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Investment Banking Technical Questions: The 25 Most Common, With Answers
Most investment banking technical questions come from six areas: accounting, enterprise value, valuation, DCF, M&A, and LBOs. A first round usually includes three to six of them. Below are the 25 that come up most, with concise answers you can actually say out loud in under a minute.
Don't memorize these word for word. Interviewers follow up, change a number, or ask "why," and a memorized answer falls apart the moment they do. Use these to check your understanding, then practice saying each one in your own words.
Accounting
1. Walk me through the three financial statements.
The income statement shows revenue, expenses and net income over a period. The balance sheet shows assets, liabilities and equity at a point in time, and assets always equal liabilities plus equity. The cash flow statement starts with net income, adjusts for non-cash items and changes in working capital, then adds investing and financing activity to show the change in cash.
2. How do the three statements link together?
Net income from the income statement is the first line of the cash flow statement and also flows into retained earnings on the balance sheet. The cash flow statement adds back non-cash charges like depreciation and reflects changes in balance sheet items such as working capital, capex and debt. Its ending cash balance becomes cash on the balance sheet.
3. If depreciation goes up by $10, walk me through the statements (25% tax rate).
Income statement: operating income falls by $10 and, after the $2.50 tax saving, net income falls by $7.50.
Cash flow statement: net income is down $7.50, but you add back the $10 of depreciation because it's non-cash, so cash from operations rises by $2.50.
Balance sheet: cash is up $2.50 and PP&E is down $10, so assets fall $7.50. Retained earnings fall $7.50, so liabilities plus equity also fall $7.50, and it balances.
4. Why does an increase in accounts receivable reduce cash?
Accounts receivable is revenue you've recorded but haven't collected. The revenue is already in net income, so on the cash flow statement you subtract the increase in receivables to remove cash you haven't actually received yet.
5. Inventory is written down by $10. Walk me through the statements (25% tax rate).
Pre-tax income falls $10 and net income falls $7.50. On the cash flow statement you add the $10 write-down back as a non-cash charge, so cash rises $2.50 from the lower taxes. On the balance sheet inventory is down $10 and cash is up $2.50, so assets fall $7.50, matching the $7.50 drop in retained earnings.
Practice accounting questions with graded feedback
Enterprise value and equity value
6. What's the difference between enterprise value and equity value?
Equity value is the value of the company to its shareholders only. Enterprise value is the value of the core business to all capital providers, debt and equity alike, independent of how it's financed.
7. How do you get from equity value to enterprise value?
Start with equity value, add debt, preferred stock and noncontrolling interest, then subtract cash and cash equivalents.
8. Why do you subtract cash?
Cash isn't part of the core operating business, and an acquirer could effectively use the target's cash to offset the purchase price. Enterprise value measures the operating business, so cash comes out.
9. A company raises $100 of debt and keeps it as cash. What happens to enterprise value?
Nothing. Debt goes up $100 and cash goes up $100, so they offset. Equity value doesn't change either, because no value moved to or from shareholders.
Practice enterprise value questions
Valuation
10. What are the main ways to value a company?
Comparable companies (trading multiples of similar public companies), precedent transactions (multiples paid in past acquisitions of similar companies), and a DCF (the present value of future cash flows). An LBO analysis is often added to show what a financial buyer could pay.
11. Which method usually gives the highest value?
Precedent transactions, because the multiples include a control premium buyers pay to acquire a whole company. It isn't guaranteed: a DCF with aggressive assumptions or a hot market for comparable stocks can come out higher.
12. Why use EV/EBITDA instead of P/E?
EV/EBITDA is independent of capital structure: both enterprise value and EBITDA cover all capital providers and come before interest. P/E is affected by leverage, interest expense and non-operating items, so it's harder to compare across companies with different debt levels.
13. When wouldn't you use a DCF?
When cash flows are negative or very hard to predict, such as early-stage companies, and for banks and other financial institutions, where debt is part of operations and you'd use a dividend discount model or price-to-book instead.
Practice valuation questions
DCF
14. Walk me through a DCF.
Project the company's unlevered free cash flow for about five to ten years. Calculate a terminal value for the years after that. Discount both the projected cash flows and the terminal value back to today at the weighted average cost of capital, and add them up to get enterprise value. Then subtract net debt to get equity value and divide by diluted shares for a value per share.
