpret what we are saying here, the events should not be a race to
collect business cards, but rather an opportunity to win “memory share”. The best
result you can achieve is that someone in the firm will remember you in a good
way and refer your name to HR. Therefore, having meaningful interactions with 23 bankers per event is a sensible goal.
Standing silently in a circle around a recruiter will not help you, nor will asking
bland questions inappropriate to the context or individual you are meeting. If the
group is too crowded, move along to the next group. Finally, remember that you
really want to avoid making a bad impression: every year 1-2 students become
infamous for “elbowing” their fellow students. This strategy doesn’t pay off.
When actually in the conversation you will need to practice your 30 second pitch
on who you are and why investment banking. At the same time, you shouldn’t do
most of the talking. See it as an opportunity to ask insightful questions that you
would like to have answered about banking and the markets.
As a final point, many students tend to focus their time with most senior people.
While they may be important decision makers, do not forget that usually
Associates and VPs prepare the first draft of the interviews’ list. Moreover, is often
harder to follow up and meet a senior banker than a VP and an Associate
LBS guide to IB interviews
4.5 Trading floor visits
Key Takeaways: Trading floor visits are a must attend event for Markets. Great networking
opportunities and a chance to check out the fabled trading floor environment.
Trading floor visits are the key networking events for all wannabe Salespeople and
Traders. Generally speaking, all the major banks looking for Associates in their
Markets division will host one trading floor visit. An indicative list includes BAML,
DB and Nomura. These visits are organized via the Finance Club between
October and December i.e. before the start of the more formal recruiting process.
These events are informal and are a great way to increase your knowledge about
Sales & Trading and the culture in a specific bank. The format is the same at all the
banks and will consist of a standard presentation, a Q&A session with alumni
working at that bank and finally a short walk on the trading floor. The actual
trading floor visit is very short, lasting about 10 minutes.
Trading floor visits are extremely useful and a must attend event. First of all, it is a
good opportunity to meet people working within different banks. Second, and
most important, many of the people you meet during these visits are the actual
interviewers! Finally, you should have a look at the trading floor before applying
for Markets. The atmosphere is very special (noise, interesting characters, countless
monitors), and you either you love it or hate it. It is better to find out whether you
like this environment sooner rather than later.
There are some strategies to make the most out of these events.
• Read information about the bank you are visiting. Generally speaking, you
should have an idea on the financials, the current strategic issues and
whether the bank has a good recruiting history with LBS.
• Follow up on the people you meet. The super simple strategy is to send a
thank you email. Be sure you send this email only to people you actually
spoke with. However, we would strongly suggest you to try to meet
someone after the event for a more informative chat. Remember, some of
these people will actually interview LBS students in January-February.
• Do not tell people you are just checking out opportunities. Even if this is
true, keep it to yourself. Bankers like motivated people and it is always best
to behave as if being a Salesperson is your only focus in life.
LBS guide to IB interviews
As a final note, these events are in great demand, they are made available on sign
up basis via the Finance Club and sell out in less than a minute. So you must be
fast in hitting the refresh button and be sure to “outclick” everyone else!
4.6 Events by invitation only
Key Takeaways: they are another step of the process, simply in a smaller setting
As with other recruiting events, these are evaluative. Banks will invite a smaller
group of people to dinner, drinks or breakfast and give them a chance to talk with
you with fewer people around. Usually the ratio students to bankers is approx. 5:1.
Your goal is to attend all company presentations, follow up with emails and phone
calls, to be invited to all closed list events and, ultimately, make it to the interviews’
list.
These events are an opportunity to make meaningful conversations about the job
and the industry away from the crowd of the company presentations. Use this
opportunity wisely and remember the importance of winning “memory share” in
the bankers’ mind.
Closed list events will not guarantee you a place in the interview’s list; it’s simply
another step in the process that banks use to know you better. Many firms have
more than one closed list event and typically try to invite different students to each
event.
4.7 Informational/mock interviews
Key Takeaways: Informational interviews are part of the selection process. Good candidates are
referred to HR for the interviews list.
Informational (or mock) interviews are an opportunity for you to visit a firm’s
office and meet bankers from different levels. These types of interviews are
designed to be “informational”, in other words are a way to answer your questions
about the bank.
However, it’s not unusual for them to turn into real interviews with direct
questions. Depending on the particular person you meet you may enter in an
interesting conversation or be grilled on your story, your strengths and weaknesses
LBS guide to IB interviews
(even accounting!). So, do not schedule a mock interview unless you feel prepared
for a real interview.
It is a good idea to attend these sessions if you feel ready, you may have a good
shot at leaving a good impression on the firm and be referred for the interview list.
Needless to say it can easily backfire, especially if your story is not convincing or
well prepared.
Finally, if you schedule an informational interview, be ready with an agenda and a
list of questions. You may find yourself sitting with two guys looking at you and
waiting for questions.
LBS guide to IB interviews
4.8
4.9 Cover Letter
Key Takeaways: A cover letter must be flawless. It’s the first piece of written work you send to
your future employees.
Writing the cover letter should be a fairly easy exercise and not take too much
time. The truth is that it won’t help you in getting the interview. However, if not
well written, it will seriously harm your application. Let’s put it in this way,
recruiters will examine your cover letter as an example of your ability to produce
an important document without mistakes and in a fairly structured and elegant
way. Screw it up, and you may not get a second chance. So, the best word of
advice is: read, proof read, ask your friends to read it, ask Career Services for their
advice on it and re-read again.
Use the cover letter as a way to highlight your strengths and why you should be
perfect for the job, and make it fairly standard so that you will be able to easily
tailor it for each bank.
Also, try to accommodate names of the individuals you have met at the bank, this
will help HR get feedback about you from them.
As a general rule, most students tend to structure their cover letter in three main
paragraphs: Introductory paragraph, Body paragraph and Concluding paragraph.
Find in the next page a sample of the structure.
For
more
detailed
information
check
Career
Services
Portal
pages.
LBS guide to IB interviews
Name Surname
London Business School
Regent’s Park | London NW1 4SA
nsurname.mba2013@london.edu
Mobile Number
Name Surname Recruiter
Bank Name | MBA Recruitment
Canary Wharf | 20 Bank Street | London E14 4AD
Month Day, Year
Dear Name MBA Recruiter,
RE: Application for Investment Banking Summer Associate Position
INTRODUCTORY PARAGRAPH:
Communicate to the recruiter what you are applying for and mention some of the bankers to
whom you have spoken to during the networking
BODY PARAGRAPH:
Highlight the parts of your precedent work experience or education that you know are relevant
skills in investment banking:
Select Critical Competencies and Key Requirements
Based on your analysis of their Key Requirements, select the most important (4-5) requirements
of the job description (draw upon your Analysis of the Job Ad/Job Description)
Demonstrate you Match the Criteria
Convincingly articulate how your demonstrated skills, strengths, experiences and achievements
can be an asset to the potential employer. Make sure you use your ACHIEVEMENTS to
illustrate specific examples. Remember – keep it succinct!!
CONCLUDING PARAGRAPH:
Adding Value
Be sure to draw direct connections between your background and the job description! This is the
time to outline your Unique Selling Points (USPs). Show your value add – how can you help the
organisation? What unique skills can you bring? This is a summary of what you have said so far
but summarise the key skills and your US.
Yours sincerely,
Name Surname
LBS guide to IB interviews
4.10 Peer Leadership Program (PLP)
Key Takeaways: The PLP sessions are a unique opportunity to get advice from second year
students who interned in some of the top banks. Attend sessions as soon as they become available,
which is generally early October.
Strictly speaking, the PLP is not a component of the recruiting process. Still, it is a
platform that gives students continuous support from the Fall term till the end of
the recruiting season. This support can be extremely valuable and help you to
successfully land a job in investment banking.
The PLP program is delivers by second year MBA students under the supervision
and paid for by Career Services. After undertaking Career Services training sessions
, PLP students release time slots on Career Central to meet with first year students.
These slots are 30 minutes each and during this time students can seek advice on
CV, Cover Letter, Interviews, networking and everything else. PLP students are
trained on all these areas and have relevant experience in different fields.
Now that we have an understanding of what the PLP is, how can we get the most
value out of it? The first thing to do is to identify among the PLP students those
who can match our needs. In doing so, you should consider where they interned,
what their background was and what their key skills are. Hopefully, you will have
identified more than one student that suits your needs.
During the sessions, it is important to have a clear goal in mind. This can be a CV
review, advice on networking email or just some soul searching. Many students
find useful to spend most of their session practicing interviews.
It is important to remember that the PLP students are more than willing to help
and will often go the extra mile. In addition, chances are that they just finished
their summer internship in one of the top banks. Thus, they have unique insights
on all the peculiarities of the recruiting process.
LBS guide to IB interviews
4.11 CV Preparation
Key Takeaways: the CV is a forward looking document telling the recruiters why you would be a
great addition to their team.
Preparing a perfect CV is your top priority in the first month of School. You will
use it sooner than you think, and it’s definitely better to have it ready when you
need it.
The way you should look at your CV is not like a summary of your past
experiences, but as a prospectus telling to future employers why you are going to
be a good addition to their team. Therefore, you want to highlight all the
leadership and team working experiences you have. Moreover, if you have
finance/deal related experiences, you should definitely point them out.
While everything on the CV must be true, the content you want to include is, to a
certain extent, discretionary. The goal is simple, try to include every experience that
is consistent with what recruiters are looking for in their candidates. It’s also
important to “frame” your experiences in the right perspective using appropriate
wording. You can find an excellent list of “resume action verbs” on the Career
Service website. Be aware that each line of your CV can become an interview
question, therefore you should be ready to back it up.
You should approach the CV review process very seriously and make good use of
all the Career Services resources (both online and in person). Start
reading/watching the CV writing guide in September, make a draft and then ask to
at least 4-5 other students (including native speakers!) and Career Services to read
it. Usually the 2nd years are a great resource together with the PLP sessions. Many
students also find it helpful to take inspiration from the format of the 2nd years CV
in the CV book.
LBS guide to IB interviews
4.12 Simple words of advice......
Key Takeaways: An elegant and conservative style is imperative. Be professional in the banking
“way”. If in doubt, observe the style of the bankers coming on campus or ask your classmates who
have worked in the sector. Remember, it’s easy to make the wrong impression.
4.12.1
Male Dress code
Let’s start saying that we have seen students showing up at closed list events with
very dirty shoes, and that’s doesn’t really work with bankers. Therefore, be careful
to shine your shoes and iron your shirts before interviews and networking events.
• Suit: black business or medium-dark grey; go for a classic and elegant style.
Avoid extravagant colours such as maroon, green or light coloured suits.
• Conservative silk tie: We suggest silk because it makes a nicer knot. I would
not go for the cheap solution given the importance of the situation.
Moreover, you want to dress as bankers do.
• Shirt: a conservative long-sleeve solid white or light blue should work well.
• Belt: a simple and elegant belt matching the colour of your suit and shoes.
• Socks: match the colour of your shoes and belt.
• Shoes: low-heeled and conservative (cap-toe or wingtip), black is safest.
• Aftershave: be moderate, you are not going on a date. The interview room is
often small and you do not want to fill it with your new scent. That would
be awkward…
• About the beard. It’s usually uncommon for bankers. Clean-shaven is the
best way to go.
• Haircut: needless to say that the bankers tend to have short and wellgroomed hair. Long hair is a rarity among bankers, most of whom are not
particularly open minded.
.
LBS guide to IB interviews
4.12.2
Female Dress code (tricky since we are men but...)
• Skirtsuit or pantsuit is a very good choice. The Skirtsuit is probably
considered the most prudent choice. Also a navy-blue, black-medium grey
business suit with white or light blue blouse with high neckline.
• Perfume: be moderate. The interview room is often small and you do not
want to fill it with your perfume.
• Belt: as usual must be coordinated with your outfit. It’s imperative to wear
one if your dress has belt loops.
• Shoes: low-heeled, conservative dress shoes colour coordinated with your
dress. They should also be closed.
• Hairstyle: I guess you don’t need advise on that. Elegant and tasteful. Don’t
let it cover your face so, if long, wear it up or back so as to avoid constantly
flipping it out of the way. Too much movement is not ideal for an interview.
• Earrings: moderate, elegant and discrete. One per ear in the traditional
earlobe position.
• Handbags: usually perceived more professional to carry a briefcase or a
portfolio.
LBS guide to IB interviews
4.12.3
Professionalism and timing
Professionalism means adhering to the principles of courtesy, honesty, and
responsibility in one's dealings with clients and associates, indicating a level of
excellence that goes over and above the commercial considerations.
Honesty it’s a necessary characteristic of recruiting. The banking world in London
is a relatively small one and if a student is caught lying, it will quickly get back to
other recruiters. This doesn’t mean you can’t be commercially savvy in selling
yourself (that’s what bankers do all the time).
Being late is inexcusable. If you are afraid you might be late, then let them know in
advance. Take note of the exact location and the travel time before scheduling
networking events/interviews. Allow yourself some extra time.
Professional manners: use courtesy and thank your interviewer for his time. If
invited out for a dinner events/drinks be aware of your alcohol tolerance. It
wouldn’t be the first time that someone oversteps the line and doesn’t get to the
interview’s list (or worse, doesn’t get a full time offer in the summer).
LBS guide to IB interviews
4.12.4
The interview schedule (23 Jan – 17 Feb)
Key Takeaways: So much preparation will unfold in three-four weeks. Be confident and be
prepared.
The recruiting process is long and intense but will unfold in three weeks only. Be
confident and enthusiastic. First rounds commence two weeks after Corporate
Partner presentations and last just two weeks. Banks will call you within 1-2 days
with their decision if you are through to the next round. Second/Final rounds are
usually at the recruiters’ offices.
Here are some words of wisdom:
• Sleep 8 hours per night. The interview period is intense and draining, and
the mind works best after sufficient rest.
• Be prepared for adverse weather conditions. If necessary, wear appropriate
shoes and change prior to the interview.
• Arrive early and ask HR the name of your interviewer(s). Take some time to
memorise them, it is good to address your interviewer(s) by name.
• Avoid bringing large bags into the interview room. Take a simple black
folder/portfolio with notepaper, a pen, spare copies of your resume and
business cards. Hand your business card to the interviewer at the beginning
of the interview(s).
• Do not exceed your usual caffeine intake and always bring breath mints and
energy bars.
• Do not take your cell phone in the interview room. Leave it in your coat
outside the interview room. A ringing phone is a bad mistake.
• Eat regularly and healthy, keep your energy at the right level throughout the
interview period. Remember that, because you may experience high levels of
adrenaline, you may not feel the need to eat. While this is understandable,
don’t fall into that trap.
At the end of the interview, thank your interviewer(s) for their time and the
opportunity to interview with the company, make again the point of how
important was for you to have this opportunity. If you feel the interview was a
good one, it is advisable to send a thank you note on the same day.
LBS guide to IB interviews
5 INTERVIEW PREPARATION
5.1 What are interviewers looking for?
Key Takeaways: Passion, humility, ability, commitment and leadership potential.
In order to understand why banks use different interview types, it is good for
candidates to know their ultimate goal. Candidates are usually assessed on three
main interrelated levels:
• Technical and competence (can you do the job?): you must have a mix
of hard skills and soft skills, able to work effectively in a team and having
the potential to lead the workflow. Typical questions include:
- Technical questions: testing your ability to understand financial
concepts.
- Your experience and unique attributes: you are selling your own story,
and bankers will ask for specific examples of when you showed the
skills they are looking for, such as problem solving, team work and
leadership.
• Fit with the firm culture (do I see you working with me?): Firms have
(or try to have) unique cultures. Talking with bankers during networking
sessions is a great opportunity to find out, if you fit with their values. If yes,
say it. It’s ok to repeat what you heard during the presentation or
networking session; it shows you’ve researched, listened and understood the
firm. However, as a general word of wisdom, you should maintain a positive
attitude even under stress, show good presence and professionalism.
• Passion and commitment (if I make you an offer, will you consider it
seriously?): Banking is a very demanding job; therefore you must have
passion and commitment. You also have to like the firm you are working
for, and that’s why networking is so important. Bankers will ask why
banking? Why us? And you should be ready with your bulletproof answer
(answers must make sense). Ask yourself, do I sound convincing? Ask your
friends to give constructive feedback on your story and reasons; this will
help you are when under fire.
LBS guide to IB interviews
• These are the three main areas of a candidate evaluation. However, the list
of qualities to be assessed will usually be longer. Here’s a list we drew up
with the assistance of other students who previously worked in banking
prior to the MBA:
• Leadership: ability to deliver results; pro-activeness and spirit of initiative to
add value to the team.
• Teamwork: communicate and work well with others, flexible, respectful with
both senior and junior bankers. There could also be references to what your
study group thinks of you and how well you get along with other members
of the study group.
• Dependability: pair of “safe hands”, ability to work hard, multitask, handle
stressful situations and integrity.
• Excellence: history of success and achievements; high intellectual
horsepower; high standards, ambitions and drive to excel.
• Attitude: pleasant to hang out with; sense of humour; motivated,
hardworking and ability to learn and develop.
• Presence and professionalism: commercial sense; good business judgement;
articulate; inspiring trust and confidence.
LBS guide to IB interviews
5.2 Interview types
Usually an interview lasts for 20/30 minutes. Therefore, if you have been
scheduled for one hour it will probably be split in 2 x 30 minutes or 3 x 20
minutes.
The usual recruitment process includes two rounds of interviews, with the first
round on Campus at the school and the final round at the bank’s office. A couple
of banks have more than 2 rounds and some have an Assessment day. There is no
firm rule, but you are be more likely to be interviewed by VPs and Associates in
the first round and by Directors and MDs in the final round. However, all rules are
there to be broken, one year a boutique and a bulge bracket bank sent MDs to the
first round.
Interviewers will often be alumni of the School, so they will know the concepts of
study groups and the MBA curriculum. You should be ready for questions about
the life in LBS and what feedback your study group would give you. Usually it will
be a one on one interview but it’s not uncommon to have two bankers conducting
the interview.
Be aware, if you are interviewing for a specific team given your particular
background, it is very likely that a member of that team will interview you.
No one can ever predict the format of an interview, so you should try to prepare
well for many different situations. However, the major part of the interviews
follows a common path (and a common goal). Below you can find a general
scheme:
• “Tell me about yourself” or “Walk me through your CV”: is usually the
first question asked. It is an opportunity for you to control the message you
want to give you interviewer(s) :
- Frame every step of your career/story in a way that explains why you
chose to do an MBA and why you are seeking a career in banking. It
must be reasonable and rational. If it’s rational then everyone will be
able to understand and believe you.
- Talk about/frame your achievements that involve transferable skills
and link them to banking (leadership, commercial, team work, deal
related etc…)
LBS guide to IB interviews
• Technical, behavioural and fit: hard skills vs soft skills, the endless battle.
Do not fall in the false myth that banking is all about hard and technical
skills. Banking is about good reasoning and great interpersonal skills. The
banker is an analyst, a strategist, a salesman and a negotiator. Therefore, all
interviews focus on the behavioural and fit of the interviewee.
- The technical part is a minimum threshold you have to meet. It will
also show your commitment and passion for finance.
If questions become more difficult, that can be a good sign. The
recruiter probably believes you have good knowledge and will want to
push it a little bit further.
- All other questions have the aim to understand if your experience and
qualities will add value to the team, and why they would want to hire
you versus another LBS student.
Sometimes you may find yourself in a hostile environment, with your interviewer
trying to systematically undermine and contradict every statement you make, even
cutting you off before you finish your answer. In most cases it’s not because the
interviewer does not like the answers, but because they are testing your confidence,
your interpersonal skills and how you perform under stress.
LBS guide to IB interviews
5.3 Know your story/pitch
Key Takeaways: Your story is how you will attract the interest of recruiters. It’s a great
opportunity to drive the conversation and make yourself interesting to them.
If you are not credible in selling your story and your skills, you will appear less
credible and capable of selling an idea, a project or a company. Your story will
make a huge difference in driving your interviews and networking, and it will
usually be the first question they will ask.
Bankers will only take you seriously, if you can capture their attention by
communicating clearly your story/pitch. When considering your key marketing
points, focus on how these points fit with the Associate role:
• What are your transferable skills for investment banking?
• What are your significant accomplishments from your work experience?
• What in your background makes you stand from the others?
Below there is a rational path that every good story should have:
• The main passages of your life must make sense and show
continuous improvement to excellence. Never talk negatively about your
experience or past employers. Always say that you decided to change
school/job/company because you were offered something better according
with your drive to learn and improve your standards. The characteristics of
your job should always show similarity to the Associate job (team working,
leadership, problem solving and client standing, etc…)
• Why an MBA at LBS and why banking? This should flow naturally
within your story. You should show thoughtfulness in your decisions,
showing that your choice of banking wasn’t solely money driven or
following the business school crowd, but a deliberate reason for taking an
MBA, why you are in London and why you are passionate about (eg)
corporate finance advisory?
• Your experiences/anecdotes should reflect transferable skills for
banking. Always support your statements with an anecdote from your past.
For example when your boss had an emergency and left you in charge of a
LBS guide to IB interviews
project at the clients’ site or reporting directly to the CEO. Also highlight
any finance related or deal experience.
The general format to structure an answer is SOAR: Situation, Objective,
Action, and Result.
A final word of wisdom, it’s very important to be structured in your exposition.
Banking usually involves multitasking on different projects with tight deadlines.
The best Associates are the ones able to communicate clearly, concisely and
quickly to time-poor senior VPs and MDs. Therefore, think in bullet points when
communicating.
For example: Why an MBA at LBS? I decided to do an MBA for three main
reasons:
• First, I felt I touched a ceiling in my past career and the role was unlikely to
stretch me intellectually and I understood a move to London would give me
the best chance of building a Career in IBD since it is the International
Finance Capital of the world.
• Second, I wanted to learn how to work effectively with professionals with
different background and nationalities, and LBS is the most diverse business
school in the world.
• Third, I wanted a broader understanding of business that only a two year
MBA can offer, which will hopefully help to make me a better business
leader/manager in the long term.
LBS guide to IB interviews
5.4 Financial knowledge: use of core courses, training on campus
and other resources
Key Takeaways: Three main areas of knowledge: accounting, corporate finance and markets
understanding. For the first two, use the core courses, the training events and the material
suggested. For an understanding of the markets it is necessary also to read the leading financial
publications regularly.
For many career changers the technical side is usually one of the scariest parts of
the banking interviews. What is considered to be acceptable financial knowledge?
Before answering this question, you should know that recruiters will test you on
your technical skills in order to understand how prepared you are.
The financial side will involve mainly three areas:
• Accounting: the accounting class will cover the majority of what you need
to know. While it is highly unlikely that you will get a basic T-account
question, it is important to understand how money flows through the three
financial statements. You should have a clear understanding of what they are
and how a change to one statement will affect the other two. This may be
asked using a “real-life scenarios” like what happens to the 3 statements
when Apple manufactures and sells iPads? Sometimes, you may also end up
with more advanced questions such as what goes into shareholders’ equity,
LIFO vs. FIFO, and less common topics like revenue and expense
recognition, M&A accounting, deferred taxes etc.
