Cash Flows * Risk & Discount Rates * Taxes * Growth * Other Valuation Topics * Terminal Value * Working Capital

Preparing for Private Equity and Investment Banking Interviews?

Here is the fastest way to prepare for private equity and investment banking interviews. Below is the ultimate list of valuation-related technical questions our students have encountered in finance and banking interviews between 2014 and 2022. 

Would you like to be tested on a PE/IB interview question by email each day? Add your email here.

Cash Flows Related Questions in Private Equity & Investment Banking Interviews

Estimating future cash flows is a key component of DCF valuations. This section lists the cash flow-related questions we have encountered in investment banking and private equity interviews.

  1. When is the midyear convention NOT appropriate to use?
  2. If you had access to depreciation and amortization cash flows as computed in the IRS code/tax books or those reported in the financial accounting/reporting books choice, which one would you prefer to use?
  3. Do you apply the midyear convention to a stub period? If yes, how?
  4. What is a stub period? When does the stub period arise when valuing a company using the DCF method?
  5. Does the midyear convention have a larger impact on the value of the business when the discount rate is higher or lower?
  6. What DCF assumptions have the most weight on your decision to use a midyear convention?
  7. How does midyear convention impact terminal value calculation?
  8. What is the midyear convention? When and why do we use the midyear convention?
  9. Do you account for business cycles when preparing a cash flow forecast? If yes, how?
  10. Why is normalization done?
  11. What is the net impact of capitalizing an operating lease on the balance sheet?
  12. What is the net impact of capitalizing an operating lease have on the income statement?
  13. What impact does capitalizing R&D expenses have on the cash flow statements?
  14. What are normalized earnings?
  15. How do you deal with onetime expenses and/or incomes in EBIT when dealing with cash flows?
  16. How do you capitalize R&D expenses?
  17. Why is expensing R&D expense not a good practice from a DCF valuation perspective?
  18. What is the difference between depreciation and amortization from a DCF valuation perspective?
  19. How do you convert an operating asset into a capitalized asset?
  20. How do you deal with operating leases when preparing cash flows for a DCF?
  21. Should you use the depreciation and amortization shown in the tax books or reporting books in estimating FCF for a DCF model?
  22. Does the choice of currency of cash flows matter when valuing an international firm?
  23. What line items found in EBIT must you remove when preparing cash flows for a DCF?
  24. When would you use levered FCF when valuing a company using the DCF method?
  25. Why/When do you use unlevered FCF when valuing a company using the DCF method?
  26. How do you determine the length of the forecast period in your DCF valuation model?
  27. What is the net impact of capitalizing an operating lease have on the income statement?
  28. What impact does capitalizing R&D expenses have on the cash flow statements?
  29. What impact does capitalizing an operating lease have on financial statements?
  30. How do interest rates factor into your DCF valuation model?

Back to Questions by Categories

Discount Rates and Risk-Related Questions in Private Equity & Investment Banking Interviews

Discount rates have an outsized impact on valuation. And estimating your discount rate is quite challenging. This section lists the discount rate-related questions we have encountered in investment banking and private equity interviews.

