To help students prepare for Investment Banking & Private Equity interviews, we have compiled a list of questions we have seen over the last 12 years.

These questions are technical and mostly related to valuation concepts. Why most of these are about the DCF valuation approach is probably self evident. We encourage students to review other areas of corporate finance theory too.

Note: We have avoided other questions that show up in Investment Banking & Private Equity interviews that are centered around 1) knowledge of the PE or investment bank you are interviewing for, 2) transaction experience, personality and 3) fit and personality. Maybe a post for another day?

## ALTERNATE VALUATION METHODS

- What types of companies are good candidates for running a DCF valuation?
- Why is the DCF valuation method most commonly used?
- Among the valuation methods, which valuation methods are more volatile?
- Multiples valuation is really simple. Why is multiples valuation a valid method in valuation?
- What factors help you decide which multiple to use in multiples based valuations?

## MIDYEAR CONVENTION

- What is midyear convention and why do we use it?
- How does midyear discounting impact the terminal value calculation?
- What is a stub period when valuing a company using the DCF method?
- Do you apply the midyear convention to a stub period?

## CASH FLOW

- What items usually found in EBIT must be removed when preparing cash flows for a DCF?
- How should you treat / What adjustments are required for operating leases when preparing cash flows for a DCF?
- How should you treat / What adjustments are required for R&D expenses when preparing cash flows for a DCF?
- What adjustments can be made to current EBIT when forecasting cash flows for DCF (operating leases/R&D/one time adjustments for business cycles, etc.)?
- How do you deal with one time expenses or incomes when dealing with cash flows?
- What is the difference between levered and unlevered FCF?
- What drives the length of the forecast period in a DCF valuation?
- How do you deal with business cycles when preparing a cash flow forecast?
- Why do you use unlevered FCF when valuing a company using the DCF method?
- When would you use levered FCF when valuing a company using the DCF method?

## DEPRECIATION

- Are different types of depreciation and amortization considered equal?
- How many depreciation schedules should you have?
- How do you deal with depreciation and amortization expenses that are not tax deductible when forecasting cash flows?
- What method of depreciation should you use?
- Should you use the depreciation and amortization shown in the tax books or reporting books?

## TAXES

- Which tax rate should you choose in preparing a DCF cash flow?
- What are the drawbacks in using the marginal tax rate in forecasting cash flows?
- What are the drawbacks in using the effective tax rate in forecasting cash flows?
- What are the drawbacks in using the statutory tax rate in forecasting cash flows?
- What can the actual taxes paid in the past tell you when forecasting cash flows?
- What tax rate would you use if your cash flows are international and have different tax rates in different jurisdictions? How do you adjust your tax rate?
- What tax rate would you use if your company currently has operating losses?

## ACQUISITIONS

- How do you forecast the cash flow of a company that has grown through acquisitions?
- How are revenues of a company that has grown through acquisitions forecast? How are its costs forecast?
- How will forecast revenues and costs change when there is a history of acquisitions?
- Does it matter if the company pays for acquisitions using cash or stock or both?

## WORKING CAPITAL

- When computing working capital, should you consider short term debt that shows up as part of current liabilities?
- Should you consider cash and cash equivalents as part of current assets when computing working capital?
- What types of liabilities are considered as part of current liabilities when computing working capital?
- What types of assets are considered as part of current assets when computing working capital?
- What part of cash and cash equivalents is considered operating assets vs. non-operating assets?
- What is excess cash? Why is it important to consider excess cash?

## GROWTH

- What is the equation for sustainable growth? How does the equation for sustainable growth rate feature in a DCF valuation?
- Can we use the sustainable growth rate equation to grow operating income? If not, how do you estimate operating income growth rates?
- When are the sustainable growth rates and operating income growth rates equal?
- How does reinvestment rate impact value of a business in DCF valuation (when the company is profitable)?
- How does reinvestment rate impact value of a business in DCF valuation (when the company is not profitable)?
- What are excess returns? How is it arrived at?
- How long can high revenue growth rates last for young companies and/or tech companies? What is a reasonable revenue growth rate?
- How are growth rates related to excess returns?

## TERMINAL VALUE

- Which of these methods to estimate terminal value in a DCF valuation is most volatile?
- Which method should you use to estimate terminal value in a DCF valuation?
- What terminal growth rate should you use?
- Should you use the real rate of growth or the nominal rate of growth when estimating terminal growth rates using perpetual growth rate method?
- What variables would you do a sensitivity analysis on when valuing a company using the DCF method?
- Do debt repayments or issuance affect the DCF?
- Can the terminal growth rate in a perpetual growth rate method be negative?
- Does increasing the terminal growth rate increase terminal value?