• Valuation/Finance: the corporate finance class and the finance club events
(modelling and valuation workshops) will cover the majority of topics that
will come up during investment banking interviews, including:
- DCF (WACC, CAPM, Beta deleveraging): Use a company’s projected
cash flows, discount them for the time-value of money and cost of
capital, then sum those with the company’s discounted terminal value
to find its present value.
- Public comps: Look at publicly traded comparable companies and the
multiples they trade at, and then apply those multiples to the
company in question.
LBS guide to IB interviews
- Deal comps: Look at what buyers paid for companies in similar
industries and with similar financial profiles and apply those multiples
to your own company.
- Accretion/Dilution analysis: will a company have higher or lower
earnings per share (EPS) after acquiring another company? This is an
analysis of the trade-off between using cash, stock, or debt to finance
an acquisition.
- Leveraged Buyout (LBO) Models – calculating the return to a PE
firm when it buys a company. Most typical questions include: “Walk
me through an LBO model”.
- Brainteasers: Although not about finance, you may end up with a
brainteaser. The main purpose is usually to test your thought process.
For a good list of examples (and answers) use the guide: “Heard on
the Street”
• General financial awareness: these questions test your “real”
understanding of what’s going on with the markets/economy. An example
could be: “where do you think the UK economy will be in the next year?”,
“if you had a $1m, where would you invest it?”, “How would you sell the
equity story for Groupon IPO?” This knowledge cannot be found in the
coursework. It is only obtained by regularly reading the Financial Times,
The Wall Street Journal and The Economist and by discussion with
classmates.
Many students in the past years have found these other resources to be very
useful:
• Adkins Matchett & Toy Midnight Manuals: practical manuals covering the
everyday work of analysts. It also includes basic modelling guides (highly
recommended!).
• Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed
practical guide covering an analyst’s role.
• Vault guide to finance interviews.
• Mergers & Inquisitions IBD guide: interesting guide with over 200 questions
to practice.
LBS guide to IB interviews
5.5 Company Research
Key Takeaways: recruiters will ask questions about their firms. They will test your preparation
(would you go to a client’s meeting without knowing its share price and main financials?) and
interest in the company.
Banks appreciate a student’s ability to differentiate amongst banks. Every firm has
its own culture, which is dictated by their history and the particular nature of their
services. Recruiters will probe your knowledge of the market and your interest in
their particular company versus others.
You should modify your pitch for each bank. Why should they hire someone who
did not even bother to seriously understand the firm he or she has applied to? Lack
of preparation is definitely not a characteristic of a good associate.
When preparing, remember that your knowledge of the banks should reflect your
knowledge of the industry, your potential fit with the firm and your ability to
prepare for important business meetings.
Many students find it helpful to make a one page slide on each bank that they
apply to. A good cheat sheet should include:
• Market position: bulge bracket, mid market, commercial bank or
independent bank? (Morgan Stanley, Unicredit, Citi, Moelis)
• Geography: US vs. European headquarters (Morgan Stanley, Deutsche
Bank)
• Breadth of services: lending (balance sheet?) division (Citi, J.P. Morgan)
• Financials: revenue breakdown
• Market cap/share price/PE ratio/ROE (current vs. 52 weeks high/low)
• Chief executive officer
• People you have met at the firm
• Culture (web site and networking)
• Major deals done in the past year - The Banker and the FT, Investment Weekly
News, Global Banking News, Euromoney and many other banking and finance
magazines and newspapers are available in full text in the database
FACTIVA (available to students and alumni on and off campus)
• Key points made at the company presentations (strengths, culture)
LBS guide to IB interviews
Some students have also found it useful to read the broker reports on the banks,
available through the Library services, analysts’ reports, company data, M&A,
bond, and private equity data are all available on and off campus in Thomson One
Banker:
Portal>Library Services>A-Z list of databases>Thomson One Banker
LBS guide to IB interviews
5.6 Practice interviewing
Key Takeaways: Study groups and mock interviews are absolutely key in your preparation.
• Practicing is crucial to performing effectively in interviews. Many students
who are committed to finding an internship in banking form study groups
of 2-3 people.
• IBD recruitment is a long marathon and having the right group to support
you will quickly become invaluable. In selecting your teammates, try to make
a choice based on potential, commitment and diversity.
• Study groups are usually very helpful for sharing information and practicing
mock interviews. Interviewing each other is probably the best way to
prepare. Use the Career Services resources as well, including mock
interviews with external consultants (Natalie is one of the best) and PLP
sessions.
• Listed below are some considerations to keep in mind when practicing with
your group:
• Complete interviews: practice some complete 30 minutes interviews, with
a full spectrum of questions (motivational, behavioural and technical). Also
simulate interviews with different banks so that you can practice bankspecific questions. It is not easy to maintain the right amount of energy for
the entire interview, so practicing is a great way to become accustomed to
real life situations.
• Practice as it was real: find a quiet room with chairs and table, and take it
seriously.
• Delivery: you may know the right answer to all the questions, but how you
communicate/deliver the message is vital. As previously emphasized, be
structured in your answers. It is okay to use “bullet points”. Also, pay
attention to how you speak, show excitement when talking about important
aspects of your life.
5.7 Mock interviews in group of three: it can help to interview in a group of
three, with one as the interviewer and another observing and taking notes.
LBS guide to IB interviews
Final considerations
Key Takeaways: Find the right attitude and style of communication. Approach every question as
an opportunity to market yourself to the interviewer. Maintain an elegant and appropriate body
language.
Keep calm:
• The interview period is draining, but with the right amount of practice you
can become more comfortable and better able to control your nerves.
Therefore, keep practicing and try to simulate a real interview situation.
• It is also important that you don’t appear too nervous or unsure. Can you
imagine a client trusting a banker who doesn’t appear confident on a vital
matter? Remain communicative and maintain a positive attitude during the
entire interview. Avoid appearing arrogant.
Keep in mind that interviews tend to follow a similar path:
• First impression: be confident and upbeat when you walk in. The first
impression is crucial in the interviewers’ opinion of you.
• Tell me your story: this is usually the first question, even if it comes in
different forms (walk me through your story, why IBD, etc). It is probably
the most important question. Depending on whether your answer sounds
credible and reasonable, the interviewer will decide how seriously he should
listen to you for the rest of the interview.
• Behavioural questions: use examples from your past to highlight why you
would be a perfect fit for IBD and the bank. It is a great opportunity to
market yourself.
• Technical questions: be structured and concise in your answers. If you do
not know the answer, remain calm and try to think through the answer
aloud and ask questions in order to engage the interviewer. Often there will
be no right answer, and the interviewer simply wants to see your thought
process(be structured and consequential!). Last suggestion, never give up
unless the interviewer changes the question.
Maintain appropriate body language:
• Posture: sit straight with your shoulders, do not cross your arms and keep
your hands where the interviewer can see them.
• Face: smile and make the interview an opportunity to learn from an expert
practitioner.
LBS guide to IB interviews
• Eye contact all the time: do not look down (not confident/shy) or up
(evasive, afraid), but maintain a positive eye contact with each of your
interviewers. It’s very important to do this when trying to convince
someone that you are perfect for the job.
• Voice: maintain enthusiasm, do not rush but maintain a good pace. Also
vary your volume and speed according to what you are saying.
• Legs: must not be crossed, and try not to let them shake.
LBS guide to IB interviews
6 INTERVIEW QUESTIONS
Sources used to create this guide:
• Adkins Matchett & Toy Midnight Manuals:
• Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed
practical guide covering an analyst’s role.
• Vault guides to finance interviews and advanced financial interviews.
• Mergers & Inquisitions IBD guide: interesting guide with over 200
questions to practice. (internet website)
6.1 Motivation/fit/understanding banking questions
View motivational question as an opportunity to present the main decisions of
your life in a way that will highlight the characteristics necessary to be successful in
investment banking. Banking is a highly demanding job, and recruiters want to be
assured that you are passionate about it.
You will also be heavily tested on your understanding of the industry players and
main services.
Answers should be clearly communicated: make use of points when talking.
There is nothing worse than burying a good answer in a flood of words.
Remember your interviewer will meet at least 10 students and will easily get bored
and lose attention.
Make use of specific anecdotes to support your statements. Whenever you are
asked a behavioural or motivational question, you need to have anecdotes ready to
back up what you say. Go through your resume and make sure you have stories
prepared for the most common questions; you can modify them as necessary for
any new question you get.
It is also important to ensure consistency and credibility. Saying that you want
to do banking because Uncle Tom is a banker and you always liked the guy is not a
credible answer. Tell the interviewer exactly why you are passionate about advising
companies on extraordinary operations. M&A transactions are a way to shape
competition in industries and are usually life-changing operations for many
companies. IBD projects are usually time-sensitive and critical to a client’s
competitive positioning, often leading to a time frenetic environment where multi-
LBS guide to IB interviews
tasking, time management, strong analytical and communication skills, stamina and
team work are essential.
Also keep in mind that how you answer the motivational questions is going to
determine the interviewer’s attitude for the technical part.
Below you will find a list of the most recurring questions. This is not an exhaustive
list of all the questions you may get.
Background and personal questions
1. Walk me through your resume / tell me about yourself / tell me who
you are:
Almost every interview starts with this question. This is a way for bankers to
form a preliminary opinion about you and to see how well you can sell your
story.
The answer should not take more than 2 minutes and you should focus on
strengths and skills that are relevant to investment banking. You do not
have to cover everything on your resume, but you should highlight all the
main points by giving a short preview of the stories you want to tell them
later. Focus on relevant achievements and transferable skills.
By the time you go for your interview, you should have repeated your story
so many times that even you should be bored of it. Be careful not to sound
mechanical.
2. Why did you major in … ?
If it was business related you can discuss your interest in the area. For
different majors you can emphasize how you liked the challenge and/or you
had a personal interest in the field. But also mention you took an MBA to
study business.
3. Why LBS?
LBS is the best finance business school in Europe, it’s also the most diverse
and is located in the financial heart of Europe. Find your story building on
the school strengths.
LBS guide to IB interviews
4. Why not a Master in Finance (or MBA for Master in Finance
students)?
For MBA students, emphasize how you believe that the role of a banker is
not only about the technical side, but also about understanding client needs
and how companies operate. An MBA will help you in being a well-rounded
professional, enabling you to master a DCF and have a dinner with the
CEO of a company at the same time
For MiF students, emphasize that you are committed to finance and thus
wanted to concentrate on that and be efficient with your time at school so
that you could get into the job you are seeking sooner rather than later.
5. What do you do for fun?
If you have anything unique or uncommon
mountaineering, investing) you should bring
differentiating point. You should also highlight
quote some of the transferable skills that
(multitasking, teamworking, leadership).
(climbing, wine tasting,
that up. It will be a
what is fun for you and
may apply to banking
6. Tell me something interesting about you that is not listed on your
resume
Use common sense. Talking about a trip in Italy or the Manchester –
Liverpool match you saw last month is totally fine.
7. What are your favourite movies /books?
Pick something that you really liked, but avoid being overly finance focused
with titles such as Liar’s Poker or Wall Street. Avoid saying you really like
Harry Potter. Pick a balanced choice (you want to be seen as a normal
person!).
8. Other background and personal questions
• What other business schools did you get into?
• Tell me about your extra-curricular activities at LBS
LBS guide to IB interviews
• What’s your proudest achievement at LBS?
• What has been your greatest learning at LBS?
• Which subject did you find more interesting in LBS? Which did you
enjoy the most? And the least?
• Why did you choose your campus involvements?
• How did you contribute to the LBS community?
• What was unexpected, both positively and negatively, at LBS?
• What was the last book you read for fun? What are you reading right
now?
• What three things would you want stranded on a desert island?
• What’s your favourite quote?
• Who is your idol/mentor? Other than a relative?
• Whose personality do you think had the biggest contribution to your
own personality to date, your mother or your father? Explain.
6.1.1 Commitment and motivation questions
1. Why investment banking?
You were researching a lifesaving medicine or well on your way to
becoming a top manager, so why on earth should you change your career to
banking? Be honest with yourself and try to really understand what bankers
do, it is the best way to find an answer. Then practice it every time you can.
Prepare for strong rebuttals and think ahead about how you will respond to
them. Recruiters will often question your reasoning in order to understand
how solid you are.
The answer to this question is very personal; it could vary from the focus on
the client, the intellectual challenge, the teamwork, the colleagues and/or the
project management skills. Many fail to understand what M&A really is:
advising clients on decisions that will likely transform how they do business
in their industry. Think of the example of the third and the fourth largest
players in an industry merging and becoming the largest one. M&A is a
strategic competitive response. Competitive pressures, changing markets,
and other forces may put pressure on management to seek external means
LBS guide to IB interviews
to improve shareholder value. Mergers, acquisitions and restructuring are an
integral part of every company’s strategic development plan.
2. What do you know about the lifestyle of this industry? Do you think it
will suit you?
Say that you have been researching the industry and have talked with many
bankers and that you are prepared to work as long as the client and your
team need you to (80-100 hours per week).
As an example, give one situation in your life when you were required to
work that hard, and say that even if no one likes continuously long hours,
you still enjoyed it because you like to be challenged and being part of a
team.
3. What you don’t like about banking?
There is no correct answer to this question. Usually no one likes working all
the weekends for multiple months (unless you live only for your work and
this would make you quite boring). Conclude saying that you understand
that M&A situations are so critical for clients and often have tight deadlines;
therefore investment bankers have to work so hard. It’s part of price you
should be prepared to pay for doing such a challenging and exciting job.
4. I see you changed quite a few jobs before business school. If we hire
and invest you, are you going to leave early?
Your answer should show that you are a good team player and an ambitious
young professional striving to grow. While it may be strange if you changed
4 jobs because you did not like the people, it is rational if you did so in order
to grow professionally.
You should also explain why you think that banking is a long-term choice (it
has all the characteristics you were looking for when you were changing
positions)
5. You have an engineering background. Why change your tech job with
Banking?
LBS guide to IB interviews
Keep it as personal as possible. Frame your precedent job in a positive light,
but say that you like the business side of technology more than the tech side
by itself. You want to advise tech companies in extraordinary operations
that will change the competition in the industry.
Many students also point out that they felt capped in their growth since
limited advancement opportunities are typical in the corporate world.
6. You have been an auditor. Why you now want to switch to Banking?
As usual, keep it personal. Your story is your differentiating factor.
Many students find the faster pace of IBD and the career advancement
opportunities more attractive. Say that you are excited about the opportunity
to certify not just a small part of a balance sheet, but to help the CEO of a
multinational corporation change the shape of a company and the
competition dynamics. It is always helpful while making such statements
that you also back up these statements with either personal examples or
examples from a recent transaction.
7. You have been a successful M&A lawyer with a potential for being a
partner in few years. Why would you forego a lucrative career and
enter in banking as a summer associate?
While being an M&A lawyer has many important transferable skills, many
students with a law background find their job too narrow and focused on
only one part of the deal.
Point out how you would like to lead the client on business/investment side,
which is of course the most important.
8. You have worked in a consulting firm for three years, why change for
banking?
Make your own story, starting from a good understanding of what M&A
advisory is.
LBS guide to IB interviews
Many students say that in consulting they learned how to approach
management and analyse market and companies, but that the work was too
project specific and that often you never got to see what appended after it.
M&A advisory it is always a high-level view of the company and it is deeply
dependent with the final results of the recommendation (bid price – deal
closing).
9. In which other sectors are you interviewing? Only in banking?
Only banking. You should already be committed to banking when at the
interview, or someone else will. IBD is a very demanding job, with 80-100
hours per week. It requires passion and commitment.
10. Recently some Analysts and Associates have left for Private Equity. If
the opportunity comes out, would you leave our team?
Recruiters want to hire students with a long-term view on the job. You
should say that Private Equity is a possibility that every banker has to
consider in their career, but that you do not see a foreseeable career path in
PE due to the lack of structure and internal promotion potential. Moreover,
decreasing fund size and increasing competition are seriously threatening the
traditional PE model. Back up statements with recent numbers.
11. You had been working in a small boutique, and you liked working in
a small team. Why do you want to move to a larger bank?
Always refer to your previous experience in a positive way. Say you loved it
and you learned a lot, but that you felt you touched a ceiling in your growth
(only middle market deals, only one country deals, the centre of the IB
profession is London) and therefore moving to a large investment bank is
your natural next step.
12. Which other banks you are interviewing with?
It’s ok to say you are interviewing with all the other large banks. You want
to work in investment banking and you want to maximize your probabilities
to get a job. It’s perfectly rational and everyone should agree with you. It’s
LBS guide to IB interviews
advisable to conclude by stating your interest in the interviewer’s bank of
course.
13. When did you start being interested about finance? You say that you
are very passionate and interested in investment banking. Why did it
take you so long to make this switch?
It should flow with your story. Make sure it’s reasonable and credible, and
not too recent. Possibly you should have done your MBA as a way to move
into a career in finance.
14. Why our bank?
What are our strengths and why you would be a good fit in our team? Think
about the banks specific characteristics and strengths and try to say why you
feel you really appreciate/fit with their culture. Also, try to study the most
recent annual report and the most current statements by the senior
management of the bank. Ensure that you are aware of some of the major
happenings relating to the bank.
15. I am concerned about (a certain area)… Can you explain more in
detail?
Everyone will be questioned on this line. If you worked in IBD they will ask
why you left; if you are a career changer they have many angles to explore
Ask your study group to question you on your reasons behind the career
move, find out in advance what the main areas of concerns will be for
recruiters and be ready (and proactive) to address them at the interview.
Sometimes the interview can become quite stressful with your interviewers
questioning everything you say in order to test the sincerity of your
statements. Relax. it is just part of the process. If you have a well thought
out story and you rehearsed your answers through many mock interviews
you will be fine.
16. Where will you be in 10 years? What’s your career goal?
LBS guide to IB interviews
A business school graduate should be committed to a career in banking, or
at least be able to convince the interviewer that he or she is. For a career
changer, some degree of doubt is acceptable.
However, you should state that you have networked and studied the
industry thoroughly and you are ready to work long hours in a team on
more than one deal, and you look forward to your summer internship so
you can have the opportunity to put in practice everything you have learned.
17. Is there anything else you would like to tell me?
Consider yourself fortunate if you get this question. This is an opportunity
to sell yourself in total freedom, go with why banking, why this bank and
why you.
18. If we were to make you an offer right now, would you accept it?
Assuming you get an offer, how will you make your decision between
us and other firms?
Some banks are particularly sensitive about their acceptance rate; therefore
they may ask the question to candidates at the final round.
It is important to not say yes unless you mean it. If you say yes remember
you are bound by your word, in line with the LBS Renege Policy. Recruiters
talk to each other.
It is not necessary to say yes in order to get an offer, but be ready to discuss
what criteria would you use to evaluate multiple offers. The criteria can
highlight some characteristics that match the strengths of the firm you are
interviewing with. This is a way to show commitment without giving your
word. It is also usually advisable to mention that your main driver will be the
fit with the people you meet. Banking requires long hours, and if you do not
get along with your team it can be a nightmare.
19. What are our greatest weaknesses?
This question is rarely asked. It is designed to test your knowledge (and
therefore level of interest) in the bank. Usually it is advisable to point out
LBS guide to IB interviews
some “non dangerous” areas of improvement for the bank, such the lack of
presence in Asia or lack of leverage or their unique international footprint.
20. Why do you think we selected your resume out of the hundreds that
we received for an interview? Why we should hire you instead of your
classmates? Were you surprised that we called you back for the
second round of interviews?
Consider yourself fortunate if you get this question. It is an opportunity to
sell yourself on why banking, why this bank and why you.
Do not make the mistake of not sounding sufficiently humble. The associate
role requires a lot of self-confidence but also a good degree of humbleness.
There will be a times when you will have to follow the guidelines of senior
bankers even if you disagree or don’t fully understand them.
Moreover, no one likes to work with overly narcissistic people. They are a
problem for everyone.
21. If you were not offered a position in investment banking, what other
jobs would you consider? How would you deal with a rejection?
There is no perfect answer. However, you are in an interview and you
should show commitment and thoughtful planning. Some non dangerous
answers may be:
- Small boutique bank in order to gain enough experience and then reapply for a bulge bracket
- M&A/business development at a corporation
- Project finance for a lending bank
- Small cap PE fund
22. Which of our competitors do you admire the most?
It is another question designed to test your knowledge of the market. It’s
advisable to choose a bank with similar characteristics of the one you are
interviewing for.
For example a good comparable for J.P. Morgan would be Citi, highlighting
their ability to cross sell products leveraging their lending capabilities.
LBS guide to IB interviews
A good comparable for Morgan Stanley would be Goldman Sachs, saying
that you really appreciate their pure investment banking model and their
culture for excellence.
LBS guide to IB interviews
6.1.2 Behavioural questions
Recruiters ask these questions in order to understand how you react to different
situations, and consequently if they would like you on their team. It’s important
to make a wise use of your “anecdotes” portfolio. You must always support
your statements with real examples.
1. Tell me about a time you or your team succeeded/failed or your
biggest achievement/failure:
This is part of the “tell me about a time…” questions and is supposed to
show the interviewer how you handle situations involving stress and
emotions. What did you learn and what was your role?
Your answer should be tailored such that the skills demonstrated should be
the ones relevant to be a good associate. Good examples usually include a
project that did not go as planned or a work situation that did not develop
as expected.
Avoid empty statements like my greatest failure was not getting a job at
Morgan Stanley right after undergrad. Also avoid big mistakes. It is
advisable to use real situations and then show how you used the failure to
progress and learn, and how the next time you handled the same situation
brilliantly.
2. What are your three major strengths?
The interviewer is going to judge if you are a good fit for banking. Answer
using the qualities described earlier for a good associate.
3. Tell me why I should hire you in three sentences/ what are the three
words that best represent you?
Welcome this question as a great opportunity to talk about your unique
selling points. It is a variation of the three major strengths, but you should
back-up your qualities with examples from your professional background.
4. What are your three major weaknesses?
LBS guide to IB interviews
This is a delicate question and you should treat it accordingly. No one is
perfect, so there is no fault in admitting it. Say a real weakness and most
important tell the interviewer how you have been working on it and the
improvements you have already achieved.
However, avoid suicidal statements such as “I do not like working in teams”
or “I am not good with numbers” or “I lose control under stress”.
5. If your best friend/classmates had to describe you in three words,
what would they say?
This question is a variation of the three major strengths. The interviewer is
just trying to figure out if you would be a good addition to the team. Answer
using the qualities described earlier in order to convey the right message.
For each word you list you should also give an explanatory sentence,
possibly recalling a short anecdote.
6. What would someone you have not gotten along with in the past say
about you?