  1. What are the drawbacks of using book values in computing the weights of capital?
  2. Are country risk premiums a one-time task or does it need to be revised frequently?
  3. Which method of estimating the cost of equity do you use? Why?
  4. Do you use market value weights or book value weights of debt and equity to arrive at the weights when computing WACC?
  5. Are short-term debt and current portion of long-term debt included in debt when computing the weight of debt?
  6. What are Discount Rates? How will you explain it to a layman?
  7. Is there really a Risk-Free Rate?
  8. What is Market Risk Premium or MRP? How would you explain it to a layman?
  9. When do you need to iterate on the value of debt and equity?
  10. Is there an appropriate discount rate you must use?
  11. Does dividend payment impact the beta? If yes, how?
  12. Does the beta of a company provide any indication of the company’s valuation?
  13. What is Equity Beta?
  14. How would you apply country risk premiums on a global company/multinational company?
  15. How do you estimate country risk premiums? Name three methods to estimate country risk premiums.
  16. Has globalization over the last three decades enhanced risk and therefore the discount rates?
  17. What is the argument for NOT using a country risk premium?
  18. When do you use a country risk premium? What is the argument for using a country risk premium?
  19. Given the issues in estimating a market risk premium, can you suggest an alternative metric or method to arrive at risk premiums?
  20. What are the issues you face in estimating a market risk premium?
  21. How would you estimate risk-free rate when valuing an international firm?
  22. Do the CAPM, Fama-French, APM and multi-factor models methods of estimating the cost of equity generally overestimate or underestimate the equity cost? Why?
  23. What is the target debt ratio of a firm? How do you arrive at it?
  24. Does the cost of equity and cost of debt change in the projected years when arriving at the WACC? Yes/No? And why?
  25. Are the debt and equity weights used to estimate WACC the same every year in a DCF valuation model?
  26. How do you arrive at the market value of equity in a privately held business to estimate weights (to arrive at WACC)?
  27. How do you get the market value of debt if a company’s debt is partly or fully bank debt (not publicly traded)?
  28. What could be wrong in using market value weights to arrive at WACC? How can you fix it?
  29. What happens to valuation when off-balance sheet financing is added to the debt when computing WACC?
  30. Where does off-balance-sheet financing figure when computing WACC? Is it considered debt?
  31. What kinds of liabilities are included in debt when computing the weight of debt (used in computing WACC)?

Back to Questions by Categories

Review these questions and test yourself on these valuation-related technical topics, so you are not surprised or stumped during your private equity and investment banking interviews. Learn the nuances of Valuation and DCF modeling, a vital piece of the private equity and investment banking interview process.

Tax Related Questions in Private Equity & Investment Banking Interviews

“No man can escape taxes and death!” said Mark Twain! Companies may escape death but not taxes. And taxes impact cash flows which drive valuations! This section lists the tax-related questions we have encountered in investment banking and private equity interviews.

  1. What tax rates apply to a company you are considering valuing?
  2. What tax rate would you use if your company currently has operating losses?
  3. What tax rate would you use if your cash flows are international and have different tax rates in different jurisdictions?
  4. Can we use the actual tax paid to estimate future tax expenses?
  5. Why don’t we use the statutory tax rate in forecasting cash flows?
  6. What are the drawbacks of using an effective tax rate in forecasting cash flows?
  7. What can actual taxes paid last year tell you about future cash flows?
  8. What are the drawbacks of using marginal tax rates in forecasting cash flows?
  9. Which tax rate should you choose in preparing a DCF cash flow?

Back to Questions by Categories

Growth Related Questions in Private Equity & Investment Banking Interviews

Growth rates have an outsized impact on valuation. This section lists the growth rate-related questions we have encountered in investment banking and private equity interviews.

  1. How does the reinvestment rate impact the value of a business in DCF valuation when the business is NOT profitable?
  2. Could a company with high growth rates have low valuations? Why?
  3. Are higher revenue growth rates always good (leading to higher valuation)?
  4. What are excess returns? What drives excess returns?
  5. How does the reinvestment rate impact the value of a business in DCF valuation when the business is profitable?
  6. When are the sustainable growth rates and operating income growth rates equal?
  7. Can use the sustainable growth rate equation to grow revenues? If not, how do you estimate revenue growth rates?
  8. Can you use the sustainable growth rate equation to grow operating income? If yes, what is the formula? If not, how do you estimate operating income growth rates?
  9. Will a company grow at the sustainable growth rate? Is that the growth rate I should use in my DCF valuation?
  10. How does the equation of sustainable growth rate feature in a DCF valuation?