15. How do you calculate unlevered free cash flow?
Start with EBIT, subtract taxes to get EBIT × (1 − tax rate), add back depreciation and amortization, subtract capital expenditures, and subtract the increase in net working capital.
16. How do you calculate WACC?
WACC = cost of equity × (equity / total capital) + cost of debt × (1 − tax rate) × (debt / total capital), plus preferred stock at its cost if there is any. The cost of equity usually comes from CAPM: risk-free rate + beta × equity risk premium.
17. What are the two ways to calculate terminal value?
The perpetuity growth method, which takes the final year's free cash flow × (1 + growth rate) / (discount rate − growth rate), and the exit multiple method, which applies a multiple such as EV/EBITDA to the final year's metric. Bankers often check one against the other.
18. What happens to the DCF value if the discount rate goes up?
It falls. Future cash flows and the terminal value are discounted more heavily, and because the terminal value is usually a large share of the total, valuations are very sensitive to the discount rate.
Practice DCF questions
M&A and merger math
19. Walk me through a merger model.
Project both companies' income statements, set the purchase price and how it's paid for (cash, debt, stock), combine the two, and adjust for the cost of financing: forgone interest on cash, new interest on debt, and new shares issued. Add any synergies, then compare the combined EPS with the buyer's standalone EPS to see whether the deal is accretive or dilutive.
20. In an all-stock deal, how can you tell quickly if it's accretive?
Compare P/E ratios. If the buyer's P/E is higher than the P/E it pays for the target, the deal is accretive. Example: the buyer earns $100 on 100 shares (EPS $1.00) and trades at $20, a P/E of 20. It buys a target earning $10 for $150, a P/E of 15, by issuing 7.5 new shares. Combined net income is $110 on 107.5 shares, so EPS rises to about $1.023: accretive by about 2.3%, before synergies and fees.
21. What about deals paid with cash or debt?
Compare the target's earnings yield, the inverse of the P/E paid, with the after-tax cost of the funding: forgone interest on cash, or the after-tax interest rate on new debt. If the target's earnings yield is higher, the deal is accretive.
22. Why would a company do a deal that's dilutive?
Because EPS in the first year isn't the whole story. Expected synergies, faster growth, entering a new market or buying a capability the company can't build can all make a deal worth doing even if it's dilutive at first.
Practice M&A questions
LBO
23. Walk me through a basic LBO.
A private equity firm buys a company using a large amount of debt plus some of its own equity. Over the holding period, usually three to seven years, the company's cash flow pays down debt while the business ideally grows. The firm then sells or takes the company public, and returns are measured by IRR and the multiple of invested capital on the original equity.
24. What makes a good LBO candidate?
Stable, predictable cash flow to service debt, low capital expenditure needs, room to cut costs or grow, a strong management team, a reasonable purchase price, and a realistic exit path.
25. What drives returns in an LBO?
Three levers: EBITDA growth, paying down debt with the company's cash flow (which raises the equity's share of the value), and selling at a higher multiple than you bought at. Using more debt also raises returns on the equity, but adds risk.
Practice LBO questions
How to practice technical questions
Reading answers builds recognition, not recall. In an interview you have to produce the answer from scratch, out loud, in a clear order. The fastest way to get there is active practice: answer each question before you look at a model answer, get feedback on what you missed, and come back to your weak spots until you can answer them cold.
ApexIB has over 1,000 technical questions across these topics. Every answer you give is graded against what bankers expect, the specific gap is pointed out, and new drills target it. Try a few questions free.
Frequently asked questions
How many technical questions are asked in an investment banking interview?
Usually three to six in a first round, depending on the firm and the interviewer. Superdays can include more, especially with analysts and associates.
Should I memorize answers to technical questions?
No. Learn the logic well enough to explain it in your own words, because interviewers change the numbers and ask follow-ups to test whether you actually understand it.
What is merger math in investment banking interviews?
Questions about whether an acquisition increases or decreases the buyer's earnings per share. You compare the P/E the buyer pays with its own P/E for stock deals, and the target's earnings yield with the after-tax cost of cash or debt for other deals.
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