Many students live these questions with anxiety. You should not, it is indeed
another opportunity to sell yourself.
It is a variant of the weaknesses question, but with the caveat that you
should tell an anecdote of your past possibly related to a misunderstanding /
team working situation. For example a time when you were in charge of
delivering a project for the client and one of the advisors (for example the
legal) was not delivering their work on time putting the entire operation at
risk, so you had to step down and “push” in order to make the process flow
again.
7. What would your ex-boss say about you?
This is a variation of the strengths question and represents another great
opportunity to sell your unique marketing points. Just ensure that you
support your statements with real anecdotes.
LBS guide to IB interviews
8. Is there any reason we should not hire you?
There is no right answer. It all depends on how your interview is going. You
can view it as a variance of the weaknesses question.
If the interview is going well and it appears that you would be a good fit,
you can answer with a joke like “if you did not hire me you would probably
not hire at all” or “I sincerely do not see any plausible reason!”
Another option is to try to think about the recruiter’s perspective. Figure
out what about your profile would worry a recruiter, and then convince
them about how that is not a weakness at all. Make sure you support your
statement with a relevant story from your professional background.
9. Do you have any questions for me?
All interviews end with this question. The worst response to this question is,
I have none. The interviewer wants to understand if you are naturally
curious and can ask intelligent questions.
It is another great opportunity to show how thoughtful your research has
been and how well you would you fit in their team. Here is a suggestion on
some common questions to ask:
- Interviewer background: how did you get started in banking? Why did
you choose your group?
- Ask for advice: what distinguishes a good associate from a great
associate? What are the key factors that make a summer internship
successful?
- Discussion: you can ask senior bankers on their view of their sector.
While this is usually appreciated, you should be prepared to discuss
the topic.
While these are all good questions, you should try to use your intelligence
and creativity. Final questions are a way of differentiating yourself.
LBS guide to IB interviews
6.1.3 Initiative / leadership questions
Bankers are not employees, but independent professionals competing in the
business arena for clients. Associates have often to use their own business
judgment to lead analysts, while VPs and MDs have little or no time to follow
them.
Therefore, initiative and leadership (coupled with business judgment) are
essential characteristics that recruiters look for in candidates. Use anecdotes
from your professional background to support your statement.
1. Tell me about a time you when you showed leadership
You should talk about an experience when you were requested to take the
lead of your team and successfully obtained the results you waited for.
• Start by stating the situation/problem and the objective.
• Describe the team and relative roles. Explain
delegated/managed the work flow.
• State the results of your work and the client’s reaction.
how
you
This is also a good opportunity to talk about how you manage expectations
with your seniors and how you can work well with others, try to state
anecdotes and prove that you have the required skills of an Associate.
2. Define leadership and describe your leadership style
There is no right answer, but a “balanced” approach is advisable. The best
associate is able to lead analysts and leave them with a good grade of
independency but at the same time will take responsibility/double checking
(the mistakes of analysts) for delivering the output in time and with no
mistakes.
3. Tell me about a time when a team did not work as intended. Tell me
about a time when you successfully resolved a conflict.
It is strongly recommended you use a story when a team wasn’t working
until you began to fix it.
LBS guide to IB interviews
Never be negative in an interview, therefore you should avoid pointing the
finger against someone in particular.
Many students take a situation where there was a personality clash between
two members of the team (ensure you are NOT one of the two) which was
blocking the workflow; and then explain how they worked to “bridge” the
two antagonist’s positions, ultimately allowing the group to deliver results.
4. Are you a leader or a follower?
The truth is you must be both (be a balanced person!). A good associate
must be versatile and take the lead or take advice and follow, according to
the team’s needs.
5. What was the most difficult situation you faced as a leader and how
did you respond? Tell me about a time you overcame
adversity/greatest challenged as a leader? Give me an example of a
leadership role you have held when not everything went as planned.
The answer is your opportunity to talk about a situation where you stayed
calm and effectively managed the situation.
LBS guide to IB interviews
6.1.4 Teamwork / Interpersonal
Associates constantly interact with analysts, other associates, other
departments, VPs and MDs. Therefore, the ability to work in teams is a
necessary skill.
1. Do you like to work with other people? Do you want that to be
part of your job?
As said before, of course you like it. Efficient teams achieve the greatest
results and in the shortest time.
2. Tell me about a time you worked on a team. What was your role?
Teamworking questions are meant to test your knowledge of the work
of an Associate. They want to know if you will work well with senior
bankers, peers in different groups and analysts, in a constant and
pressing communication flow.
Many students tell about a time when teamworking was complex and
eventually very successful and they were both leader and followers in the
process.
LBS guide to IB interviews
6.1.5 Problem Solving
Associates often face problems with no easy or immediate solution. Therefore,
problem solving and the ability to overcome any obstacle are essential skills for an
Associate.
Use these questions as an opportunity to show you would be a great addition to
the team, someone who doesn’t just “pass” the ball, but that actually deliver value
and take off “worries” from the shoulders of VPs and MDs.
LBS guide to IB interviews
6.1.6 Understanding banking questions
1. You have never worked in finance before, what do you know about
the job of an associate?
You should acknowledge that fact, but show how much research you have
carried out (including talking to friends who work in banking etc) which
means you have formed a good idea of the role and believe that you would
be a great fit. Then you should talk about what you understand the role to
be.
eg. In IBD
The associate leads the execution of all the work done by the team, from the
pitch to the execution of the deal as well as acting as the coordinator of the
team.
The main qualities/roles of an Associate:
- Successfully lead and coordinate with Analysts.
- Get the number rights and are technically prepared.
- Have business judgment (do not waste time of analyst by working on
useless things).
- Have commercial skills when facing a client.
2. What’s the work of a banker in managing an IPO?
In an IPO the main role of banks is to guide companies in the process to
raise money from equity investors on the public markets.
The process is lengthy and involves many steps and different actors.
Bankers are in charge of the coordination of the all process, with particular
attention to the communication with potential investors. The final
responsibility of the process being in time lies always on the bankers.
In managing the IPO, banks have four main activities:
• Coordination:
- Coordination and planning of the process
- Control and monitor work streams
• Documentation/Listing filings:
- Prospectus
LBS guide to IB interviews
- Due diligence (legal, business, financial)
- Legal filings
- Documents/contracts
(Underwriting
agreement,
opinion…)
• Valuation / Equity story:
- Valuation (price range)
- Equity story (why the company is a good investment?)
• Marketing:
- Offer structure (index, size)
- Communication
- Roadshow/book building
- Aftermarket (greenshoe, stabilisation)
legal
3. Tell me about a deal you have been following
This question is highly important, even if it is not directly asked during an
interview, it can be used during your interview and is nowhere else, you can
use it during the last part of your interview when the interviewer asks if you
have any questions for them, thus prepare a recent deal that the bank has
done.
This question reflects an everyday situation in banking. Often senior
bankers ask analysts and associates to scout for information on specific
deals and prepare a concise summary.
However, the main purpose for this question is to understand your passion
about M&A and how well you followed the market. If you are applying for a
specific sector you should cover that with particular attention.
Summarise the deal and why you think it is interesting in few sentences.
Prepare a one-page deal summary on at least 4-5 transactions. You should
include the following information:
- Announcement date
- Acquirer and target description
- Enterprise Value and Equity Value
- EBITDA and PE multiples (in line with industry average? Accretive
or dilutive for the buyer?)
- Structure of the deal (Cash vs stock, LBO?)
LBS guide to IB interviews
- Deal rationale (VERY IMPORTANT, remember what’s M&A all
about)
- Synergies announced at transaction
- What is the impact on the industry?
- Market response
- Banks involved
4. What do you think are the three most important criteria for hiring
someone into this position? What about your background will make
you a good investment banker?
Use your story and the answer to the role of an associate to formulate your
unique answer.
5. If you can relate a sports position on a team to an Associate's role,
what would it be?
If you played any sports it’s a good opportunity to link its particular skills
with those required from an associate. Build the answer around “what
makes a great associate?”
6. What do you expect to get from your summer experience?
Again, this question is a test of your understanding of the job. Many
students say that you look forward to contributing to your team and finally
practicing/learning what you have been studying so hard.
7. Would you rather be on the buy-side or sell-side of a transaction?
If it is an auction, of course you want to be on the sell-side because it is
more probable you’ll earn the success fee.
Think of an auction where 10 buyers are in competition to buy one
company. The advisors on the buy-side are going to earn the success fee
only if their client ends up buying the company, while those on the sell-side
can sell to each one of the 10 buyers. If you had to be on the buy-side, you
should prefer to be on the side of a strategic buyer, because they’re more
likely to be able to pay more, since they will generate more synergies
through the transaction than a financial buyer.
LBS guide to IB interviews
6.1.7 Investment evaluation questions
Business judgement is one of the most important qualities of a banker. Knowing
how to analyse an investment will make you stand out from the crowd. Most of
the material produced by investment bankers includes an equity story and a risk
and mitigants analysis.
As an associate you will be required to draft pitches, info memorandums and
management presentations, all analysing why a company should be attractive for
investors.
These kinds of questions tend to repeat themselves and usually involve how you
would invest a large amount of money, evaluate the attractiveness of an
investment, or decide whether to start a business on your own.
While it’s very easy to start wandering around with your answer, the only good way
is to be structured and ask the right questions:
• Ask the interviewer what your goal is (understand the risk profile and
expected return)
• Ask whether there are any constraints such as time horizon, markets, assets
class etc
1. If you had £1m, where would you invest?
Ask for the goal of the investors. Is it a 20% return in one year or a longterm investment looking to cover your retirement needs?
Build the portfolio of investments around your objective. If it is a shortterm capital gain you should pick a high beta stock. Good ideas can be
found from the stock pitch competition organized every year from the
Investment Management club.
Evaluate the investment, stating why you believe the industry is attractive
and then why the company is going to be able to capture value in the
industry.
If the investment goal is to create returns on a 30 year time horizon, a
balanced portfolio may be the best option. Use the corporate finance class
LBS guide to IB interviews
to prepare better for this question, but keep in mind that recruiters are
interested in your ability to understand clients’ need, respect limitations and
understand why some investments are better than others.
Another strategy that can really help is if you have been building on your
own portfolio, this can be a real winner as you have spent time on choosing
certain sectors and or companies and while doing so you have built some
understanding/rationales for the same. If you have done so, you will be able
to very comfortably answer this question and possibly win over the
interviewer.
2. In which sector/trend of the industry would you invest and why?
This is an obvious question if you are interviewing for an industry team.
They want to test your understanding and your passion for the industry,
don’t miss out on this opportunity to show your preparation.
Structure your answer by addressing:
• Why this trend is going to create or shift demand
• How the competition in the industry is likely to change
• Why M&A activity may happen as a consequence (quote a recent deal
if you can)
• Returns in the sector
• Regulatory environment and possible changes in the near future
• Major players and their returns
• Future of the sector
You should pick a relevant and recent trend, and be specific.
3. If you owned a business and were approached by a large
multinational for selling it, how would you make a decision on what
to do?
Recruiters want to see how well you reason about valuing an investment. In
fact, if you do not sell, it means you are “investing” the lost price in the
company. Therefore, from a pure financial point of view you expect the
present value of future cash flows to be higher than the price offered.
LBS guide to IB interviews
Of course there are other factors you would like to address, such as the
cultural affinity, the governance and the fact that you may want to retain a
decisional role in the company.
From an evaluation point of view you should understand the future of your
company and the potential business plan:
• How attractive is the market?
• Is the company going to capture value in the market? This will give
you an estimate of the growth of the company.
• At what price can the company be valued in 5 years? What’s the
present value? This can be done by either looking at the intrinsic
value of the company (done using DCF) or also looking at
comparable public companies or even comparable transactions in the
past. Also, try to get a range of an acceptable value for the company.
This exercise will give you the guidelines to understand how to look at the
value of your company. Then you should consider the key terms of the
offer:
• What’s the price vs the combination of the value of the company
calculated in the previous step and the present value of the synergies
the acquirer expects to realize
• Payment structure (cash vs stock), for a better idea of what this
means, have a look at the section on Merger Consequence Analysis.
Finally draw your conclusions.
LBS guide to IB interviews
6.2 Technical questions / IBD
Key Takeaways: study groups and mock interviews (Career Services/PLP/friends) are absolutely
vital in your preparation.
Technical questions are an important part of the interview and it is vital that you
are well prepared. You should see it as a threshold you have to pass in order to be
considered for the job.
Technical questions will not ultimately get you the job. The behavioural part of the
interview (your passion for banking and your potential to succeed in it) is much
more important. If you do well enough on the behavioural part and you haven’t
given the interviewer cause to think you don’t know finance, you may not even get
any technical questions.
Before even trying to understand the questions, you should have a solid knowledge
of the basics of corporate finance. Then, you should use this section as a way to
perfect your knowledge and fine tune your preparation.
It’s not only important to know the answers to technical questions, but also to
communicate clearly your thinking process. Recruiters are more interested in how
you reach the solution of the problem. So, even if you do not know the answer to
a particular problem, you should try to show the interviewer how you would
structure/dissect the problem in order to reach a conclusion. Like an exam, the
recruiter is going to give you partial credit for being on the right path, thinking the
right way
LBS guide to IB interviews
6.2.1 The Foundation – Some very basic knowledge you should
already have in place
Key Takeaways: we are going to provide some very basic theoretical concepts before introducing the
questions. They are not in any way a substitute of your own personal study, which you need to get
to a higher level. We just want to provide some basic guidelines to help you orientate your personal
studies.
Enterprise Value
The value of the Assets of a company is given by the fact that owning 100% of the
company will give you 100% of all the future income generated from the company.
Therefore, the value on the financing side (owners of the future income) is equal to
value on the assets side (you are as rich as much it’s valued what you own). Usually
companies are financed through a mix of debt and equity; therefore the enterprise
value is equal to the sum of the value of debt and the equity
Why debt is part of the EV?
Think about the case you buy a house worth $100m using $70m of Debt. After
one year you decide to sell the house, which is worth now $120m, how much is the
value of the equity?
You receive $120m, from the sale, but you have to repay your debts for $70m, so
equity is what remains after you repay debt: $120 - $70 = $50m. Here we go.
Value of Assets: present value of the future income generated by the assets of the
company.
LBS guide to IB interviews
Value of Debt: present value of the payments to debt holders less the excess cash
(Net Financial Position). Payments to interest holders include passive interests and
capital repayments (think to your HSBC loan).
Value of Equity: present value of payments to equity holders (if listed, share price x
shares outstanding). Payments to equity holders include all the income left after
having paid the debt holders. For this reason equity represents a “residual” claim
on the value of the company assets.
Therefore, in every valuation we will use the following equation:
Enterprise Value = Equity Value + (Debt – Cash “net debt”)
However, given that you are interviewing from LBS and have studied Corporate
Finance, you need to come up with a more sophisticated answer to this question:
Enterprise value =
common equity at market value + preferred equity at market value + minority
interest at market value, if any + net debt (debt at market value - cash and cashequivalents) + unfunded pension liabilities and other debt-deemed provisions
- Long term and Equity Investments – Net Operating Losses + Capital Leases
• Preferred and Minority Interest are just other types of equity and thus
treated just as common equity is treated
• Net Operating Losses – Should be valued and arguably added in, similar to
cash.
• Long-Term Investments – These should be counted, similar to cash.
• Equity Investments – Any investments in other companies should also be
added in, similar to cash (though they might be discounted).
• Capital Leases – Like debt, these have interest payments – so they should be
added in like debt.
• (Some) Operating Leases – Sometimes you need to convert operating leases
to capital leases and add them as well.
• Unfunded Pension Obligations – Sometimes these are counted as debt as
well.
LBS guide to IB interviews
How do I find the value of an Asset?
Good question, the value of an asset depends on the cash you will receive from it.
But because future cash flows are risky, we have to discount them in order to
account for risk and time value of money.
Discount Rates - how do you value something that is uncertain and in the
future?
By using discount rates, which reflect the cost for the time value of money and the
cost for remunerating the risk of volatility of the future cash flows.
How do you find the right discount rate for cash flows to equity investors?
Using the CAPM:
Return of market portfolio = Rf + Beta (Rm – Rf)
Let’s start from a basic question, what does return to equity investors compensate?
It compensates for the time value of money and for the risk of the investment.
• Time Value of Money: imagine a US govt T-bill which matures in 1 year. It
is assumed to carry no risk (US Govt will not default), but is still offering a
positive return on your investment. Why? The return offered from a T-bill
(Rf) is compensating the investors for the fact that if you lend money today
you will not get it back for a year.
• Risk: risk arises from the standard deviation of the cash flow profile. As we
have seen, a T-Bill carries no risk (standard deviation = 0), because the US
government is asumed to be able to pay back the exact amount promised.
However, if you are buying a market portfolio ( eg ETF on SP500), you will
require a higher expected return than T-Bills since it does not offer the same
certainties of return. Since there is a higher risk that you might lose money,
you want to be compensated for that by receiving a greater return.
But how do we find out about risk and how we measure it?
It all boils down to the variability (standard deviation) of cash flows, which are
influenced by two kinds of risks:
• Unique project risk: These are the risks associated with the fact that there
are some perils which threaten the success of an individual company but not
necessarily the economy in general (management, plant failure, etc.)
LBS guide to IB interviews
• Market risk: These are the risks arising from the fact that there are economy
wide perils which threaten all businesses (nuclear meltdown, recession, FED
interest rates…)
Good, but should investors be worried about both types of risk?
If you own only one stock in your portfolio, of course the unique project risk is
going to be important, but if you own more than 20 stocks, you are going to worry
more about the covariance of the stocks of your portfolio (market risk).
Think in the following way: if the specific risk of each stock is idiosyncratic, it
means that it moves randomly. If each specific risk in your portfolio moves
randomly it means that their net effect will be zero (one stock goes up and some
other goes down, net effect averages zero).
Therefore, for a reasonably well-diversified portfolio, only market risk matters
since it influences all your stocks in the same direction. This is the risk you can’t
diversify. That is why stocks have a tendency to move together, and that’s why
investors are exposed to market uncertainties, no matter how many stocks they
hold.
Which risk should then be remunerated?
As we have just seen, the risk of a well-diversified portfolio depends only on the
market risk of the securities included in the portfolio, in others words from the
covariance of the stocks with the market portfolio. Why the market portfolio?
Because market risk is by definition measured by the movement of the market
portfolio (SP500 for example).
Great, and how do I measure the market risk of a stock?
You simply measure how sensitive it is to market movements. The sensitivity of an
asset to the market is called beta. Stock with betas greater than 1.0 tend to amplify
the overall movements of the market. Stocks with betas between 0 and 1.0 tend to
move in the same direction of the market, but not as far. Of course the market is
the portfolio of all stocks, so it has a beta of 1.0.
Example: a stock with a beta equal to 1.20 will amplify market movement by a
factor of 1.2 (market movement +10%, the stock will perform +12%).
I see, so how does CAPM find the required return?
LBS guide to IB interviews
CAPM states that the return required by equity investors in order to invest in a
stock, is a function of the market return and its sensitivity with it (remunerates only
non diversifiable risk).
Required return for stock A = Rf + BetaA (Rm – Rf)
Rf = Risk free
Rm = Return on the market portfolio
Beta A = Beta of company A
CAPM can be expressed graphically:
CAPM relation
14.0%
12.0%
CAPM return
10.0%
Return
8.0%
6.0%
4.0%
2.0%
0.0%
0
Data:
Rf = 3%
Rm = 9%
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Beta
1
1.1 1.2 1.3 1.4 1.5
For Beta = 1
Return is equal to
the mkt return
Rf: Risk free return, ie the yield on a US bond, no risk of default and no risk of
variability of cash flows. It’s the return offered when there is no risk at all.
Rm: return of the all stock market, if you owned the “market portfolio” you will
get exactly the market return.
(Rm – Rf): is the market risk premium (MRP), how much more is the market
offering in order to attract investors to invest in the market instead that in risk free
assets? Rm should always be higher.
LBS guide to IB interviews
Ok great; we have just seen how the value of a company is equal to the
present value of the future cash flows it will pay. But how does a company
generate value for its shareholders?
As easy as that, it should generate a return higher than the required return by
investors. In doing so it will become a positive NPV investment and its stock price
will appreciate.
What if a company can’t deliver the required rate of return?
Investors will discount expected cash flows with the required return, thus
achieving a lower valuation. Stock price will go down in order to align it with the
required rate of return.
We talked about discounting the cash flows, but what exactly are we
discounting?
That depends on what you want to value. A company produces Revenues through
its business activities on an ongoing basis. Then it pays all the operating costs,
taxes and makes important investments decisions for the future. What remains is
called “unlevered” cash flow, which is not influenced by how the company is
financed.
However, the financing mix dictates how this cash flow is then divided among
holders of rights on the company. If there is debt, debtholders have a fixed claim
and get paid first. What is left goes to equity holders.
So, if you discount the cash flows to debtholders using the debt discount rate, you
will find the value of the debt.
In the same vein, if you discount the cash flow to equity holders using the CAPM
discount rate, you will find the equity value. Adding the value of debt and equity
will give you the enterprise value.
However, what do you derive if you discount the unlevered cash flows? You will
get directly to the Enterprise Value, but of course the discounting rate will be the
weighted average of the cost of debt and the cost of equity (CAPM), which is
called WACC (Weighted Average Cost of capital)
LBS guide to IB interviews
The formula of the WACC is:
WACC = Rd (1-tc) * D/EV + Re * E/EV
Return on
Assets
(WACC)
Unlevered
Cash Flows
(Enterprise
Value)
Return on Debt
(Rd)
Return on
Equity
(CAPM)
Cash Flows to
Debt Holders
Cash Flows
to Equity
Holders
LBS guide to IB interviews
6.2.2
How would WACC change if debt were to go up? How would WACC
change if tax rates were to go up?
These are the category of questions, which are derived from the formula given
above, so if debt were to go up, given that it is a cheaper source of capital, WACC
would go down.
Now answering the second question, if tax rates were to go up, WACC would go
down as the after tax cost of capital has come down. Thus, remember the formula
and also reason what the effect of each component of WACC’s formula is on
WACC and why.
How would you find the WACC of a private company with no debt?
Firstly, here WACC is simply the cost of equity or in other words how much
should the equity sponsors be compensated for taking on the business risk of the
company. The answer lies in looking at similar companies on the basis of the
following criteria:
• Industry
• Size
• Geography ….
LBS guide to IB interviews
6.2.3 General Finance and Banking
1. What is an Income Statement? What are the major line items on it?
The income statement provides the results of a business’ operations during a
specified period of time.
• Revenues: Income that arises from the sales of goods and/or services and is
recorded when it’s earned.
• Expenses: Commonly includes COGS, SG&A, D&A, Interests and Taxes,
which are the costs a business incurred over a specified period of time to
generate the Revenues reported.
• Net Income = Revenues minus expenses.
2. What is Revenue?
Sales (or Revenue) is the first line item, or “top line,” on an income statement.