Back to Questions by Categories

Working Capital Related Questions in Private Equity & Investment Banking Interviews

Working capital is required to run most businesses. Investments in working capital feature in the estimation of cash flows. This section lists the working capital-related questions we have encountered in investment banking and private equity interviews.

  1. What type of current assets are considered as part of current assets when computing working capital?
  2. Should you consider cash and cash equivalents as part of current assets when computing working capital?
  3. How is excess cash treated in your DCF valuation?
  4. What is excess cash? How do you estimate excess cash amounts?
  5. What types of liabilities are considered as part of current liabilities when computing working capital?
  6. Is short-term debt showing up as part of current liabilities included in working capital when estimating cash flows in a DCF valuation?

Back to Questions by Categories

Terminal Value Related Questions in Private Equity & Investment Banking Interviews

Terminal value forms a large piece of the value of a company. So it is important to get it right! This section lists the terminal value-related questions we have encountered in investment banking and private equity interviews.

  1. What are the different ways you can estimate terminal value in a DCF valuation?
  2. What factors drive the percentage of your total value the terminal value represents?
  3. How can you check if your terminal assumptions are reasonable? (other than as a percentage of total value)
  4. Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?
  5. Should you use the real rates of growth vs. nominal rate of growth when estimating terminal growth rates when using the perpetual growth rate method?
  6. What are the draws backs of the liquidation (fire sale or orderly sale) approach to terminal value?
  7. What are the draws backs of the multiples approach to terminal value?
  8. What are the key principles you must stick with when deciding on the terminal growth rate you use in your DCF valuation?
  9. What are the draws backs of the perpetual growth approach to terminal value? How do you address this?
  10. What cash flow value do use to calculate terminal value if you are using the perpetual growth method?
  11. Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?
  12. Which method should you use to estimate terminal value in a DCF valuation?
  13. How can you check if your terminal assumptions are reasonable?
  14. What percentage of your total value does your terminal value usually represent?
  15. Can your terminal growth rate be higher than the economy’s growth rate? or GDP growth rate?

Back to Questions by Categories

Other Valuation Related Questions in Private Equity & Investment Banking Interviews

This section lists questions we have encountered in investment banking and private equity interviews that we could not fit into any of the other categories.

  1. How do you deal with stock-based compensation in your DCF valuation model?
  2. How does it matter if the company pays for acquisitions using cash, stock or both when estimating cash flows for a valuation?
  3. How are acquisition costs forecasted for a company that has a history of acquisitions?
  4. What are the Essential Ingredients of a DCF Valuation Model?
  5. What are Three-Stage or Multi-Stage Models?
  6. What is the Lifetime of a Business? How many years do we need to forecast financials?
  7. How is the liquidity discount arrived at?
  8. When is a liquidity discount appropriate?
  9. When is a private company discount irrelevant?
  10. What conditions make a control premium irrelevant?
  11. What additional liabilities must you consider after you have valued a firm using the DCF method?
  12. Where does a majority holding feature in your DCF valuation? Do you need any adjustments to account for the minority holdings?
  13. Where does minority interest feature in your DCF valuation?
  14. What additional assets must you consider after you have valued a firm using the DCF method?
  15. What could you have missed out on if you did a DCF valuation?
  16. How can you estimate the probability of bankruptcy of a firm?
  17. How can you feature the risk of bankruptcy in your DCF model?
  18. What are the drawbacks of the adjusted present value (APV) (if any)?
  19. How is the adjusted present value (APV) method different from your standard DCF -WACC method?
  20. Why would you consider the adjusted present value (APV) method of valuation?

Do let us know if we have missed any questions you have encountered in banking and finance interviews. Emails us if you would like some clarifications on the questions listed above too.

Note: We list only valuation-related technical questions we have seen in private equity and investment banking over the last 12 years. We have avoided fit/personality questions.

Cash Flows * Risk & Discount Rates * Taxes * Growth * Other Valuation Topics * Terminal Value * Working Capital