## WACC WEIGHTS

- What kinds of liabilities are included in debt when computing the weight of debt used in computing WACC (eg. total liabilities, total debt, accounts payables, notes payables, long term debt, etc.)?
- Are short term debt and current portion of long term debt included in debt when computing the weight of debt?
- Does increasing debt reduce the valuation of the company?
- Where does off balance sheet financing figure when computing WACC? Is it considered?
- Do you use market value weights or book value weights to arrive at the weights when computing WACC?
- What are the drawbacks of using book value weights to arrive at WACC?
- What are the drawbacks of using market value weights to arrive at WACC?
- Do the debt equity weights have to be the same every year when forecasting cash flows?

## WACC VALUE

- How do you arrive at the market value of equity in a privately held business to estimate weights?
- How do you arrive at the market value of debt in a privately held business to estimate weights?
- Can I use book value of debt and equity in a privately held business to estimate weights given that market value is not available?
- What is the target debt to equity ratio of a firm? How do you arrive at it?

## BETA

- What does beta capture in a CAPM model?
- What companies generally have a beta greater than 1?
- What companies generally have a beta equal to 1?
- What companies generally have a beta less than 1?
- Does dividend payment impact the beta? If yes, how?
- When do you need to look for comparable companies’ beta?
- What adjustments do you need to make to comparable companies’ betas if you want to use it to estimate your beta and WACC?
- What does unlevering mean? Why do you need to unlever betas?
- Why do you need to relever betas?

# COST OF EQUITY

- Name different methods of estimating the cost of equity?
- Which method of estimating the cost of equity do you use? Why?
- Do these methods of estimating the cost of equity generally overestimate or underestimate the equity cost?
- How would you estimate risk-free rate when valuing an international firm?
- Does the currency of cash flows matter? How would it impact your model?
- What does a discount rate represent?
- What factors drive the discount rate?
- What factors drive the WACC?
- What factors drive the cost of debt?
- How does the tax rate impact the cost of debt?
- What factors drive the cost of equity?
- Does the cost of equity and cost of debt change in the projected years when arriving at the WACC?

## COST OF CAPITAL AND TAX RATES

- How does the tax rate impact cost of equity?
- Why is equity more expensive than debt?
- What factors drive the cost of equity?
- When the percentage of debt increases in a company, what happens to WACC?
- What happens to WACC if a company has % debt in its capital structure?
- How do I treat convertible debt when estimating the percentage of debt and equity to compute WACC?
- How do I treat preferred equity when estimating the percentage of debt and equity to compute WACC?

## MARKET RISK PREMIUM

- What is MRP? How would you explain it to a layman?
- How do you estimate Historical Risk Premiums?
- What are the different ways you can estimate historical risk premiums?
- What issues do you have in measuring MRP?
- What is an alternative to historical risk premiums?
- How do you adjust your valuation for country risk?
- How do you estimate country risk?
- How do you factor in country risk for a multi-national company?
- What is the adjusted present value (APV) method of valuation?
- How is the adjusted present value (APV) method different from your standard DCF -WACC method?
- What are the draw backs of the adjusted present value (APV) (if any)?
- Where does the cost of financial distress or risk of bankruptcy feature in your valuation?

## MISC Investment Banking and Private Equity Questions

- How can you feature the risk of bankruptcy in your DCF model?
- Can you name alternate ways to factor in a risk of bankruptcy in your DCF model?
- What have you not valued yet? In other words, what do you need to add on to the present value you have arrived at using the DCF valuation approach?
- What additional assets must you consider after you have valued a firm using the DCF method?
- What additional liabilities must you consider after you have valued a firm using the DCF method?
- How do you arrive at the value of equity from the value of debt?
- If you are given the firm value, what factors other than the debt value impact the value of equity?
- What is a control premium?
- What conditions make a control premium irrelevant?
- What is a liquidity discount?
- When is a liquidity discount appropriate?
- How do you estimate the value per share after arriving at the total equity value?
- Do you prefer to use the # of shares outstanding or the # of diluted shares outstanding when valuing equity shares?
- How do you adjust the earnings per share to reflect the employee equity share options outstanding?

Note: This just blew up. If you would like to be informed when we add more Investment Banking & Private Equity Interviews questions, please add your emails. We may also add questions around 1) knowledge of the PE or investment bank you are interviewing for, 2) transaction experience, personality and 3) fit and personality.