Sales represents the total dollar amount realized by a company through the sale of
its products and services during a given time period.
Sales levels and trends are a key factor in determining a company’s relative
positioning among its peers. All else being equal, companies with greater sales
volumes tend to benefit from scale, market share, purchasing power, and lower
risk profile, and are often rewarded by the market with a premium valuation
relative to smaller peers.
Revenue = Units Sold * Price
3. What is COGS?
Cost of Goods Sold includes all the costs directly related to the production of
products and services, such as raw materials, direct labours, plant costs.
4. What is Gross Profit?
Gross profit is the profit earned by a company after subtracting COGS. As such, it
is a key indicator of operational efficiency and pricing power, and is usually
expressed as a percentage of sales for analytical purposes.
LBS guide to IB interviews
Gross Profit = Revenue – COGS
Gross Profit % = Gross Profit / Revenue
5. What is SG&A?
Selling, General & Administrative Expense usually refers to all the “central” costs,
and includes expenses such as salespersons' salaries and commissions, advertising
and promotion, travel, office payroll and expenses, and executives' salaries.
6. What is EBITDA?
EBITDA = Revenues – COGS (not including depreciations of plants) – SG&A (not
including amortisation)
EBITDA Margin = EBITDA / Revenue
It refers to Earnings Before Interests, Taxes, Depreciation and Amortisation. It is
generally considered a proxy of the operating cash flow generation of a company,
but does not include change in working capital, capex, principal repayment’s and
dividends.
EBITDA is widely used for financial analysis and valuation and is considered a
proxy for operating cash flow since it reflects the company’s total cash operating
costs for producing its products and services. In addition, EBITDA serves as a fair
“apples-to-apples” means of comparison among companies in the same sector
because it is free from differences resulting from capital structure (i.e., interest
expense), tax regime (i.e., tax expense) and accounting policy (D&A). [However,
you will also find advocates who prefer using EBIT as they believe that the
company’s investment in CAPEX is an indicator of the future growth of the
company, and one such advocate is Warren Buffet]
It is also considered a good indicator of the ability of the company to generate
profits, because it measures the profitability of the company after having paid all
the operating costs. However, it does not include the cost of the tangible and
intangible assets which for, particular industries such as Telecom, could be
significant. In these cases analysts often use EBITDA-Capex
LBS guide to IB interviews
You should also remember that even EBITDA can be influenced by individual
company accounting decisions (revenue recognition, unjustified rise in account
receivables, etc…).
7. What is EBIT?
EBIT = Revenues – COGS (not including depreciation) – SG&A (not including amortisation)
– Depreciation – Amortisation
EBIT Margin = EBIT / Revenue
EBIT refers to earnings before interests and taxes and is commonly referred as
“operating profit”.
EBIT is generally considered a proxy of the operating profitability of a company
and it is independent by the capital structure (before interest). It is used to
compare companies, but as it includes non-cash expenses (D&A), it can be
impacted by particular accounting policies of the company. Since those policies
may differ from company to company, comparability may be affected.
8. What is Net Income?
Net income (“earnings” or the “bottom line”) is the residual profit after all of a
company’s expenses have been subtracted. Net income can also be viewed as the
earnings available to equity holders once all of the company’s obligations have
been satisfied (e.g., to suppliers, vendors, service providers, employees, utilities,
lessors, lenders, state and local treasuries). Wall Street tends to view net income on
a per share basis (i.e., EPS).
9. What is a balance sheet? What are the major line items on it?
The balance sheet is a snapshot of the financial position and the economic
resources of a company.
• Assets: resources that a company uses to operate its business
o Current Assets: assets that could reasonably be expected to be
converted in cash within one year. These are important because they
LBS guide to IB interviews
fund day-to-day operations. Include mainly receivables, inventory,
cash & equivalents.
o Long-Term Assets: assets which are not liquid, such as Plant &
Equipment.
• Liabilities: claims that creditors and shareholders have on company
resources:
o Current Liabilities: include both operational (payables) and financial
obligations due within one year.
o Long-Term Liabilities: include both operational (payables) and
financial obligations not due within one year.
Shareholders’ Equity: the book value of the equity of a company. It comprises
the original “paid-in” capital plus any subsequent issues of new equity plus the
retained earnings less the dividends, which “flow through” from the income
statement each period
10. Describe the three main parts of the cash flow statement
Net Income
+
Non Cash Expenses (D&A)
Change in Working Capital
Cash from Operating Activities: Cash flows related to producing and
delivering goods/services
+
-
Capital Expenditure (Capex)
Disposals
Acquisitions
Cash from Investing Activities: Cash flows related to acquiring or disposing
of long-term assets
+
+
-
Issue of Debt
Repayment of Debt
Issue of Equity
Dividends and Buy-backs
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Cash flows from Financing Activities: Cash flows related to obtaining cash
from lenders and shareholders, and repayments of amounts borrowed.
11. What is Enterprise Value?
Enterprise value is the value of the assets of the company. It reflects the
discounted future cash flows to all claimants, whereas equity value reflects the
discounted future cash flows only to equity holders.
Since the assets side of a balance sheet must be equal to the liabilities side, we can
derive that EV is equal to the value of all the financing instruments emitted by the
company (ie bonds).:
EV = Equity Value + Net Financial Position + Minority Interests + Preferred Stock
12. What is Equity Value (market cap)?
Equity Value (“market capitalization”) is the value represented by a given
company’s basic shares outstanding plus “in-the-money” stock options, warrants
and convertible securities (called fully diluted shares outstanding).
It is calculated by multiplying a company’s current share price by its fully diluted
shares outstanding.
Equity Value = Share price * Fully Diluted Shares Outstanding
13. How do you find the number of Fully Diluted Shares Outstanding?
A company’s fully diluted shares are calculated by adding the number of shares
represented by its in-the-money options, warrants, and convertibles securities to its
basic shares outstanding.
The incremental shares represented by a company’s in-the-money options and
warrants are calculated in accordance with the treasury stock method (TSM).
The TSM assumes that all tranches of in-the-money options and warrants are
exercised at their weighted average strike price with the resulting option proceeds
LBS guide to IB interviews
used to repurchase outstanding shares of stock at the company’s current share
price.
In-the-money options and warrants are those that have an exercise price lower
than the current market price of the underlying company’s stock. As the strike
price is lower than the current market price, the number of shares repurchased is
less than the additional shares outstanding from exercised options. This results in a
net issuance of shares, which is dilutive (ie, it increases the outstanding share
count)
If the CEO of a company owns 100 call options with a strike price of $18 and the
current stock price is $20, the CEO will pay the strike price to the company
100*$18 = $1,800 in order to exercise these options. The company receives the
money but has the obligation to give to the CEO 100 shares (which are worth $20
each). Therefore, it uses the $1,800 to buy shares on the market. $1,800/$20 = 90
shares, but it has to give to the CEO 100 shares, so it has to issue the difference:
100-90 = 10 shares, which is the addition to account for the dilution of the in-themoney options.
Treasury Method (New Shares)= ((Share Price – Strike Price) / Share Price)* Number of
Options
14. What’s the difference between common stock and preferred stock? How
do they trade relative to each other?
Preferred stock are shares with a guaranteed dividend, while common stock are
not. Moreover, in case of bankruptcy, preferred stock shareholders have
priority over the commons stock.
As a result, they have claims on the same cash flows, but just as debt usually
requires a lower cost of capital (Rd) than the cost of equity (Re) because it has a
precedence on being satisfied, so preferred stock cash flows are a little safer
than common and so returns will be lower than those offered to normal
shareholders.
LBS guide to IB interviews
15. What are Minority Interests?
Minority interest occurs when one company purchases a controlling stake in
another but does not acquire 100% of the Equity. Due to consolidation
accounting, however, even if you acquire only 70% of a company, the acquiring
company will recognize 100% of the acquired company’s assets and liabilities on its
own balance sheet. Minority Interest is the line item on the balance sheet where
you will net out the 30% you do not own.
Let’s say LBS is listed and buys 90% of the shares of Columbia, what happens to
the 10% that they did not buy? The Columbia shareholders become minority
shareholders and keep their 10%.
16. Why is Minority Interest not included in the Equity Value calculation
(market cap)?
Think about if from a cash flow perspective. 10% of the cash flows coming from
the subsidiary are owned by minority shareholders, not regular shareholders. So
you can’t have what is not yours… but it is still part of the enterprise value, which
is the present value of all cash flows discounted for the appropriate WACC.
17. If one of your clients had some extra cash, how would you tell him to
invest it?
First of all we should define “extra cash” (keeping in mind that the industry maybe
cyclical, and what is extra cash in one period may be necessary in the next). Every
business requires some level of cash and working capital to run operations on a
day to day basis. Anything that is not required to meet these day-to-day cash flow
obligations is excess cash.
If the managers have positive NPV investments they should undertake them by
definition. If they do not have where to invest they should return money to
stockholders via dividend or stock repurchase.
They may also repay debt, but only if this would be useful to move the D/E ratio
toward the optimal ration (minimise the WACC thanks to tax shield).
LBS guide to IB interviews
18. In a tax free world, if you have a company with an Enterprise Value of
$10bn and you issue $2bn in debt, what is the new EV?
This question represents the type of questions where the interviewer is trying to
test your ability to connect the three statements, so try to work with the
interviewer one statement at a time. In this question, it is just the balance sheet,
issuing $2bn in debt increases the assets side of $2bn of cash, but also the liabilities
side for $2bn of cash. So the net effect is zero, value is $10bn.
19. What if after issuing the debt you use the $2bn to pay a dividend?
If the company uses the cash raised with the debt to pay a dividend, equity goes
down by $2bn. The firm value therefore remains at $10bn. Remember that the
value of a company depends only on its future cash flow and the return on assets.
Capital structure matters only if there is a tax shield on debt or for the present
value of financial distress.
20. What if, instead of paying a dividend, the Company uses the $2bn to
invest in a new project with an NPV of $3bn?
Enterprise Value increases by the NPV $3bn and the Investment $2bn, therefore
of $5bn. New firm value is $15bn.
21. Why do you subtract cash in the formula for Enterprise Value?
In an acquisition the buyer would “get” the cash of the company, so effectively it is
paying a price minus the cash he will receive back once he becomes the owner.
Theoretically, it’s not very accurate since one should only subtract the “excess
cash”, the amount of cash the company has above the minimum needed to fund its
operations.
22. In a world with taxes, if you issue debt for $100 and pay it out as a
dividend, how does it affect your EV? Ignore the present value of
financial distress.
Simply speaking, you are decreasing the amount of equity in the company by
increasing the amount of debt in the company, thus the presentation of debt
LBS guide to IB interviews
(cheaper source of capital and also having a tax shield) has increased and
presentation of equity has decreased, thus enterprise Value increases by the PV of
the tax shield generated by the new debt (please refer to the APV method of
calculating the enterprise value of the company for a better understanding).
23. Could a company have a negative equity value?
No, but it could be zero if the value of the assets are lower than the value of the
debt. You can’t have a negative share price or a negative number of shares
outstanding.
24. Can a company have a negative enterprise value?
Yes, a company can have a negative enterprise value if the company has loads of
cash.
25. Why are some stock options relevant to valuation?
Unexercised, in-the-money options represent implicit equity value that will dilute
current shareholders. Theoretically, it should already be reflected in the company
share’s price.
26. When looking at establishing the price of a company, do you pay more
attention to the Enterprise Value or the Equity Value?
Enterprise Value, since it represents the present value of all the future cash flows
generated by the real assets of the firm.
LBS guide to IB interviews
6.2.4 Valuation
1. How do you value a company?
There is almost a 100% chance that you will be asked this question, so please pay
extra attention to each method and also how one is different from the other. To
value a company you can create a football field showing the results of main
Valuation methodologies:
• Discounted Cash Flows: measures the “intrinsic value” of a company by
discounting to the present value all the future cash flows of the firm
available to stakeholders. This can be done using the WACC or APV.
• Public Comparables: measures “relative value”, looks at a group of listed
peer companies to understand how the market values companies in the
same business or industry along relevant metrics, such as EV/EBITDA and
P/E. You might use different metrics depending on the industry.
• Acquisition Comparables: Analyses which prices and multiples companies in
the same business or industry have been bought and sold historically.
• Accretion/Dilution analysis: it is an affordability analysis of what the
acquirer can pay rather than an analysis of the value of the target.
• Leveraged Buyout: indicates how much a financial sponsor should pay a
company given a targeted IRR, the debt capacity of the firm and an exit
hypothesis.
Another two methodologies are also widely used to frame the value of a company:
• Liquidation Value: Examines how much the assets of the company are
worth if sold on a stand-alone basis and used in potential distressed
situations.
• 52 week Trading Range: if the company is listed, then market valuation is an
important benchmark
2. Which valuation methods tend to lead to the highest valuation?
To be honest, there exist many versions to this question; however, following is the
most highly accepted answer during the recruitment season for 2012 interns:
LBS guide to IB interviews
• DCF tends to give the highest valuation as this valuation is generally based
on the estimates (growth) by company and for obvious reasons, every
company would want to get the highest valuation and thus get the
maximum price.
• Acquisition comparables tend to give a higher valuation than public
comparables because strategic buyers generally generate synergies in an
acquisition, which will drive a higher valuation. In addition, there is also an
acquisition premium to public comparables because the acquiring entity will
win control of the company and will now have access to that company’s
cash flows (a public shareholder can’t decide how to allocate cash flows)
• Leveraged Buyout Valuation (LBO) will be driven by financing terms
available in the market.
• Public Comparables tends to lead to the lowest valuation
3. What are the pros and cons of each method?
• DCF it is probably the best measure of the “intrinsic value” of a firm as it
discounts the unlevered free cash flow of the company by its cost of capital.
It takes into account the synergies, management expectations and the tax
shield generated by the desired capital structure. However, DCF is extremely
sensitive to changes in its assumptions, in particular on growth expectations
and discount rates. Moreover, the WACC method works only if the capital
structure (D/E) doesn’t change, otherwise you must use the APV method.
Finally, it is “subjective” because it reflects only your view.
• Public Comps have the great advantage of showing the market
valuation/expectations on companies in the same business. The main
disadvantage is that depends on the availability of good peers and it relies
only in public information. It also does not include a control premium
which would be relevant in you are trying to value the company for
purposes of an acquisition.
• Deal Comps show how valuation in M&A transaction for companies in the
same business has evolved in the past. However it suffers of the same
comparability problem of public comps, exacerbated by the often lack of
information on the deal. Moreover, M&A transactions are cyclical (move in
LBS guide to IB interviews
waves), tend to respond to shocks in the industry (include a strategic
premium) and include synergies that are very hard to extrapolate.
• Leveraged value is basically a DCF with special conditions. It gives you the
value that a financial sponsor can pay given a certain business plan, an exit
multiple and a targeted IRR.
4. Walk me through a DCF
To create a DCF valuation involves 5 steps:
• First, you look at the financial statements of the target in order to derive the
historical financials such as Revenue, COGS, SG&A, EBITDA, CAPEX,
Change in Net Working Capital, D/E, etc.
• Second, project financials (usually 5-10 years) in order to derive future cash
flows available to both debtholders and shareholders (unlevered FCF) for
the business plan period. There are two ways to extrapolate FCF, both give
you the same result:
METHOD 1
EBITDA
- D&A
EBIT
- Taxes
NOPLAT
+ D&A
- Capex
- Increase in Working Capital
Unlevered Free Cash Flow
METHOD 2
Net Income
+ Interest expense * (1-Tc)
+ D&A
- Capex
- Increase in Working Capital
Unlevered Free Cash Flow
• Third, find the right discount rate. Bankers often use the WACC, which is
very convenient when you use a long-term D/E and you don’t expect the
capital structure of the company to change dramatically.
LBS guide to IB interviews
Where Re is the Return required by equity investors (CAPM), Rd is the cost
of debt, Tc is the marginal tax rate, and D/E is the long-term capital
structure for the company.
If the D/E ratio is expected to change dramatically you need to use the
APV method. Basically you first calculate the value of the company as if it
were all equity financed (WACC = Re if there is no debt) and then you add
the present value of the tax shield created by interest expense and subtract
the present value of the financial distress.
• Fourth, determine the Terminal value of the company, in other words the
present value of all the future cash flows after the least year of
projections/business plan. There are three ways to find the TV:
o Gordon Growth Model (Perpetuity formula): present value at
the last year of projections of an infinite series of cash flows
growing at g and discounted at WACC. Perpetuity growth is
obviously highly sensitive to the long-term growth
assumptions, which is usually calculated between inflation and
long-term GDP growth (2-5%).
FCF (last year) * (1+g)
WACC - g
o Exit multiple: terminal value is most commonly calculated as a
multiple of the EBITDA or EBIT in the last year of
projections. Of course, a high EBITDA multiple implies high
growth expectations. The multiple you use is generally based
on the average multiple observed for companies of this type in
the public market (ie, from your public comparables analysis)
o Liquidating value in the terminal year (used for example in
mining)
• Fifth, obtain the Net Present Value of the company by discounting to today
using the WACC the cash flows for the year of projections and the terminal
value.
LBS guide to IB interviews
5. Walk me through how you get from Revenue to Unlevered Free Cash
Flows. And to cash flows to equity holders?
METHOD 1
Revenue
- COGS
Gross Profit
- SG&A
EBITDA
- D&A
EBIT
- Taxes
NOPLAT
+ D&A
- Capex
- Increase in Working Capital
Unlevered Free Cash Flow
- Interest expense * (1-Tc)
- Principal repayments
Free Cash Flow to Equity
6. What percent of the company NPV is usually in the Terminal Value?
The terminal value typically accounts for a substantial portion of a company’s
value in a DCF, sometimes as much as three-quarters or more. Therefore, it is
important that the company’s terminal year financial data represents a steady state
level of financial performance, as opposed to a cyclical high or low. Similarly, the
underlying assumptions for calculating the terminal value must be carefully
examined and sensitized.
The weight on the value depends mainly on:
• Length of projections period before using the TV (visibility of the business)
• Long-term growth rate (g) used to calculate the TV. Note that if you used
the exit multiple method, your assumption would be the same. A high
multiple corresponds to a high growth rate, and you can always calculate the
implied perpetuity value to an exit multiple value by finding the g where the
two values are equal.
LBS guide to IB interviews
7. Why would you use (1+g) in the Terminal Value?
Mathematically, (1+g) grows the last projected year out another year (to the first
year of the perpetuity method). Why? The simple formula without (1+g) is: FCF /
(WACC-g) says: “give me a constantly growing stream of cash flows that starts at
the end of the year and I will give you the value of that cash flow stream at the
beginning of the year. However, you need the present value of the cash flows to
fall at the end of the last projected year, not at the beginning.
8. What is an unlevered cash flow?
A business generates cash through its daily operations of supplying and selling
goods and/or services. Some of the cash has to go back into the business to renew
fixed assets and support working capital. If the business is doing well, it should
generate cash over and above these requirements. Any extra cash is free to go to
the debt and equity holders. The extra cash is the free cash flow to stakeholders.
9. Why does DCF use unlevered cash flows?
Unlevered free cash flows are generated by the use of the company real assets,
disregarding the company financial structure (D/E). Therefore, discounting
unlevered cash flows will give you the enterprise value of the whole company.
If, however, you discounted the cash flows to debt holders by the cost of debt you
would be able to find the value of the Debt, while if you discount the cash flows to
equity holders by the cost of equity you would be able to find the value of Equity.
The unlevered free cash flow is equal to the sum of cash flow to debt holders and
the cash flow to equity holders.
10. How do you get to the free cash flow to equity holders?
There are two ways to extrapolate FCF to equity holders, both give you the same
result:
LBS guide to IB interviews
METHOD 1
EBITDA
- D&A
EBIT
- Taxes
NOPLAT
+ D&A
- Capex
- Increase in Working Capital
Unlevered Free Cash Flow
- Interest expense * (1-Tc)
- Principal repayments
Free Cash Flow to Equity
METHOD 2
Net Income
+ Interest expense * (1-Tc)
+ D&A
- Capex
- Increase in Working Capital
Unlevered Free Cash Flow
- Interest expense * (1-Tc)
- Principal repayments
Free Cash Flow to Equity
Important note: you should know both ways of calculating FCFs as the interviewer might be
bored of hearing one kind and then might want you to tell him the other ways, so be prepared,
this happened to me.
11. What is the WACC?
WACC is the Weighted Average Cost of Capital of a company including the tax
shield generated by the tax-deductible nature of interest. It reflects the riskiness of
the cash flows you are discounting and can be seen as an opportunity cost of
capital or what an investor would expect to earn in an alternative investment with a
similar risk profile. For example, a large utility company should have a lower cost
of capital than a more risky start-up in social media.
Most companies use a combination of debt and equity to finance their assets;
therefore their cost of capital will be a combination of the cost of debt adjusted for
the tax shield and the cost of equity. WACC is the combined, weighted cost of
debt and equity:
WACC =
Debt
Total Capital
* Cost of Debt * (1-Tax Rate) +
Equity
Total Capital
* Cost of Equity
Cost of Equity = is the return required by equity investors, which is dependent by
the riskiness of the cash flows (Return on Assets) and the financing mix (D/E).
Cost of Debt = yield to maturity implied by the trading price of a company publicly
traded debt.
LBS guide to IB interviews
D/E = Long-term ratio of the company, usually in line with the industry and the
long-term strategy of the management. In the absence of explicit company
guidance on target capital structure, the banker examines the company’s current
and historical debt-to-total capitalization ratios as well as the capitalization of its
peers.
Tax Rate = use the marginal tax rate, not the effective.
12. Why do you put tax savings from interest in the WACC?
The WACC uses the after tax cost of debt because unlevered free cash flows do
not include the effect of interest when you calculated taxes. However, most
businesses have debt and interest payments, and the WACC picks up the tax
savings from interest payments.
The idea is that because interest payments are tax-deductible, the cost of debt to
the firm is actually lower than the stated coupon.
13. How do you estimate the cost of equity? What is the CAPM?1
Cost of equity is the required annual rate of return that a company’s equity
investors expect to receive (including dividends). Unlike the cost of debt, which
can be deduced from a company’s outstanding coupons and maturities, a
company’s cost of equity is not readily observable in the market. To calculate the
expected return on a company’s equity, the banker typically employs a formula
known as the capital asset pricing model (CAPM).
The Capital Asset Pricing Model is based on the premise that equity investors need
to be compensated for their assumption of systematic risk in the form of a risk
premium, or the amount of market return in excess of a stated risk-free rate.
Systematic risk is the risk related to the overall market, which is also known as non
diversifiable risk. A company’s level of systematic risk depends on the covariance
of its share price with movements in the overall market, as measured by its beta.
1
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl,
Investment Banking, Wiley Finance
LBS guide to IB interviews
By contrast, unsystematic or “specific” risk is company or sector-specific and can
be avoided through diversification. Therefore, equity investors are not
compensated for that form of risk. As a general rule, the smaller the company and
the more specified its product offering, the higher its unsystematic risk. Here is the
formula:
Cost of Equity (Re) = Risk Free + Beta Equity * (Market Risk Premium)
Risk-Free Rate (rf): The risk-free rate is the expected rate of return obtained by
investing in a “riskless” security such as U.S. government securities such as T-bills,
T-notes, and T-bonds. The general goal is to use as long dated an instrument as
possible to match the expected life of the company (assuming a going concern),
but practical considerations also need to be taken into account. Due to the lack of
liquidity on the issuance of 30-year Treasury bonds, bankers often use the 10-year
T-bond.
Market Risk Premium (Rm - Rf): The market risk premium is the spread of the
expected market return over the risk-free rate. Finance professionals, as well as
academics, often differ over which historical time period is most relevant for
observing the market risk premium. Some believe that more recent periods, such
as the last ten years or the post-World War II era are more appropriate, while
others prefer to examine the pre-Great Depression era to the present.
Ibbotson tracks data on the equity risk premium dating back to 1926. Depending
on which time period is referenced, the premium of the market return over the
riskfree rate (rm – rf) may vary substantially. For the 1926 to 2007 period,
Ibbotson calculates a market risk premium of 7.1%. Many investment banks have a
firm-wide policy governing market risk premium in order to ensure consistency in
valuation work across their various projects and departments. The equity risk
premium employed on Wall Street typically ranges from approximately 4% to 8%.
Consequently, it is important for the banker to consult with senior colleagues for
guidance on the appropriate market risk premium to use in the CAPM formula.
Beta: Beta is a measure of the covariance between the rate of return on a
company’s stock and the overall market return (systematic risk), with the S&P 500
traditionally used as a proxy for the market. As the S&P 500 has a beta of 1.0, a
stock with a beta of 1.0 should have an expected return equal to that of the market.
LBS guide to IB interviews
A stock with a beta of less than 1.0 has lower systematic risk than the market, and
a stock with a beta greater than 1.0 has higher systematic risk. Mathematically, this
is captured in the CAPM, with a higher beta stock exhibiting a higher cost of
equity; and vice versa for lower beta stocks. A public company’s historical beta
may be sourced from financial information resources such as Bloomberg, FactSet,
or Thomson Reuters. Recent historical equity returns (i.e., over the previous twoto-five years), however, may not be a reliable indicator of future returns. Therefore,
many bankers prefer to use a predicted beta (e.g., provided by MSCI Barra27)
whenever possible as it is forward-looking.
The exercise of calculating the Cost of Equity for a private company involves
deriving beta from a group of publicly traded peer companies that may or may not
have similar capital structures to one another or the target. To neutralize the
effects of different capital structures (i.e., remove the influence of leverage), the
banker must unlever the beta for each company in the peer group to achieve the
asset beta (“unlevered beta”). The formula for unlevering beta is shown below:
BLevered
BUnlevered =
1+
D * (1-Tax Rate)
E
After calculating the unlevered beta for each company, the banker determines the
average unlevered beta for the peer group. This average unlevered beta is then
relevered using the company’s target capital structure and marginal tax rate. The
formula for relevering beta is shown below:
BLevered = BUnlevered *
1+
D * (1-Tax Rate)
E
The resulting levered beta serves as the beta for calculating the private company’s
cost of equity using the CAPM.
14. Should the cost of capital be higher for a $10bn or $100m company with
the same capital structure?
LBS guide to IB interviews
In theory, the cost of capital of the smaller company should be higher, because its
future cash flows are more sensible to movements in the macro-economy factors
(higher beta).
15. How do you calculate the WACC for companies with different business
segments?
WACC can also be thought of as an opportunity cost of capital or what an investor
would expect to earn in an alternative investment with a similar risk profile.
Companies with diverse business segments may have different costs of capital for
their various businesses. In these instances, it may be advisable to conduct a DCF
using a “sum of the parts” approach in which a separate DCF analysis is
performed for each distinct business segment, each with its own WACC. The
values for each business segment are then summed to arrive at an implied
enterprise valuation for the entire company.
16. If you discount the free cash flow to equity with the cost of equity, what
do you get?
Equity Value
17. How do you value a private company?
The methods are always the same, with some complication on how to find the
data, especially the cost of debt and equity for computing a WACC for the DCF.
To find Re:
• Find the Leverage beta of a group of comparable companies and then
unlever it. In this way you will get to a measure of the industry unlevered
beta (Beta Assets).
• Relever the unlevered beta using the target long-term D/E for the private
company.
• Recalculate the cost of equity using the CAPM.
To find Rd:
LBS guide to IB interviews
• Some private companies have public traded debt; having the price and the
payment structure of the bond will give you the YTM requested by the
market.
• If the debt is not traded, estimate the credit rating of the company based on
its leverage ratios and operating statistics and use the current market yields
for similarly rated companies in that sector. Many banks have a credit rating
advisory group or debt capital markets team that can help with this.
18. Two companies operate in the same business and have the same beta,
however, one of them has debt while the other does not. Which has the
lower WACC?
Because the cost of debt (interest expense) is tax deductible, the WACC of the
company using leverage will be lower. However, the company must have sufficient
earnings to use the tax shield and the amount of debt must be sustainable.
19. Draw for me the relationship between WACC and “use of leverage” and
explain it to me.2
Like for the graph used to show the CAPM relation, we use in the X-axis the D/E
ration and on the Y-axis the WACC.
WACC =
Debt
Total Capital
* Cost of Debt * (1-Tax Rate) +
Equity
Total Capital
* Cost of Equity
The graph in shows the impact of capital structure on a company’s WACC. When
there is no debt in the capital structure, WACC is equal to the cost of equity. As
the proportion of debt in the capital structure increases, WACC gradually
decreases due to the tax deductibility of interest expense. WACC continues to
decrease up to the point where the optimal capital structure is reached. The optimal
point is the financing mix that minimizes WACC, thereby maximizing a company’s
theoretical value (lower discount rate, higher EV).
Once this threshold is surpassed, the cost of potential financial distress (i.e., the
negative effects of an over-leveraged capital structure, including the increased
probability of insolvency) begins to override the tax advantages of debt. As a
2
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl,
Investment Banking, Wiley Finance
LBS guide to IB interviews
result, both debt and equity investors demand a higher yield for their increased
risk, thereby driving WACC upward beyond the optimal capital structure threshold
20. How do you do a public comparable valuation3?
Comparable companies provide a market benchmark against which a banker can
establish valuation for a private company or analyze the value of a public company
at a given point in time. The foundation for trading comps is built upon the
premise that similar companies provide a highly relevant reference point for
valuing a given target as they share key business and financial characteristics,
performance drivers, and risks. Therefore, the banker can establish valuation
parameters for the target by determining its relative positioning among peer
companies.
The core of this analysis involves selecting a universe of comparable companies for
the target (“comparables universe”). These peer companies are benchmarked
against one another and the target based on various financial statistics and ratios.
Trading multiples are then calculated for the universe, which serve as the basis for
3
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl,
Investment Banking, Wiley Finance
LBS guide to IB interviews
extrapolating a valuation range for the target. This valuation range is calculated by
applying the selected multiples to the target’s relevant financial statistics.
Comparable companies analysis is designed to reflect “current” valuation based on
prevailing market conditions and sentiment. Market-trading levels may be subject
to periods of irrational investor sentiment that cause valuation to differ on a
constant basis. Furthermore, no two companies are exactly the same, so assigning
a valuation based on the trading characteristics of similar companies may fail to
accurately capture a given company’s true value.
As a result, trading comps should be used in conjunction with other valuation
methodologies. A material disconnect between the derived valuation ranges from
the various methodologies might be an indication that key assumptions or
calculations need to be revisited. Therefore, when performing trading comps (or
any other valuation/financial analysis exercise), it is imperative to diligently
footnote key sources and assumptions both for review and defense of conclusions.
To perform a public comparable valuation, perform these 5 steps:
• Step I. Select the Universe of Comparable Companies: look at companies
with similar operations (products/services, customers/clients, distribution
and geography) and financial aspects (size, profitability, growth profile, ROI,
Credit Profile). You can screen for comparable companies from:
o Previous analysis of other bankers such as fairness opinions and
equity reports.
o Proxy statement and 10-K
o Industry reports
o Screen by SIC or NAICS code using databases such as Capital IQ,
Factset, Thomson, Bloomberg.
• Step II. Locate the Necessary Financial Information (both historical and
future) to calculate key financial statistics, ratios, and multiples for the
selected comparable companies:
o Latest 10-K and 10-Q in order to get the historical financials
(mainly for Revenues, EBITDA, EBIT, Net Income, Diluted
Shares Out, Net Financial Position, Minorities).
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o Equity research or IBES estimates for the future three years.
o Market information, such as share price and dividends.
• Step III. Spread Key Statistics, Ratios, and Trading Multiples: Calculate the
key financial statistics and ratios, such as:
o Enterprise Value and Equity Value.
o Key financial data such as Revenue, Gross Profit, EBITDA, EBIT
and Net Income.
o Calculate key trading multiples such as P/E, EV/EBITDA,
EV/EBIT, EV/Revenue.
• Step IV. Benchmark the Comparable Companies: analyze and compare each
of the comparable companies with one another and the target. The ultimate
objective is to determine the target’s relative ranking so as to frame
valuation accordingly.
• Step V. Determine Valuation: the trading multiples for the comparable
companies serve as the basis for deriving an appropriate valuation range for
the target. The banker typically begins by using the means and medians, min
and max, of the most relevant multiple for the sector (e.g., EV/EBITDA or
P/E) to extrapolate a defensible range of multiples.
21. What are the main key trading multiples?4
While various sectors may employ specialized or sector-specific valuation
multiples, the most generic and widely used multiples employ a measure of market
valuation in the numerator (e.g., enterprise value, equity value) and a universal
measure of financial performance in the denominator (e.g., EBITDA, net income).
For enterprise value multiples, the denominator employs a financial statistic that
flows to both debt and equity holders, such as sales, EBITDA, and EBIT. For
equity value (or share price) multiples, the denominator must be a financial statistic
that flows only to equity holders, such as net income (or diluted EPS). Among
these multiples, EV/EBITDA and P/E are the most common.
4
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl,
Investment Banking, Wiley Finance
LBS guide to IB interviews
• Equity Value Multiples: equity multiples compare the value of common
shares to the earnings available to common shareholders. Use equity
multiples to calculate the value of a company’s equity:
o Price Earnings Ratio / Equity Value to Net Income: The P/E
multiple gives investors an idea of how much the market is paying for
a company’s earning power. P/E ratios are typically based on
forward-year EPS (and, to a lesser extent, LTM EPS) as investors are
focused on future growth. Companies with higher P/Es than their
peers tend to have higher earnings growth expectations in earnings.
While the P/E ratio is broadly used and accepted, it has certain
limitations because by using earnings it is influenced by the
company’s capital structure (interests), differences in accounting
policies (depreciation and taxes) and one-off expenses.
P/E Ratio = Price of Stock / Earnings per Share
o Enterprise Value to Revenue Multiple: EV/sales is also used as a
valuation metric. Sales may provide an indication of size, but it does
not necessarily translate into profitability or cash flow generation, both
of which are key value drivers. In certain sectors, however, as well as
for companies with little or no earnings, EV/sales may be relied upon
as a meaningful reference point for valuation.
Enterprise Value / Revenue
o Enterprise Value to EBITDA or EBIT Multiple: EV/EBITDA serves
as a valuation standard for most sectors. It is independent of capital
structure and taxes, as well as any distortions that may arise from
differences in D&A among different companies. For example, one
company may have spent heavily on new machinery and equipment in
recent years, resulting in increased D&A for the current and future
years, while another company may have deferred its capital spending
until a future period. In the interim, this situation would produce
disparities in EBIT margins between the two companies that would
not be reflected in EBITDA margins. For the reasons outlined above,
as well as potential discrepancies due to acquisition-related
amortization, EV/EBIT is less commonly used.
LBS guide to IB interviews
Enterprise Value / EBITDA
Enterprise Value / EBIT
22. What quantitative and qualitative factors drive the P/E multiples?
• Quantitatively, P/E is moved by changes in share price and earnings through
the numerator and denominator, respectively.
• Qualitatively, share price is affected by market perception/expectation of
risk, growth, quality of earning and general investor confidence.
23. What do you get when you multiply a firm’s net income by its P/E ratio?
Market capitalization (equity value).
24. How would you present the valuation of a company using all the main
methodologies to a client?
Bankers use football fields to summarise the outcome of each valuation method.
25. When would you not use a DCF for valuing a company?
If the company has unstable or unpredictable cash flows, you cannot discount
them. It doesn’t apply for banks and financial institutions. In addition, in a
distressed situation, a liquidation valuation methodology would be more
appropriate.
26. Would you use Enterprise Value/Net income as a multiple?
No way! Total value to debt holders and shareholders (EV) should be matched
only with the flows available to them. Remember, enterprise multiple use earnings
above the interest line of the P&L; equity multiples use earnings below the interest
line.
LBS guide to IB interviews
27. What is a precedent transaction analysis?5
Precedent transactions analysis, like comparable companies analysis, employs a
multiples-based approach to derive an implied valuation range for a given
company. It is premised on multiples paid for comparable companies in prior
M&A transactions.
The selection of an appropriate universe of comparable acquisitions is the
foundation for performing precedent transactions. This process incorporates a
similar approach to that for determining a universe of comparable companies. The
best comparable acquisitions typically involve companies similar to the target on a
fundamental level.
There are four main issues with valuations using M&A multiples:
• Timing and market condition: as a general rule, the most recent transactions
(i.e., those that have occurred within the previous two to three years) are the
most relevant as the relevant market conditions (state of capital markets)
were probably similar to current conditions.
• Control Premium: buyers generally pay a “control premium” when
purchasing another company. In return for this premium, the acquirer
receives the right to control decisions regarding the target firms business
and its underlying cash flows.
• Strategic buyers often have the opportunity to realize synergies, which
supports the ability to pay a higher purchase price. Synergies refer to the
expected cost savings, growth opportunities, and other financial benefits
that occur as a result of the combination of two businesses.
• There is limited availability of public information on the deal terms and
multiples. You will often be relying on rumors, articles or footnotes to
financial statements to determine the purchase price for the company and
financial information for the acquired company.
28. How would you value an early stage company (such as Groupon or
Facebook) that has no profit?
If you can predict cash flows in the future, use a DCF. If you can’t, avoid it.
5
For the answer we refer to the following book: Joshua Rosenbaum and Joshua Pearl,
Investment Banking, Wiley Finance
LBS guide to IB interviews
You can look at creative multiples such as EV/Unique visitors, EV/Pageviews.
29. Why do some investors prefer EBIT multiples versus EBITDA
multiples?
EBIT reflects the depreciation of Capital Expenditure, which is the price paid
for building the company’s real operating assets, which in turn are used to
generate profits.
That’s why some investors prefer EBIT multiples, EBIT accounts for a
different level of investments. The difference between EBIT and EBITDA is
particularly important in capital-intensive industries.
30. When would you use liquidation value?
It is the most common method when a company is about to default and banks
have to assess whether the value of the assets will be enough to cover the value
of the debt.
It is also used in deciding whether a company should be refinanced, sold as
whole or broken up and its assets sold separately.
31. Why would a company with similar growth and profitability to its
comparables be valued at a premium?
• The company has higher cash generation.
• It is the market leader in the industry and has a stronger and more
sustainable competitive advantage.
• The company has reported stronger than expected earnings and the
market expects this to continue.
32. When would the liquidation value give a higher value than a DCF?
This can happen when the company has substantial tangible assets that can be
sold on the market but very poor cash flow generation in the ongoing business.
LBS guide to IB interviews
33. Let’s say a company has 100 shares outstanding at a share price of $10
each. It also has 10 options outstanding at an exercise price of $5 each,
what is the fully diluted equity value?
• Shares outstanding * Share Price: $10*100 = $1,000.
• 10 options are exercised, the company receives the strike price $5*100 =
$50.
• The company uses the $50 to buy shares from the market, $50/$10 = 5
shares.
• The company must issue 5 new shares in order to pay the call option: 5*$10
= $50.
• So the fully diluted shares number is 100 + 5 = 105 and the market cap is
105 * $10 = $1,050
34. Let’s say a company has 100 shares outstanding at a share price of $10
each. It also has 10 options outstanding at a strike price of $15 each.
What is the fully diluted equity value?
The options are not in the money, therefore there is no dilutive effect on the
market cap.
35. What are some common ratios used to compare equity performance?
•
•
•
•
Price/EPS
Market Value / Net Income
Market Value / Book Value
PEG Ratio: Price to Earnings / Growth Rate
36. You never use Equity Value/ EBITDA, but is there any case where you
might use Equity Value /Revenue?
This may happen only if the company has a negative Net Financial Position
(more cash than debt), so that the Enterprise Value is equal to the Equity Value.
LBS guide to IB interviews
37. Why would you use Sum of the Parts valuation?
When you have a company with completely different divisions, such as
broadcasting and chemicals, you should value each division separately, with its
own cost of capital, and then add them together to get to the Enterprise Value.
38. How do you normalize earnings?
Many times you’ll see one-off expenses or income items on an income statement.
“One-off” means they will not recur. If you include them in your calculation of the
multiples, they will distort your multiples and therefore your valuation. Your
earnings number in a multiple should reflect the company’s underlying
profitability, not a one-time event.
• When you are using EBITDA and EBIT to calculate a multiple, just add
back the non-recurring expenses and subtract the non-recurring income.
• When you are using earnings after tax, you must adjust the tax expense. For
example, you can remove a non recurring cost by multiply the increase in
profits by (1-Tax Rate).
39. How do you annualize or calendarize?
Companies in the set of comparables may not have consistent year-end dates. You
can adjust for these timing differences by annualizing the data.
Annualization or calendarization means you must calculate a time weighted average
of two year-end numbers. You are simply taking part of one year and adding it to
part of another year to adjust for different year ends.
40. What do we do if debt is not traded and thus, we do not have a market
value of debt available?
If the yield has not significantly changed since the issue of the debt then the book
value is a good proxy of the value of the remaining coupon payments and principal
(In fact on the books we always use the yield at the time the debt was issued and
then we expense the interest each year using this yield. We adjust the bond payable
account for coupon payments, both in the case of a bond issued at a premium or
LBS guide to IB interviews
at a discount.) If you observe that the yield in the market is significantly different
from the coupon rate, either because the company has become riskier or because
the interest rate has changed, then we have to recalculate the market value of the
debt. To do so, we look at the cash flow that the debt contract has promised in the
future and discount it at the right yield to find the market value.
41. Why do we use the market value of equity and market value of debt?
We use market value of equity because we want to find the market value of assets.
The market value of assets is given by the discounted free cash flow to assets. The
free cash flow to assets is then divided between the equity holders and the debt
holders. If we assume that the equity is fairly priced by the market then the market
has incorporated all the information about the future cash flow to assets
(considering part is going to equity holders and part to debt holders). If the market
has fairly priced the securities, i.e. it has evaluated the present value of cash flow to
equity and the present value to debt; the firm becomes a portfolio of the securities
at their market value. Thus, we say that the value of assets is the present value of
the cash flow to assets that can either go to equity holders or to debt holders
42. Why do we use cash flow?
Cash flow and assets are two drivers of value for capitalholders. Provided the
company is viewed as an ongoing enterprise, you calculate cashflows to derive a
value for the company.
Cash flow is not the same as net income. Net income captures non-cash expenses
like depreciation and interest expense depending on the company’s debts. Net
Income thus, doesn’t give the true value of the cash flows to the assets.
43. What are the drawbacks of WACC?
• It assumes that the capital structure of the firm, and consequently the
Debt/(Debt+Equity) ratio and Equity/(Debt+Equity) ratio, remains
constant during the life of the company. This is restrictive and an
approximation. If it changes as it does in an LBO we cannot use WACC.
• WACC assumes that the company can take advantage of tax savings, i.e., the
company will make a profit in order to actually pay for taxes.
• WACC includes the effect of the debt tax shield the firm gets by leveraging
up but it does not account for the cost of financial distress, i.e., the cost of
LBS guide to IB interviews
additional default risk due to the higher leverage. It is very difficult to
formally model the effect of financial distress on the return on debt and
therefore model it into WACC.
• For conglomerates you should calculate a WACC for each of the divisions
since the risk that the assets bear may be different for each division and also
the way divisions are leveraged may be different.
44. What is APV (Adjusted Present Value)?
APV is another method used to discount the unlevered cash flows of a company.
In this case we separate the evaluation of the operations from the evaluation of the
benefit we derive from financing. Thus, we need to calculate the NPV of financing
(i.e. the tax shield benefit) and also the cost of financial distress. It is important to
include the cost of financial distress because without this calculation the firm value
would only increase with higher leverage. Higher leverage will increase the risk of
bankruptcy of the firm.
45. What are steps to calculate value of a firm using APV?
Discount unlevered free cash flows with the unlevered cost of equity cost to derive
the value of the firm as if the firm were entirely equity financed
plus
Present value of the tax shield
Minus
Present value cost of financial distress. This would the reduce the value of the
company.
While debt adds value to the firm because interest is tax deductible, the debt also
increases the risk to the company. Too much debt could result in losses due to too
much interest expense and this probability of loss should be considered in the
valuation. In the WACC we included the tax benefit of interest in the calculation,
but did not include the cost of financial distress. We discount the free cash flow
and the terminal value using the return on asset, which is an unlevered return. We
go through the same steps as we did in the DCF analysis.
The next step is to find the beta of the Assets by looking at comparable betas and
the effect of unlevering as described elsewhere, and applying the CAPM to find the
LBS guide to IB interviews
return on the assets. You then use the return on assets to discount the unlevered
free cash flow (of the specific period - we examine 5-10 years) and the terminal
value.
To this you add the value of the tax shield. To calculate the value of levering up
the company, calculate the debt tax shield in any year of the specific period being
analyzed. D/V and E/V need not be constant in the periods. The interest
expenses for each year are:
Interest expenses = rdebt × Debt
Thus, the tax shield for each year is: DTS = τ × rdebt × Debt
46. What discount rate do we apply to the debt tax shield to calculate the
present value of the debt tax shield?
If we assume that the risk of using the tax shield is as much as the risk of the asset
(that is as risky as the cash flow assuming that the company has profits on which it
will pay taxes and thus, can have a tax shield) then we use the return on asset (i.e.
the cost of unlevered equity). If we say that the risk of capturing the tax shield is as
much as the risk of the debt then we use return on debt. In particular, we should
also judge the probability that the company has to use the debt tax shield which is
dependent on the probability of the company actually being profitable and paying
taxes.
47. What does cost of financial distress cover?
• Direct bankruptcy cost like court fees
• Indirect bankruptcy costs like difficulty of managing a company that is
undergoing restructuring (additional cost of supplies)
• Conflicts of interest between bondholders and stakeholders may lead to
poor operating and investing decisions that may add to losses (stakeholders
may try to play games at the expense of bondholders; the contract should
avoid this but there is a cost of setting up the contract and enforcing it
LBS guide to IB interviews
48. What are the differences between WACC and APV?
The main difference between the WACC and the APV is that the WACC takes the
target ratio Debt/(Debt+Equity) as a constant whereas APV removes the effect of
this target ratio in the calculation of the value of the assets from the cash flows and
takes it into account in calculating the debt tax shield. The APV is more of an
academic method and it is often problematic to find data to apply it. Investment
banks in general use WACC
49. What is a rights offer?
It is a way in which a company can raise more cash in Europe. It is very
uncommon in USA. The company gives existing shareholders the right to buy one
additional share for every share they own, at a price lower than the one at which
the share trades currently at. Shareholders can decide to exercise the option (rights)
or decide to sell them. Anyone who buys the rights will then have the option to
buy the share at the “rights” price.
50. How can we increase a stock price?
• Pay or increase dividends.
• Increase the transparency of the financial statements.
• Acquire a company paying less than its NPV.
• Any positive NPV projects.
• Work on the capital structure of the company and leverage up the company
to increase the value because of the debt tax shield (provided the company
is profitable and is paying taxes, also provided the company expects to be
able to service the debt in future and has a good, stable cash flow to do
this).
• Give some signal to investors that the stock is undervalued by buying back
stock (this is a way to redistribute cash or assets to shareholders but it is not
perceived to be a long term commitment).
51. What is a PEG ratio?
Price/earnings divided by the growth rate (of earnings per share):
• More than 1 is poor.
• Less than 1 is good.
• Less than 0.5 is excellent.
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52. What is a private placement?
Private placement is the issuance of stock to private parties. This does not require
registration with the SEC but it must be to less than a certain number of investors.
Often insurance companies are not concerned with marketability and thus, the
market for not traded debt has increased. If the placement is large then an
investment bank can be involved to deal with the investors.
53. What happens if a company buys back stock?
Share price should increase:
• Earnings per share: If a company buys back stock, the earning per share will
increase afterwards and the investors anticipate this and drive the prices up.
(However, value is driven by cash flows, not earnings)
• Signaling effect: a company that buys back its own stock gives a good signal
of what the company management believes are the prospects of the
company, “who else has better information about the company than its own
management?”
• Debt Tax Shield: Buying back stock drives up the net debt, thus increasing
the effect of the debt tax shield and the valuation goes up; the company is
changing its capital structure by buying back stock and replacing it with
debt.
• The taxes for shareholders are different on capital gains and on dividends.
There is also a reason why the price may go down instead. The fact that the
company is distributing excess cash could mean that it has utilized all growth
opportunities with a positive NPV.
54. What information do dividends carry?
Generally the dividends controversy is complex but the way market reacts to
dividend announcements proves that the dividends actually carry information to
the market (in a Modigliani-Miller world, the dividend policy should not matter).
The assumption behind the signalling effect is that the managers are reluctant to
change dividends unless they have concerns about the future prospects of the firm.
Therefore the signalling effect is negative if dividends are reduced and positive if
increased. Thus, a firm should pursue a policy of dividend stabilization.
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55. Company A trades at P/E of 20. Company B trades at P/E of 10. Both
are considering acquiring Company C, which trades at P/E of 15. For
which of the two acquiring companies would the deal be dilutive? For
which would it be accretive? Explain why for each.
Before you even start answering this question, it is important to ask if the deal
is an all-stock one:
• For Company A the deal would be Accretive, this is because company A is
paying less for earnings (of company C) than what the market is paying for
company A’s earnings, this is reflected in the price to earnings ratio of both
companies
• For Company B the deal would be Dilutive for the same reason as stated
above.
• The earning per share will increase for A after the merger. It will depend on
the sum of the earnings after the merger and the number of total share after
the merger.
56. Now, lets say that the transaction is changed so that the acquirer gets
debt from the market at lets say 5% and then uses this money as cash for the
acquisition, whether the deal is still accretive or dilutive?
The first step is to calculate the acquirer’s P/E, which has now become 1/interest
rate *(1-t), as t = 0 (or so we can assume), acquirer’s P/E is now 1/5% = 20, and
as given in the question above, target’s P/E is 15, thus the deal is accretive.
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6.2.5 Mergers & Acquisitions
1. Why do companies undertake M&A transactions? Which major factors
drive M&A?
Companies undertake Mergers and Acquisitions mainly for three reasons:
• Commercial synergies / growth opportunities: This is a wide category which
includes access to new markets, new geographies, new products, gaining
market share and bargaining power with customers, cross – selling in the
same distribution channels, vertical integration, network effects and brand
recognition.
• Cost synergies / savings: This refers to economies of scale and scope. When
companies merge, they are usually able to reduce their
overhead/administration costs, including IT and rent expenses. They can
also optimize their supply chain and gain bargaining power with suppliers.
• Strategic concerns: M&A transactions often happen after a shock in the
industry, such as deregulation or a threat of new entrants and potential
substitutes. M&A activity is a strategic tool that managers have to quickly
reshape the competitive profile of their company.
2. A client comes to you and would like your opinion on whether it should
do an M&A deal.
To evaluate an M&A deal you should cover three main areas:
• Shareholder value: As discussed previously, the major consideration when
valuing an acquisition is whether it creates value for the shareholders or not.
Investments create value only if NPV>0.
• Financial considerations: Accretion/dilution analysis in the EPS post
acquisition, capital structure and financing of the acquisition, impact on
margins, tax implications and cost of capital concerns.
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• Strategic considerations: Does the M&A deal make strategic sense for the
company? Is it improving its competitiveness? Does it include growth in
market shares, industry growing trends, vertical integration or regulation
changes?
3. What is a fairness opinion?
A fairness opinion is a professional evaluation by an investment bank or other
third party as to whether the terms of a merger, acquisition, buyback, spin-off, or
going private deal is fair for the shareholders.
The board of directors of public companies under takeover often request it, in
order to determine whether to accommodate the buyer or not.
4. Company A wants to buy company B for $500m, the maximum they
think it is worth. Under what circumstances might company A agree to
pay $530m in a stock transaction rather than a cash one?
The answer should address two hypotheses:
• Why is Company A paying $30m more? Company A uncovers additional
synergies which will lead to a present value in excess of $30m. Another
option is that the company has a deferred tax asset with a present value
higher than $30m.
• Company A agrees to pay $30m more but to convert the deal to a stock one
because it believes its stock price is currently overvalued.
5. What are some common hostile takeover defenses?
• Poison pill, issue of new shares that can be redeemed at a premium in case
of hostile takeover, thus diluting the acquirer.
• Poison pill, staggered board of directors. So that a hostile buyer cannot gain
the majority of the board of directors until a certain number of years (buyer
can change a limited number of directors each year).
• Buy a number of small companies in order to dilute the shareholders.
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• A white knight or "friendly investor" may be a corporation, or a person that
intends to help another firm and buy it in order to protect it from a hostile
bid.
• Increase leverage massively and spend all the cash available (for example in
the form of an extraordinary dividend).
• Greenmail, buying shares back from the acquirer at a price at which he is
happy to sell (definitely not the preferred way).
• Golden Parachute: is a clause in an executive employment contract that
provides the executive with a significant severance package in the case that
the executive loses his job through firing, restructuring, or even scheduled
retirement. This can be in the form of cash, equity, and other benefits, and
is often accompanied by an accelerated vesting of stock options
6. A company has 4 divisions and its stock price is depressed because of the
underperformance of one of the divisions. What are five things you could
do to improve the stock price?
• The best option is to improve the performance of the divisions
(restructuring).
• Spin-off or sell the division trying to achieve the highest valuation possible.
• Shut down the division.
• Ensure that the accounting methods allocate headquarters costs correctly so
that you don’t have cross subsidization among divisions
7. What are the pros/cons on a stock vs. cash acquisition?
Without issuing any debt, the company can finance an acquisition in three ways:
• Use cash accumulated on the balance sheet.
• Issue equity to the public and use the cash raised to finance the acquisition.
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• Offer stock as payment for the target firm. i.e. Structure the payment in
terms of a stock swap.
A variety of factors should be considered when deciding the best option, such as:
• Cash position: Obviously if the company has no cash available at hand it
cannot use it to finance a deal.
• Perceived value of the stock: Managers have private information and are
able to assess if the company is fairly valued by the market. If they believe
that the stock is trading at a price significantly below value, they should not
use stock as currency on acquisitions.
• The acquirer is not sure about the value of synergies. In this case by issuing
equity it will “keep in” the former shareholders.
• Tax issues: Stock deals offer a tax advantage to sellers because they do not
have to pay taxes until they sell the stocks. Therefore the present value of
taxes is lower.
8. What advantages do financial buyers have?
• Financial sponsors tend to move quicker than corporate buyers since their
decision process is leaner.
• Financial buyers are often favored by incumbent managements since they
tend to keep former management in place and offer conspicuous incentives
packages.
9. What is an accretion/dilution analysis?
Bankers use accretion/dilution analysis to measure the pro forma effects of the
transaction on earnings, assuming a given purchase price and financing structure.
The acquirer’s EPS pro forma for the transaction is compared to its EPS on a
standalone basis. If the pro forma EPS is higher than the standalone EPS, the
transaction is said to be accretive. Conversely, if the pro forma EPS is lower, the
transaction is said to be dilutive.
As a general rule, public companies are reluctant to pursue dilutive transactions
due to the potential detrimental effect on their share price. Therefore, a given
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public buyer’s perception of valuation and corresponding bid price is often guided
by EPS accretion/dilution analysis.
10. Who would pay more for a company, a financial sponsor or a strategic
buyer?
Strategic buyers should be able to pay more for targets because they are able to
achieve synergies. However, in periods that had hot leverage markets, financial
sponsors were often able to achieve higher prices.
11. What are the pros and cons of a purchase of assets instead of equity?
An assets’ deal is usually very advantageous for the buyer because it can depreciate
the price paid and therefore have a tax shield. Moreover, it allows the acquirer to
pick and choose the assets of the company he wants to take.
However, this is allowed only if the remaining entity keeps its ongoing business
open. In the event that they don’t,, tax authorities require an equity deal
12. Why are accretive transactions sometimes not well received by the
market?
There can be plenty of reasons; the bottom line is that EPS is not cash flow, and
present value (NPV) of future cash flows is the ultimate driver of shareholders’
value.
13. If a company with a lower P/E multiple acquires through a stock merger
a company with a higher P/E multiple, is the transaction going to be
accretive or dilutive?
If the exchange ratio is 1:1, the transaction is going to be dilutive. The acquiring
company is going to give to the target shareholders 1 of its shares in exchange for
1 share of the target.
The acquisition decreases the acquiring company’s EPS because the price paid by
the buyer exceeds the addition to EPS.
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Dilution can be minimised or completely avoided by issuing debt or using cash to
buy the company.
14. When pursuing an accretion/dilution analysis, which factors impact the
pro-forma company’s EPS?
In the numerator, the pro-forma earnings of the combined entity are a result of the
buyer’s and the target’s net income, the expected level of synergies, the amount of
new interest from debt and goodwill amortization.
In the denominator, the pro-forma shares number is a function of the acquirer
outstanding shares and the number of shares issued to fund the acquisition.
15. How do you derive a breakeven price on the EPS for an all-stock
transaction?
Target EPS * Buyer’s P/E Ratio
16. What is likely to yield the highest synergies? A diversification or a
consolidation deal?
A consolidation deal enables (in theory) the buyer to extrapolate cost, commercial
and strategic synergies.
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6.2.6 Capital Structure and Financing
1. What factors should be considered in determining the optimal capital
structure?
•
•
•
•
•
Optimal D/E structure minimizing the WACC.
Tax considerations.
Dilution by issuing new shares.
Signaling effects.
Strategic concerns.
2. Why is equity riskier than debt?
Equity is a residual claim, meaning that it gets satisfied only after all the
bondholders have received their money back in full.
However, debt holders have limited upside on their investment.
3. What is the LIBOR?
The London Interbank Offered Rate is the rate at which international banks lend
money to each other; it is often used as a basis for many other corporate loans,
which pay the LIBOR plus a spread.
4. What are the major factors that affect the yield on a corporate bond?
The yield to maturity of a corporate bond is usually expressed as a spread over the
risk free rate (such as LIBOR).
The spread is driven by the creditworthiness of the company and the standard
deviations (riskiness) of its future cash flows.
The riskier the company the higher the yield it must pay to convince investors to
buy its bonds.
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5. How would you value a bond?
The value of a bond is equal to the present value of its future payments (coupons
and principal repayments) discounted at the market rate.
If the bond is traded, the discount rate is equal to the YTM. If the bond is not
traded, determine the credit rating the company would have given its D/E. Once
you have the rating, try to find out the cost of debt of similar companies or ask the
debt capital markets department.
The difference between a company’s cost of debt and the benchmark rate (usually
LIBOR or government debt) is called spread. Bankers talk about spreads when
discussing a company’s cost of debt.
6. What type of debt is the most expensive? The least? Apart from the cost,
why might a company might choose one type of debt over the other?
• Senior Debt is the least expensive, because it is usually secured by the assets
of the company and it is the first to be repaid in case of default. It also tends
to have covenants that limit the firms’ ability to undertake extraordinary
operations.
• Unsecured debt is usually the most expensive debt because it is not secured
by any asset of the company and in case of distress it gets repaid senior debt.
The covenants are also usually quite light.
7. Describe the difference between a bond issued at par, at a discount or at
a premium.
The amount borrowed is the nominal value (principal) of the bond. The coupon
rate is the interest rate that the company will pay its bondholders and is calculated
as a percentage of the outstanding nominal value. Sometimes the market will
require a higher cost of debt than the coupon rate. In this case, the price of the
bond will go down so that its yield to maturity will increase accordingly
• A bond is issued at the par when the coupon rate is equal to its yield to
maturity (market rate).
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• A bond is issued below par (at discount to the nominal value) when the
coupon rate is lower than the required market rate, which will decrease the
price of the bond.
• A bond is issued at a premium when the coupon rate is higher that the
market rate, which will raise the price of the bond.
8. How would you approach the valuation of a convertible bond?
A convertible bond has two parts: a bond and a warrant (an option to buy equity).
To calculate the value of the convertible bond you add these two components:
• PV of the bond
• PV of the warrant (Black Scholes model)
9. When should a company issue equity rather than debt?
• Growth firms, or in general high-risk profile companies (high volatility in
cash flows), find it problematic to get access to debt.
• A company has too much debt and wants to lower its D/E ratio.
• A company with predominantly intangible assets will find it more difficult to
get access to debt.
• Market signaling: when managers expect to have higher earnings in the
future, issuing debt is a better idea because of the tax shield and the fact that
they are then keeping all the upside for current shareholders. Conversely, if
managers expect earnings to decrease, equity may be a better choice since it
will lower the interest expense burden.
10. How can a company reduce its Debt/EBITDA ratio? How can you
achieve it without increasing EBITDA or paying down debt?
• Acquire a company with a lower Debt/EBITDA ratio.
• Convert the debt to operating leases (not preferred, it’s still part of the debt).
11. Why does an issue of equity tend to decrease the share price?
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This is partially explained by the signalling theory. Managers who believe that their
share price is overvalued will have an incentive to issue stock at the current price.
If they believed that the stock was undervalued, they would issue debt or buy back
stocks.
Moreover, if managers need the funds to invest in a positive NPV project, they
should issue debt, thus keeping the all upside of the project for the existing
shareholder base rather than diluting it.
Finally, the fact that the management is taking on additional debt shows the market
that they are confident about the prospects of the company.
12. If you were pitching to be the underwriter for an IPO, what would be the
table of contents for the pitch book?
• Executive Summary.
• Industry overview and main trends (is the industry attractive?).
• Company positioning, track record and financials (why the company is going
to be able to capture value in the market?).
• Equity story.
• Preliminary valuation (Trading comps, DCF, Deal Comps).
• Credentials of the Bank
13. Why are IPOs generally underpriced?
• Conservatism, issuers do not want their stock to lose value the first day it
trades.
• Attract investors to the IPO in order to generate demand.
• Compensation to initial owners for the risk they are taking.
14. If a company with a market cap of $80m issues $20m of new equity, what
% of the company will new shareholders own?
20 / (80+20) = 20%
Old shareholders get diluted to 80%.
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15. Why would an entrepreneur embark on an IPO?
• Need capital to undertake new strategic opportunities with a positive NPV.
• Need capital to fund its business.
• Looking to diversify/monetize his/her wealth by selling part or all of the
shares.
16. What are the implications for cash dividends versus share buybacks?
Why should you use one instead of the other?
In deciding, you should keep three main facts in mind:
• Signaling effect of regular dividends - quality of earnings and confidence for
the future. Because of a certain degree of freedom in accounting policies,
sometimes investors are not able to separate marginally profitable firms
from the best ones. Therefore, investors interpret managers’ actions to
assess the quality of a company.
We can understand, therefore, why investors would value the information
content of dividends and prefer to believe a firm’s reported earnings were
backed up by an appropriate dividend policy.
Of course, firms can cheat in the short run by overstating earnings and
scrapping up cash to pay a generous dividend. But it is hard to cheat in the
long run. A firm that is not making enough money will not have enough
cash to pay out and will have to lower the dividend (with a consequent drop
in the share price).
Therefore, most managers don’t increase dividends until they are confident
that there will be sufficient cash flows going forward to pay them constantly.
Dividends anticipate future earnings.
This of course applies only to an increase in regular dividends. An
extraordinary one-time dividend does not carry this information.
• Signaling effect of share repurchases - stock price may be undervalued.
Share repurchases, like dividends, are a way to hand cash back to
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shareholders. But unlike dividends, share repurchases are frequently a oneoff event. So a company that announces a repurchase program is not
making a long-term commitment to earn and distribute more cash.
A share repurchase tends to increase stock prices because it signals that
management thinks the firm’s stock is undervalued. Other effects are an
increase in net debt from the use of cash, increasing the tax shield.
• Taxes. In some jurisdictions capital gains taxes have a lighter taxation than
dividends (income).
Therefore, handing cash to investors also can be interpreted as:
• Confidence in the future, positive message (price increase)
• The company does not have positive NPV projects to invest in (price
decrease)
In conclusion, increase cash dividends only if you think you can commit to the
new pay-out ratio for the long-term.
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6.2.7 Financial Sponsors and LBOs
1. What is a Financial Sponsor?
The term “financial sponsor” refers to traditional private equity (PE) firms,
merchant banking divisions of investment banks, hedge funds, venture capital
funds, and special purpose acquisition companies (SPACs), among other
investment vehicles.
PE firms, hedge funds, and venture capital funds raise the vast majority of their
investment capital from third-party investors, which include public and corporate
pension funds, insurance companies, endowments and foundations, sovereign
wealth funds, and wealthy families/individuals. Sponsor partners and investment
professionals may also invest their own money in particular investment
opportunities.
This capital is organized into funds that are usually established as limited
partnerships. Limited partnerships are typically structured as a fixed-life investment
vehicle, in which the general partner (GP, i.e., the sponsor) manages the fund on a
day-to-day basis and the limited partners (LPs) serve as passive investors.
These vehicles are considered “blind pools” in that the LPs subscribe without
specific knowledge of the investment(s) that the sponsor plans to make.
General partner’s goal is to purchase assets, which they plan to sell in the shortmedium term for a substantial profit.
• Their time frame is typically 3/5 years.
• They fund a substantial portion of the purchase price using debt.
• Leveraged valuation established the maximum price a financial buyer can
pay for a business.
2. How many types of LBO deals there are?
• Institutional buy out (IBO): Private Equity buys all the equity and does not
involve the current management.
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• Management buy-out: Private Equity buys the equity of current owners in
conjunction with the current management team.
• Management buy-in: the Private Equity buys the equity of current owners
and brings in a new management team.
• Leverage recapitalization: an existing LBO deal is refinanced to release some
cash to equity investors through an extraordinary dividend.
3. What are the advantages and the disadvantages of high leverage?
The main advantages are:
• Returns: value gains are not shared equally thereby enhancing potential
equity returns.
• Fiscal: interest expense is generally a tax-deductible expense.
• Discipline: high leverage increases default risk, forcing business efficiency.
The main disadvantages are:
• Volatility: fixed costs increase, as high proportion of profit and cash flow is
used to service debt, thus increasing earnings and cash flow volatility.
• Default risk: higher leverage and higher volatility result in higher default risk.
4. What deal metric is most important for PE firms in evaluating deals?
• IRR: it is the breakeven discount rate or return that equals the present value
of future cash flows to zero. The price that can be offered by a financial
sponsor will be heavily influenced by the IRR required by the PE to invest.
The IRR captures both time-weighted and cash flow metrics.
• Money Multiple: it is still used but it does not take in account the time value
of the money.
5. What is a leveraged buyout?
A leverage buy-out is the acquisition of a target company primarily financed with
debt collateralized by the target’s cash flow (or in some cases its assets).
A company’s value is derived by establishing how much a financial buyer could pay
given two constraints:
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• A target cost of equity (required minimum IRR).
• The maximum sustainable leverage given the forecast cash flows.
Financial buyers maximise their returns by purchasing companies using as much as
leverage as possible. Debt is paid down using the cash flow of the acquired
company. The debt tax shield is one of the “magic” ingredients that enhance the
financial sponsors’ return. They expect a high return on their equity usually
between 20% and 30%.
6. Describe the steps in the evaluation of an LBO*6
Step1: Understanding the story looking at the qualitative aspects of the target
company, trying to find answers to:
• Is this a good debt story? in terms of stability of revenues, margins, requirement
of working capital; also looking at the requirement for future capex
investment; track record of the management team etc
• What are the risks and mitigants?
• Are you convinced with the projections?
Step2: Normalize EBITDA
Step3: Construct the sources and uses, where the typical sources would be Senior
Debt, Senior Subordinate Debt, Revolver, Management Rollover Equity, Sponsor
Cash Equity (this is what the acquirer company is putting in); and the typical uses
are Refinancing of debt, transaction costs and purchase price (this is the plug in).
And obviously sources equal uses.
Step 4: Calculate IRRs, assuming exit multiple = entry multiple; running various
scenarios
Step5: Evaluate if the LBO makes sense given the debt multiples, are the coverage
ratios (described in the next question) adequate, and most importantly (amongst
other things), are the IRRs acceptable to the sponsors given the contribution and
the risk being taken.
7. What multiples are traditionally stated as financial parameters for an
LBO?
• Leverage Ratio: Net Debt/EBITDA – 4.0x – 5.0x
*
http://pages.stern.nyu.edu/~eofek/InvBank/LBO%20Overview.pdf
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• Interest Coverage Ratio: EBITDA / Interest Expense - >2x
• Equity Contribution: Equity/EV, before credit crunch was 20-30%, recently
40-55%.
8. If you buy a company for $100 and sell it for $100 two years later, how can
you make money?
• You paid yourself dividends.
• You paid down debt.
9. Why you should take private, through an LBO, a listed company?
The company is perceived as undervalued by the acquirer. Thus, to take control of
the company the financial sponsor uses leverage and equity to offer an attractive
price to current investors.
Once private, the acquirer puts in place a new management team and works on
improving the performance of the target.
After 3-5 years, when the company performance is improved and therefore it is
worth more, the financial sponsor sells the company, thus making a profit.
10. What are the criteria for finding a good LBO candidate?
•
•
•
•
•
•
Strong and stable cash flows
Good management team
Limited Capex
Undervalued
Motivated seller
Viable exit strategy
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6.2.8 Accounting
1. Tell me about the three financial statements. What is the connection
between the three?
• P&L shows the economic performance of a company for a determined
period. However, because of the matching principle and the accruals
method, profits are not equal to the cash generation of a company.
• The Balance Sheet is the picture of the value of a company’s assets and
liabilities at the end of the period (end of fiscal year or quarter). It describes
the financial status at a specific time, and it shows the business’s economic
resources that creditors and shareholders can claim.
• The Cash Flow statement is what connects the P&L to the Balance Sheet. In
fact, cash flows can be inferred from income statements and balance sheet
alone. Here is an exemplified version:
Net Income
+
Non Cash Expenses (D&A) (Decreases Assets and Net Income)
Change in Working Capital (Receivables, Payables, Inventory)
Cash from Operating Activities: Cash flows related to producing and delivering
goods/services
Capital Expenditure (Capex) (Increases Assets)
+
Disposals (Decreases Assets)
Acquisitions (increases Assets)
Cash from Investing Activities: Cash flows related to acquiring or disposing of
long-term assets
+
Issue of Debt (Increases Liabilities)
Repayment of Debt (Decreases Liabilities)
+
Issue of Equity (Increases Shareholders’ Equity)
Dividends and Buy-backs (Decrease Shareholders’ Equity)
Cash flows from Financing Activities: Cash flows related to obtaining cash from
lenders and shareholders, and repayments of amounts borrowed.
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By adding the three cash flows you have the change in cash & equivalents during
the period.
2. If you have to choose two statements to value a company, which would
you pick?
P&L and BS, since the cash flow can be approximately inferred looking at the
change year to year.
3. What is working capital?
Net Working Capital is the difference between a company’s short term assets and
liabilities.
• The principal short-term assets are accounts receivable (customers’ unpaid
bills) and inventories of raw material and finished goods.
• The principal short-term liabilities are accounts payable (bills that you have
not paid).
Net Working Capital = Receivables + Inventory – Payables
• Receivables are a way to finance the firm’s customers by extending payment
terms, so the company is temporary financing its clients.
• In the same vein, payables can be seen as a short-term loan from company’s
suppliers.
• Inventory is comprised of finished goods and works in progress and can be
seen as money that the company spent to produce the products that have
not yet been sold
From a valuation perspective, the changes in net working capital impact cash
flows. An increase in net working capital is associated with a decrease to cash flow
because more cash is being used to finance the purchase of short-term assets such
as inventory than is being generated through a decrease in short-term liabilities
such as payables. Similarly, a decrease in new working capital is associated with an
increase in cash flow.
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4. Why is income statement not affected by changes in inventory?
Expenses (COGS) are recognised only when sales are realized due to the matching
principle and accrual-based accounting. Therefore, an increase in inventory only
represents an accumulation of finished goods and work in progress that have not
yet been sold. When this inventory is sold, the corresponding expense of the
product will be matched with the revenue realized at the sale.
5. Where do you look to find the full depreciation expense of the year?
In the cash flow statement since depreciation is added back (a non cash expense).
6. Let’s say a company is buying $100m of new factories using leverage.
How are all the three statements affected at the beginning of the first
year?
• P&L: at the beginning of the period there is no transaction recorded.
• Cash Flow Statement: Cash Flow from Investing will go down of $100m,
but Cash Flow from Financing will go up of $100m (debt issue). Net Effect
is zero.
• Balance Sheet:
o Assets: PP&E goes up of $100m
o Liabilities: Debt goes up of $100m
o Shareholders’ Equity: unchanged.
7. Now let’s go at the end of the first year, Assume the debt is “bullet” so
the principal is not repaid, and assume an interest rate of 10%. Also
assume that the plant depreciates at 10% per year.
• P&L:
o
o
o
o
Depreciation of 10% * $100m = $10m
Interest Expense of 10% * 100m = $10m
Net effect pre taxes = -$20m
Net effect on net income = -$20m * (1-40%) = $12m
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• Cash Flow Statement:
o Add back non cash expenses (depreciation) = +$10m
o Net effect on the cash flow = -$12m from net income + $10m of
Depreciation = -$2m
• Balance Sheet:
o Assets: Cash goes down by $2m.
o Assets: PP&E goes down though Depreciation by $10m.
o Assets net effect is -$12m.
o Liabilities: Net Income goes down by $12m; therefore Shareholders’
Equity goes down by $12m. Net Effect on Liabilities is -$12m.
8. Walk me through how additional depreciation of $10 would affect the
financial statements. Assume a tax rate of 40%.
• P&L: EBIT would go down by $10, Net income by $6.
• Cash Flow Statement: Cash flows goes up by the tax shield $10*40% = $4.
• Balance Sheet:
o Assets: PP&E go down $10.
o Cash: goes up of $4.
o Liabilities: Shareholders’ Equity goes down of the minus income, $6.
9. What line item is usually found in all three financial statements?
Net Income (P&L, Beginning of Cash Flows, Part of Shareholders’ Equity).
10. If depreciation is a non-cash expense, why does it affect the cash
balance?
Depreciation is tax deductible.
11. If you had to choose only 1 statement to assess the health of a company,
which one would you choose?
LBS guide to IB interviews
There is no right answer to the question. A well-done profit & loss it’s the best
representation of the economic performance of a company. However, because of a
certain degree of freedom in accounting practices, a company’s earnings (including
revenues) can be easily manipulated.
Since what drives the value of a company is cash flow generation, many would
probably vote for the cash-flow statement. However, it’s useful to note that cash
flows can be manipulated as well in the short term (for example a company can
increase payments terms to win additional customers).
12. If a company changes its inventory accounting policy from LIFO to
FIFO, how would that impact on the three financial statements?
It would depend whether the cost of materials has been increasing or decreasing.
If costs are increasing, by passing from LIFO to FIFO the COGS will decrease
(using past raw materials) and operating and net income will increase. Taxes will go
up as well.
However, the net effect of the cash flow should be negative since the inventory
will go up.
13. What happens when Inventory goes up by $10 assuming you pay for it
with cash?
• P&L Statement: no changes in the income statement. Inventory has not
been sold.
• Cash Flow Statement: inventory is an asset, part of working capital. Increase
in working capital decreases your cash flow. Therefore, cash goes down by
$10.
• Balance Sheet: Inventory goes up $10, Cash goes down $10. (A = S+L)
14. What do you do if you understated depreciation by $100 and discovered
the error in a period after the statements are issued? Use a tax rate of
35%.
LBS guide to IB interviews
• P&L Effect: Depreciation is a non-cash expense, however is tax deductible.
Therefore, Net Income decreases of $100* (1-0.35) = $65.
• Balance Sheet Effect:
o Liabilities: Shareholders Equity will decrease by $65, (Net Income).
o Assets: PP&E will decrease by the new depreciation of $100.
o Assets: A deferred tax asset is created = $35.
• Cash Flow Statement Effect: Cash Flow remains the same, because we are
looking at the past we have created the deferred tax assets to balance the
accounting equation (A 0 L + SE):
o Net income goes down of $65.
o Add back new depreciation of $100.
o Take out $35 of deferred tax assets.
Net Income (P&L, Beginning of Cash Flows, Part of Shareholders’ Equity).
15. What is FAS 142? How does it treat goodwill?
Goodwill is not longer amortized on the P&L, but is subject to impairment every
year. In case of impairment, goodwill is impaired and the impairment passed as a
one-off charge through P&L.
16. What are deferred taxes and liabilities? How do you treat them?
• Deferred Tax Assets arise because taxes from the P&L are different from
the amount of taxes effectively paid to authorities. Cash Taxes are usually
calculated more on a cash basis than a P&L basis.
An example could be a prepayment, when you receive the payment for a
service you still have to supply to the client:
o The Company pays taxes on the prepayment.
o However, for the matching principle the Revenues from the
prepayments have not been recorded in P&L, therefore no taxes are
shown for it.
LBS guide to IB interviews
o A deferred tax asset is created in balance sheet, so that when in the
next period revenues will booked and taxes show in the P&L, there
will be an adjustment for the use of the deferred tax asset.
• Deferred Tax Liabilities arise from booking taxes in accrual terms prior to
payments to tax authorities.
An example could be the use of accelerated depreciation for tax purposes
while use straight-line depreciation for the income statement. This would
create a deferred tax liability.
17. In calculating the Net Tangible Assets for the Balance Sheet, is the value
a market value or book value?
Book value.
18. Walk me through the impact of an asset write-down on the financial
statements
When the net book value of an assets is lower than its market value (present value
of the assets), the asset is impaired.
The impairment loss is equal to the difference between the net book value and the
market value.
The loss is then recorded in the P&L, reducing net income and therefore
shareholders’ equity.
19. What’s the difference between an operating and a capital lease?
When a company leases equipment, it’s providing itself with a long-term financing
for the asset. It can account for the its leases in two ways:
• As an operating lease. Accounting treats operating leases like rentals. The
P&L shows only an expense and no assets or liabilities appear on the
balance sheet.
LBS guide to IB interviews
• As a capitalized lease (finance lease). Accounting treats capitalized leases as
though the company used a loan to purchase the leased asset. The company
records the depreciation of the assets and the interest expense from the loan
on the income statement. The balance of the loan and the undepreciated
amount of the asset appear on the balance sheet.
20. How do you distinguish between an operating and a capital lease?
A lease is a capital lease if it respects at least one of the following conditions:
• Transfer of ownership at the end of the lease term.
• Contains a bargain purchase option
• It lasts at least for 75% of the assets’ life.
• The present value of the payments it is more than 90% of the fair market
value of the asset.
21. How can a bond’s cash payment and interest expense be different during
a given period?
• The cash payment of a bond is equal to the face value multiplied by the
coupon rate.
• The interest expense of a bond is its market yield times the value of the
balance sheet debt liability.
If the bond was issued at par, its market yield and the coupon rate are the same. If
the bond was issued at premium or discount, the rates will differ.
22. Why the operating and finance leases are important to valuation?
A company with operating leases expenses them before interest: they are part of
EBITDA but to do not appear on the balance sheet. A company with finance
leases expenses the lease in the depreciation and interest lines, which are not
included in EBITDA, but shows them on the balance sheet.
It is important to know how to convert an operating lease into a finance one for
two reasons:
LBS guide to IB interviews
• When comparing companies with different accounting policies, you need to
make the accounting for leases consistent across all companies.
• Companies sometimes may try to hide debt in the balance sheet through the
use of operating leases.
• The loan connected with a finance lease should be considered as part of the
net financial position of a company.
23. How do you convert an operating lease to a finance one?
Most analysts convert operating to finance leases. To do so:
• Calculate the Present Value of the minimum operating lease payments at the
current balance sheet date.
• Add the Lease obligation and the value of the asset to the balance sheet.
• Adjust EBITDA and by removing the rent expense, add back the
amortization and the interest expense to find EBIT and Net Income.
• Adjust Cash Flow Statement by removing the rent expense and adding back
interest and amortization. Classify the repayment of the obligation as
financing.
As a shortcut, analysts use the rule of eight as a common method of estimating the
equivalent finance lease liability. They multiply operating lease payments by eight in
order to come up with an estimate of their value if capitalized.
24. What is goodwill? Does it affect net income?
Goodwill is the excess cash paid over the net identifiable assets of the target
company as well as the “write-up” of the assets’ historical value.
Goodwill generated internally to the company is not recognized in the balance
sheet. It is only recognized in case of an acquisition.
The buyer recognizes the goodwill as an asset in its balance sheet. Goodwill is not
amortized and its tested on an annual basis. The testing for goodwill impairment
requires that the reporting unit being valued and the fair market value should be
LBS guide to IB interviews
compared to the carrying value of the unit. If the carrying value is greater than the
fair market value, the goodwill impairment should be reported in the income
statement.
Goodwill = Price paid for the acquisition – fair market value of tangible assets
25. What are two possible explanations of a declining ROE?
• Net Income went down.
• Shareholders’ equity has gone up (issue)
26. How a disposal of fixed assets in exchange for cash would be reflected
on the GAAP/IAS cash flow statement.
The gain or the loss on the disposal (versus the book value) is recorded on the
P&L.
The price received is recorded under the voice “net cash flow from investing
activities”.
The book value of the assets is removed from the balance sheet.
LBS guide to IB interviews
6.3 Global Markets
In structuring this section, we will provide you a list of the most typical questions
that you may encounter in an interview for an Associate level position. Please bear
in mind that this list is not exhaustive and the type of questions you may actually
get is potentially infinite. This is particularly true for market awareness questions.
You will not find answer to all of the questions proposed below. For market
awareness questions, giving an answer is actually impossible. Instead, we will
provide a guideline for a good general answer. For technical questions, we provide
answers only for some of the trickiest and less obvious questions. The answers we
provide are what, according to our experience, recruiters want to hear. However, it
is strongly suggested that you review and study each subject for which you do not
feel confident.
Finally, remember that practice is crucial. You want to be over prepared for the
interviews as this is the best thing to do to secure your job. On top of these
questions, you should read all the books that contain interview questions. The
most popular book is probably “Heard on the Street: Quantitative Questions”. We
strongly advise you to learn that book by heart.
LBS guide to IB interviews
6.3.1 Market awareness question
1. What is your global outlook for next year?
This is a typical question. You are guaranteed to get a question of this kind
during one of your interviews. While it is true that there’s no correct answer,
there are good and bad answers. Here’s how to structure a good answer.
You want to have two or three themes to discuss. After you state what the
two or three main themes are you need to explain what the potential
impacts on the global economy are. After you do so, it is very important to
specify how likely that specific scenario is. What you really need to avoid is
to give the interviewer a list of ten different issues without explaining
anything about a particular theme.
2. If you were Trichet (King), what would you do at the next BCE (BoE)
meeting?
These questions are fairly common. Note that this question is similar to
question 1, but it also asks you to elaborate on the possible actions
following a particular scenario that may happen.
So a good answer should first focus on highlighting what you think are the
most important issues out there. Then, you would elaborate on these issues
as suggested in question 1. At this point, you need to tell the interviewer
what actions you would take given the scenario you imagined.
3. How would you invest €100M?
Again, you should try to have two or three investment ideas ready to use.
Interviewers are not looking for a particular answer, but they are instead
particularly interested in hearing a structured answer. Giving a structured
answer means covering the following three aspects:
a) Explaining the rationale behind each investment idea
b) Describing what factors can negatively affect your idea
c) Give a rough estimate of the expected return, riskiness and time
horizon of the investment (e.g. I think this investment can
generate a 50% return in one year time, although there is
substantial downside risk)
4. Additionally, during the recruitment for Summer 2012, there were
many questions on the Euro Crisis and what the future of the Euro
LBS guide to IB interviews
Zone Economy looks like. Some were even asked what the solution
could be.
Thus, read up on the Euro Crisis and keep yourself updated. Its not possible
to give an answer as the Euro Crisis is just getting deeper and deeper with
every passing day.
LBS guide to IB interviews
6.3.2 Technical questions
The good news is that the typical interview is not extremely technical. You are
unlikely to get hundreds of super complicated technical questions during an
interview. And when you get technical questions you will not be required to write
formulas and stuff.
The bad news is that you will get one technical question each interview. And
getting the answer wrong will inevitably lead to a rejection. So it is crucial that you
“over prepare”
The following questions cover some of the most typical questions for Associate
interviews. However, you may get questions that are slightly different to the ones
proposed. Alternatively, the interviewer may be geekier and wants you to write
down the Black-Scholes equation. Hence, treat the following question as a starting
point for further reading and studies.
6.3.2.1
Fixed Income
1. What is an interest rate swap (IRS) curve?
The IRS curve represents the different swap rates (for the fixed leg) at
different maturities. Generally speaking, it will have a shape similar to the
yield curve. However, the IRS curve will generally be slightly higher since it
incorporates a counterparty risk. Remember, an IRS is an OTC derivative
contract and you are always exposed to the counterparty risk.
2. What is duration? (why it's important)
The important thing to tell here is that duration is an approximation of the
change in bond price if interest rate changes. The interviewer expects you to
be fully familiar with duration and how to use duration.
3. Can convexity ever be negative?
Yes, convexity can be negative for callable bonds.
4. What is bootstrapping?
Bootstrapping is a simple technique to derive yield curves when zerocoupon bonds are not available. This technique is covered in the Core
Finance course, so there are no excuses
LBS guide to IB interviews
5. If interest rates drop 20 basis points, how much does a zero coupon
2yr bond's price increase/decrease?
This is a fairly standard question which tests your knowledge of duration
and how it can be used. First, as interest rates are dropping, bond price will
increase. Second, you should know that for a zero coupon bond the
duration is equal to the bond’s maturity. In this case, duration is 2 years.
Now that you know this, you can estimate the % change in bond’s price by
multiplying bond’s duration by the change in interest rates. By doing so, you
can easily see that the bond price increases by 40 basis points.
1. Price me a 5 year zero-coupon yielding 5%. No calculators, you have
30 seconds to give me a price
This is a popular question at some banks. You should know the price
formula by hearth, which in this case will be 100/(1.05)^5. The problem is
to compute 1.05^5 in your head. The trick is to know that 1.05^5 can be
approximated as 1.05*5 which equals to 1.25. Knowing this, you can give a
price of 80, which is very close to the actual price.
6.3.2.2
FX – Money Markets
1. What drives exchange rates?
Don’t get lost in technicalities and do not start out by listing ten different
items that may have an impact on exchange rates. Even though exchange
rates are driven by thousands of different variables, there are three
macroeconomic variables that are the main drivers of exchange rates.
• Interest rates differential and expectations – this broad category refers
to how different rates and future expectations about changes in rates
may affect exchange rates. Note that there are several factors
affecting rates expectations, such as inflation, debt problems, poor
economic performance etc.
• Trade balance – very generally, countries with trade surpluses (exports
greater than imports, think of China) should expect currency
appreciation. On the other hand, countries running trade deficits
(think of the US) should see their currency depreciating
• Purchasing Power Parity (PPP) adjustments – this is an economic
factor which has impact in the very long run. The Economist Big
Mac index is the most popular PPP index and may give some
LBS guide to IB interviews
indications on disparities between countries. According to this PPP
theory, exchange rates should adjust to eliminate these differences.
These three factors play a role on exchange rates simultaneously. However,
at any given point in time, one of the three will have a major role in moving
exchange rates pairs.
2. What is the difference between appreciation and revaluation of a
currency?
The final effect on the currency is the same i.e. the currency will be more
“valuable”. Appreciation refers to an increase in currency value when the
exchange rates are floating. Revaluation refers to the same increase but for
currencies that are fixed (e.g. China).
6.3.2.3
Options
1. How does a European option differ from US option?
The main difference is that a European option can be exercised only at a
specific date, while American options can be exercised whenever you want
before the expiry date. If you are really into mathematics, you can also
mention that there is no closed-formula for pricing American options.
2. What are delta and gamma?
There is a fairly good chance that you will get some questions on the socalled “greeks”. Simply speaking, Greeks are measures of option’s value
sensitivity to changes in different factors. Delta refers to the change in
option value as the value of underlying security changes. Gamma is the
change in Delta as the value of underlying security changes.
3. You are long a call option on XYZ Inc. stock and you have delta
hedged your position. You read on the Internet that the CEO plunged
from the roof of XYZ skyscraper in Canary Wharf. The stock plunges
£5. How do you adjust your hedge (qualitatively) ?
Other things being equal, the delta falls with a fall in stock price. However,
you are long the call and short the replicating portfolio. This means that the
number of units of stock you are short has to fall. So, you must buy back
some stock.
LBS guide to IB interviews
LBS guide to IB interviews
6.4 Brainteasers and logic questions
Brainteasers are a crucial part of any Sales & Trading interview. People think of
brainteasers as unfair. Generally speaking, it is true that it is hard to get them right
the first time. Moreover, the stress during an interview makes them even more
difficult.
However, many interviewers ask the same brainteasers again and again. Hence, if
you go through as many brainteasers as possible, chances are that you will get
asked something that you already know. Answering the question will then become
extremely easy.
Unfortunately, it may still be the case that you get one totally new. In these
situations, it is extremely important to stay calm and try to break down the
problem. You can still make a good impression even if you do not get to the right
solution; interviewers are interested to see how you approach a problem under
pressure.
What follows is a list of brainteasers. This is a starting list to get you familiar with
the most popular questions you can get. However, you should go beyond this list
and practice as many brainteasers as you possibly can.
1. What is the expected value of a roll of a dice?
This is basic probability and the correct answer is 3.5.
2. If you look at a clock and the time is 3:15, what is the angle between
the hour and the minute hands?
The answer to this is not zero! The hour hand, remember, moves as well.
The hour hand moves a quarter of the way between three and four, so it
moves a quarter of a twelfth (1/48) of 360 degrees. So the answer is seven
and a half degrees, to be exact.
3. You have a five-gallon jug and a three-gallon jug. You must obtain
exactly four gallons of water. How will you do it?
You should find this brainteaser fairly simple. If you were to think out loud,
you might begin by examining the ways in which combinations of five and
three can come up to be four. For example: (5 - 3) + (5 - 3) = 4. This path
does not actually lead to the right answer, but it is a fruitful way to begin
thinking about the question. Here’s the solution: fill the three-gallon jug
with water and pour it into the five-gallon jug. Repeat. Because you can only
LBS guide to IB interviews
put two more gallons into the five-gallon jug, one gallon will be left over in
the three-gallon jug. Empty out the five-gallon jug and pour in the one
gallon. Now just fill the three-gallon jug again and pour it into the five
gallon jug. (Mathematically, this can be represented 3 + 3 - 5 + 3 = 4)
4. A company has 10 machines that produce gold coins. One of the
machines is producing coins that are a gram lighter. How do you tell
which machine is making the defective coins with only one weighing?
Think this through—clearly, every machine will have to produce a sample
coin or coins, and you must weigh all these coins together. How can you
somehow indicate which coins came from which machine? The best way to
do it is to have every machine crank a different number of coins, so that
machine 1 will make one coin, machine 2 will make two coins, and so on.
Take all the coins, weigh them together, and consider their weight against
the total theoretical weight. If you’re four grams short, for example, you’ll
know that machine 4 is defective.
5. What is the sum of the numbers from one to 50?
Easy question and fairly popular. Pair up the numbers into groups of 51 (1
+ 50 = 51; 2 + 49 = 51; etc.). Twenty-five pairs of 51 equal 1275.
6. If you have seven white socks and nine black socks in a drawer, how
many do you have to pull out blindly in order to ensure that you have
a matching pair?
Three. Let’s see—if the first one is one colour, and the second one is the
other colour, the third one, no matter what the colour, will make a matching
pair. Sometimes you’re not supposed to think that hard
7. If you invested $500 and it doubled in eight years, what was the
interest rate?
This is a nice little application of the so called Rule of 72. When
approaching this question: 72 divided by a period of time where an
investment has doubled (8 years in this case), equals your rate of return, or 9
percent. By extension, there is also something called the 7-10 rule. It takes 7
years to double money invested at 10% and it takes 10 years to double
money invested at 7%.
8. You are given nine balls, one of which weighs less than the rest. You
are also given a traditional two-sided scale. How many times do you
need to weigh balls to determine which is the lightest one?
LBS guide to IB interviews
Like the earlier weighing question, this one will challenge your process of
elimination skills. Most people immediately think three times, but the
answer is actually two. First, you would put six balls on the scale—three on
each side. If the light one is in one of these two groups, you’d know. If not,
you know it’s in the final group. Whatever the case, you weigh two balls
(one on each side) from this lighter grouping. If they are equal, the light ball
is the odd one out. If they aren’t, you already know the answer.
9. Picture a 10 x 1 0 x 10 "macro-cube" floating i n mid-air. The macrocube is composed of 1 x 1 x 1 "micro-cubes," all glued together. The
outermost layer falls to the ground. How many micro-cubes are on
the ground?
The answer is 488. The best way to get to the correct answer is to think of
the cube that will remain after the outermost layer falls. The remaining cube
will have 8 micro cubes on each side. The number of micro cubes in the
remaining macro cube is then 512 (8*8*8). So the number of micro cubes
on the ground will be 1,000-512=488.
10. Give me the decimal equivalent of 13/16 and of 9/16?
First you should know how much 1/16 is. You should know this by heart
(because this is how US treasuries are still quoted) and the answer is 0.0625.
Now, 13/16 is 1/16 + 3/4. So, it’s 0.0625 plus 0.75. Hence, the answer is
0.8125. Applying the same reasoning, 9/16 is really 1/2 plus 1/16. Thus, the
answer would be 0.5625
11. You are dealt just two playing cards from a well-shuffled standard 52card deck. The standard deck contains exactly four Kings. What is the
probability that both of your cards are Kings??
The correct answer is roughly 0.5%. There are four chances (out of a deck
of 52) that the first card dealt is a King. Conditional on the first card being a
King, there are three chances (out of 51) that the second card dealt to you is
a King. Hence, the probability is 4/52 * 3/51 which is roughly 0.5%.
12. What is the standard deviation of (1, 2, 3, 4, 5)?
To solve this question, you should first compute the variance and then take
the square root. You should know that the variance equals the expected
value of the squares minus the squared expected value. First compute the
expected value which is equal to 3, which squared is 9. Second, compute the
expected value of the squares, (ie 1, 4, 9, 16 and 25). This expected value is
LBS guide to IB interviews
equal to 11. Hence, the variance of (1, 2, 3, 4 and 5) is equal to 2. Taking the
square root you get the standard deviation, which is 1.414.
13. You hire a man to work in your yard for seven days. You wish to pay
him in gold. You have one gold bar with seven parts-like a chocolate
bar . You wish to pay him one gold part per day, but you may snap
the bar in only two places. Where do you snap the bar so that you may
pay him at the end of each day, and so that on successive days he may
use what you paid him previously to make change??
Snap the bar into pieces that are one, two, and four parts long, respectively.
On day one, give him one part. On day two, exchange your two parts for his
one. On day three, give him back the one part. On day four, exchange four
parts for his three. On day five, give him one more part. On day six,
exchange your two parts for his one. One day seven, give him back the one
part.
Sources used to create this guide:
• Adkins Matchett & Toy Midnight Manuals:
• Investment Banking of Joshua Rosenbaum and Joshua Pearl: a detailed
practical guide covering an analyst’s role.
• Vault guides to finance interviews and advanced financial interviews.
• Mergers & Inquisitions IBD guide: interesting guide with over 200
questions to practice. (internet website)
LBS guide to IB interviews
7 ASIA RECRUITMENT
7.1 Networking and Presentations (September – October)
Finance Club and Career Services will organise many bank presentations from
September to December. Whilst networking with London based bankers has
limited impact on your chances of getting an interview in Hong Kong, it is critical
for Asian Trekkers to learn about each bank’s unique culture, business structure,
strategy and value proposition. More importantly, Asian Trekkers also need to
learn how to make a positive impression effectively - it’s a task many students find
challenging but mastering it would reward you handsomely.
• Pick your ‘battle’ (banker) – usually HR will introduce bankers from different
sectors to network with after the presentation. You might want to focus on the
bankers who are from the sector(s) you have prior knowledge of or you are
interested in. Your job is almost half done once you choose the bankers you
want to network with later – the subsequent conversation should follow its
natural course. With some research done beforehand, making a positive
impression should not be too hard. You will need this important skill during
the trek.
• Research in school portal on Hong Kong alumni and start your contact list, you
will need this list later.
7.2
CV and Cover Letter (October – Mid-November)
While other MBAs are partying away, it is time for Asian Trekkers to start their
resume and cover letters. Career Services usually will have dedicated time slots to
review Asian Trekkers CV, but it definitely helps to start early.
• Stress your ‘Asian’ connection: fluency in an Asian language definitely gives you
an edge. However, if you do state you are fluent in Mandarin for example, be
ready to prove yourself during interviews.
• Be honest on your CV. Most banks’ background checking processes are
rigorous. The last thing you want to happen is to be offered a position then fail
the background check.
• Start to contact the Hong Kong alumni (coffee chat or meeting during the bank
presentations in Hong Kong).
• Networking with bankers in London – keep honing your
networking/communication skill.
• Schedule your applications for December. You will find many deadlines are
very close to each other, so it will significantly reduce your stress level if you
schedule your submissions early.
LBS guide to IB interviews
• Trek Leader: If you want to lead the Asia Trek, now is time to put your hand
up and run for this position. Duties include: compose trek CV book, liaise with
each bank’s HR for the detail of the visit, manage Bank Champions (who will
research the bank and ask questions in the Q&A session after the presentation),
develop detailed itinerary and lead your fellow trekker through the busy
schedule in Hong Kong. Perks: you are more likely to be noticed by the banks
hence higher chance to be interviewed.
7.3
Application (Late November – Early December)
Most banks’ applications are due between late November and early December. So
yes, if you don’t have your CV and cover letters ready to go, you will struggle to
submit all of them on time correctly.
While you are researching the banks, it is worthwhile to take notes on their recent
deals – it will be very helpful for the trek and often you won’t have time
researching the banks when you are on the trek.
• Allow two to three hours per application. You may not want to submit the
application right after you complete it. Go away for a few hours/sleep on it,
double check later then submit it. There are only a dozen banks offering
summer internship and the competition is fierce. So make sure every
application counts.
• Mock interview - by now you should be able to answer most of the questions
from the London Business School Guide to IB interviews. It’s very likely you
will get interviewed in Hong Kong, so you should be ready for interview before
you leave London. Don’t leave it until you get the interview invite email
because your interview might be scheduled for the next day.
• Follow up with the alumni and confirm meetings in Hong Kong (if possible).
7.4
During the trek (Mid-December)
The finance trek demands both physical and mental strengths. Typically day starts
at 9AM and finishes at 5PM (officially). However, if you are lucky enough to score
an interview while you are in Hong Kong (which happened to many of us in 2011),
then be prepare to mock interview with your fellow trekkers until 2AM - the more
you practise, the better you will be prepared for. Typical bank visit format:
• The visit starts with a presentation, which usually goes for approximately an
hour with one/two presenters (If two presenters, then one from IBD and one
from Sales and Trading). The presentation often takes place in the bank’s
auditorium, where you may sit with MBA students from other business schools
(50-200 MBA students depending on the bank).
• Q&A: The presentation usually ends with a Q&A session. It’s important that
Bank Champions act swiftly to ask the first question. We find this is the best
LBS guide to IB interviews
way to showcase the quality of our student body and re-enforcing London
Business School brand in Hong Kong finance industry.
• After the presentation, you will then meet the bankers in an informal
environment – apply the skills you learned from Networking and Presentations. The
strategy changes a little here. Whilst it is important that you make a positive
impression effectively, it is also important to take as many business cards and
meet as many bankers as you can. You may also meet some MBA students
from other business schools - take it as an opportunity to make new friends and
establish new connections.
• Make notes on each banker immediately after the networking session – you will
need this for the Thank-You email and the interview.
• Thank You Email – always write the bankers you met a thank-you email after
you get back to the hotel. Refer to the notes you made earlier today, your email
should reflect some of the conversations you had earlier today so the banker
could recall you easily. Many bankers are very helpful in Hong Kong (especially
BoAML). Some bankers might even give you tips on your interviewer if you get
along with them well. Of course, you will only get these tips if you have written
them a Thank-You email.
7.5
First round Interview (Late December/Early January)
Usually the first round interview will be carried out via telephone. Downside: it is
rather difficult to gauge your interviewer. Upside: you can have all your answers
(ppt/doc) in front of you while talking on the phone.
• Do it systematically. You will be interviewed by two people in the first round
and each interview last for half an hour. IB interviews are usually very similar
and there are a handful of questions you MUST know the answer of, so tattoo
the answers to your arm if you need to.
• Don’t panic if you don’t know the answer. First round interview usually focuses
on communication skills, personal attributes, career aspirations etc. If you
encounter a technical question that is beyond your knowledge, be humble,
explain your thought process in a clear and logical manner and politely ask for
the correct answer (and feedback if appropriate). Always thank your interviewer
for his/her answer/time.
• Smile during your telephone interview, trust me, it makes a huge difference.
• Write your interviewers a Thank-you email after the phone interview.
LBS guide to IB interviews
7.6 Second round interview (Late January/Early February)
Most second round interviews will be face-to-face. The benefit of Asia Trek really
shows at this stage of the game. In many cases, you might have met either your
interviewer or his/her colleagues already. It is very likely your interviewer will ask
about who you have met in Hong Kong if he/she hasn’t met you before – so do
remember the bankers’ names/job functions because it is a perfect icebreaker and
shows your commitment to the bank.
The format of second round interview varies from bank to bank:
• Telephone interview (e.g., Standard Chartered): interview with two senior
bankers and each interview lasts for half an hour. Again you can have your
answers in front of you while you are interviewed.
• Videoconference at your preferred location (e.g., BarCap): you can
videoconference at home, at school or wherever you can find reliable Internet
connection. Again, you will be interviewed by two bankers (can be scheduled
on different dates) and each interview usually lasts for half an hour. Make sure
you now know all the answers by heart. Dress properly (at least top half of your
body), speak loud and clear, and test with your friends prior the interview to see
the optimal angle/lighting/distance/background etc.
• Videoconference at the bank’s meeting room (e.g., GS): you will go to the
bank’s office and videoconference there. You are likely to be interviewed by
three bankers in a row with 5 minutes breaks in between. It is quite an intensive
experience – make sure you are well rested and mentally prepared for it.
• Interview in person (e.g., BoAML), you will need to go to the bank’s office in
London. You are likely to be interviewed by two or three bankers with 10 – 15
minutes breaks in between. Make sure you arrive on time, dress properly and
have your ‘firm handshake’ ready.
• Remember to write your interviewers a Thank-you email after the interview, no
matter what the outcome is.
Sharpen your blade: most of the interview questions will focus on career aspiration
and technical material. Technical questions could be very academic or practical, so
a solid preparation on fundamentals as well as current affairs is essential. Last but
not least, don’t be disheartened by rejections. Rejection usually implies a natural
misfit, there is no need to dwell on it.
8 SOME ADVICE FROM PREVIOUS YEARS
STUDENTS
8.1 From KPMG to Morgan Stanley IBD
LBS guide to IB interviews
Background:
UK, MBA 2012
2008 – 2010: KPMG, Corporate Finance Senior Associate, lead advisor on midmarket M&A deals and restructurings
2004 – 2008: PricewaterhouseCoopers, Forensic Accountancy and Audit
Associate
2002: Merrill Lynch, Intern, Prime Brokerage and Stock Loan trading desks
IBD Recruiting Experience:
Although there are a number of different ways of getting into IBD, in my
experience most successful candidates follow the standard recruitment path from
September to January. For me, the most important element in securing a position
was preparation for every interaction with a banker. This really matters. Whilst
clearly a poor interaction can harm your chances of being selected for interview,
having strong, effective interactions with bankers through being prepared will
differentiate you across the process.
My hints and tips for preparing for the various stages in the process are shown
below:
Networking after bank presentations: The purpose of the networking is for you
to find out about the bank and for the bank to find out about you (and hopefully
identify you as a high calibre candidate). Hence before the presentation, make sure
that you have spoken to LBS students who interned at the firm in IBD the
previous year. They will be able to provide a briefing on the firm and its internship
structure. If the LBS student received a full-time offer, then I would tend to
mention their name in conversation with bankers at the event to show that you
were pro-active ahead of the session. Knowing deals that the bank has worked on
and recent news on the firm will also help.
Crucially you need to have practised your pitch before the session on your
background and why you want to move into banking. At the event you should
then introduce yourself and your background to the bankers. The formal pitch
may not always be appropriate however the key elements of it should be
communicated. This sounds obvious but a lot of people don’t do this and are not
remembered by the bankers!
Coffee chats with bankers: Generally you will do these by yourself. Remember
that you asked for the meeting, and so you should plan and outline at the start of
the session what you want to cover with the banker. This sounds like a small task,
though this logical organisation and structure will show the banker that you have
thought about the meeting. They will typically like this approach – this logical style
LBS guide to IB interviews
is used on the job, and so you are also showing that you can operate in this manner
immediately.
In terms of content I would look to introduce yourself to the banker (do your
pitch) first, and then cover the other topics of interest to you (particular team, part
of the bank, market trends etc). Do not be afraid about asking for other contacts at
the end of the meeting if appropriate – if you have made a good impression then
the banker may be willing to introduce you to their colleagues, or other members
of the recruiting team.
Other admin points: Take a copy of your CV to the meeting when you are happy
with it and it has been reviewed. Some bankers will ask to see this and again shows
preparation.
Interviews: Preparation and practice is the key to success in interviews. I met up
with 2 LBS colleagues and completed a mock interview almost every day from the
end of December through to the start of February. There was absolute honesty on
how well people had performed and areas for development. After that amount of
time we had all been exposed to most types of questions. We also held “round
table” sessions where we asked each person in turn a question - we covered
technical, competency, and commercial awareness areas in a lot of depth.
Almost every interviewer asked the following key questions. Walk me through your
CV, why banking, why our firm. You need to nail these. If you do though, then
that is great as these questions normally come first and so the interviewer may
decide at that time that you are a strong candidate. Most interviewers then covered
standard technical, commercial and competency areas. Hence it is worth spending
most of your time on those general areas, and then spending a smaller amount of
time looking into more advanced areas.
If you have a finance background and put a deal on your CV then really, really
know the deal. I worked in Corporate Finance pre LBS and was asked what the
expected IRR of a PE investment was. The interviewer then passed a pen and
paper and asked me to prove it through working through the numbers in detail. I
was asked if it was a good deal, what other investments the PE house had made,
what the condition of the sector was, likely exit valuation, likely buyers,
considerations for investing in the sector etc. This could have been replicated for
any of the 5/6 deals on my CV so be careful.
You can also direct the interview quite a lot with your responses to open questions.
If you have a topic that you want to talk about in the interview, then consider
incorporating this into your answers. Often the bankers will drill down into the
detail you have provided, and so this can be an effective method of directing the
conversation. Similarly do not mention detail that you do not want to talk about –
e.g. if you mention that bank X has worked on 8 out of the top 10 deals in 2010,
then it is not unreasonable for the interviewer to ask what those 8 deals were (or at
least some of them).
Conclusion
LBS guide to IB interviews
IBD recruiting is tough. There is immense competition and a large number of
highly qualified applicants for each position. Planning for each stage of the process
takes a lot of time and effort, however will allow you to differentiate yourself by
interacting with the bankers in a manner which replicates that found on the job.
8.2 From M&A Lawyer to US Top Investment Bank
Background:
European, MBA 2012
M&A Lawyer
Investment Banking interviews for MBA’s with a law background
Having a law background may be an advantage if you want to pursue a career in
investment banking, especially if you were an M&A or finance lawyer.
As with other career changers, you will have to come up with a convincing story as
to why you are willing to leave a successful career in your law firm for an uncertain
career in investment banking.
In interviews, you can emphasise that you love to work on transactions but feel
limited by only advising on the legal side of deals. By getting exposed to M&A or
capital markets transactions in your firm, you learnt that Investment Bankers are
the ones who are actually driving these deals. This is what you would like to do as
well, as opposed to writing down whatever the parties agree on, negotiating the
nitty-gritty clauses and not being involved in the major decisions.
Investment Bankers will generally appreciate the fact that you already have
transaction experience, know how to deal with clients and that you are used to the
hours. However, they will thoroughly test your quantitative skills. They know that
you are good with words, but there is a widespread prejudice that lawyers are poor
when it comes to numbers. You may therefore get some brainteasers during the
interviews.
What they are also looking for is whether you get the basics of corporate finance.
Almost all interviews will therefore involve standard questions about different
types of valuations, “walk me through a DCF”, accounting etc. Some interviewers
will want to test you some more on the financial side and will ask detailed valuation
questions. Questions about deal structures are rare, as they will expect you to know
this already.
As you do not have a finance background, they really want to test how much
you’ve learned about Corporate Finance, Valuations and Accounting during your
LBS guide to IB interviews
MBA. They will not expect you to be a corporate finance expert. It is however
important to get the basics right. In addition, Investment Bankers will try to verify
whether you have the drive to learn more about these topics.
On your CV, make sure that you list some of the most important and high profile
deals that you have been working on as a lawyer. However, expect questions from
your interviewer regarding these deals, especially if the bank that you are
interviewing with has been involved in those deals. As Investment Bankers have a
different focus than lawyers, such questions are likely to be about the financials of
the deal. Make sure that you know the respective multiples and have a detailed
understanding of the financial structure.
Many lawyers have successfully transferred into Investment Banking. As one
interviewer said: “Ex-lawyers make both the very best and the worst investment
bankers. The difference is whether they know how to count”.
8.3 From Natural Resources Corporate to US Top Investment
Bank
Background – Australia - MBA 2012
As a career switcher looking to move into IBD, it was essential that I developed
strong financial knowledge and networked well if I was to gain a summer
internship. Even though I had previously worked for 5yrs as an engineer in oil and
gas, having studied finance during my undergrad was helpful in allowing me to
converse with bankers initially.
How you approached the process, from networking to interviews prep
My early focus was primarily on building my knowledge and technical skills in
finance such that I could have more meaningful conversations with those that I
met with over coffee. Although my first contacts within the industry were of
various backgrounds, I asked for referrals to colleagues with similar backgrounds,
i.e. nationality / sector, as I would naturally have more to discuss with them and be
able to build a better rapport.
My own background was in natural resources (NR) so to support my strategy I
focused my daily reviews of the Financial Times on NR or similar subject matter,
and also kept abreast of developments within financial services. Tools such as the
school library’s Thomsom Reuters database, where I could access deal summaries,
were also helpful in complimenting what I read in the news.
LBS guide to IB interviews
Over time my relatively narrow sector knowledge was re-enforced by what I read
and learned from bankers working in this area, and, relatively quickly I was able to
build some expertise and a city wide network in NR.
How your particular background influenced the process (questions you were asked)
My approach was relatively successful and I gained interviews at most banks.
Interviews with bankers in NR were particularly fruitful, but I should have
prepared more in terms of general knowledge of different bank departments. Some
particularly challenging interviews included in-depth discussion of wide-ranging
subject matter including, private-equity and FIG, and I could have been better
prepared for such instances.
Fit questions were relatively easy once a number of interviews had passed as the
repetition made it easy to remember and tweak your story, i.e. tell me about
yourself Æ why banking Æ and why us, in a nutshell. I therefore suggest you form
a ‘gorilla group’ to practice with from day 1.
Technical questions within the general finance / valuation context were relatively
routine, but again the idea is to know these cold such that you come across as
strong in basic finance and can move on to more challenging material.
Additionally, throughout the interview stage I took the fairly abnormal step of
continuing to meet with people for coffee chats. If you know your finance material
well these chats can be very valuable as they are like interviews and help to keep
you up to date, relaxed and ‘front of mind’ with firms.
Conclusion: Key success factors
I think everyone’s strategy should vary to exploit personal strengths. In my case a
sector focus was useful in developing my finance knowledge and network. It also
helped to differentiate myself from other applicants. In summary some key success
factors that I learned through the process were:
• Be sure to start meeting people by mid-September to ensure you are on firm
radars early (some make a decision on who they want very quickly, plus
getting started early shows you are committed to the industry)
• Leverage your background and continue to develop areas of expertise /
strength that will set you apart from the competition, and use this to
facilitate networking
• Although I pursued a sector ‘expertise’ strategy it is important to remain
‘focused but flexible’ in terms of which department you would like to join at
a firm (especially when speaking to HR or people from other departments
and remembering that some firms may just not be hiring in your sector)
LBS guide to IB interviews
• Work hard early to turn your technical knowledge of finance into an asset
(you will need this for your interviews anyway so learn it early to come
across knowledgeable whilst networking)
8.4 From Marketing to GS IBD
Background
UK - MBA 2012
Three years non-financial experience at a leading marketing strategy and
advertising advisory firm.
Pre-MBA internship at large multi-strategy hedge fund.
Approach to the process + learnings:
Approaching the preparation and interview process in a small group is
extremely beneficial. If you work with a few similarly committed people you
trust well, you can work closely and learn from each other, ultimately making each
of you stronger. There are enough IBD jobs available that you can be comfortable
sharing your insights with your study group.
Focus on addressing your weaknesses when you are preparing and
revising. What are your 'red flags', the parts (or gaps) of your background and
experiences that investment bankers will worry about? Early on, spend time
considering how to best reposition your 'story' to overcome your weaknesses and
emphasise the key skills investment bankers looks for in candidates.
Identify and work on the core concepts and questions that you need to
know perfectly as a base level of knowledge (eg. 'why investment banking?'; 'walk
me through a DCF'; 'why this bank?').
Practice mock questions. Repeatedly. Challenge each other with a wide range
of difficult questions to make the real interviews feel easy.
Make sure to focus your efforts efficiently. In general, I experienced a lot more
questions on conceptual corporate finance topics than accounting.
Network intelligently. Always make sure you are extremely pleasant, thankful
and succinct when contacting alumni or other students. You need their help, not
the other way around.