3 of the most common interview questions in finance, and how to answer them successfully

It’s no secret that investment banking interviews are extremely technical. They will test your ability to walk through the three financial statements, break down a discounted cash flow model and convince someone that you truly are willing to work grueling hours.

What most people don’t know, however, is that the interviews for the elusive buyside jobs are often even more challenging. To make matters more difficult, the candidates recruiting for these positions are the lucky undergraduates that landed the top few seats in investment banking, so they have almost no time to prepare.

Private equity interview questions range from quick IRR math in your head to detailed interrogations of the deals you worked on in banking. Hedge fund interview questions often ask you to pitch a specific long idea or short idea and/or ask you explain your investing philosophy.

This article is a short preview into some of the more advanced questions you may get as well as the competitive nature of these interviews and how you might go about preparing for them.

Investment Banking

When building a model, what is the most common way to project items like accounts receivable, accounts payable, inventory, depreciation, and capital expenditures?

  • Accounts receivable is normally projected as a percentage of revenues or using a ratio like Days Sales Outstanding.
  • Accounts payable is normally projected as a percentage of cost of goods sold or using a ratio like Days Payable Outstanding.
  • Inventory is normally projected as a percentage of cost of goods sold or using a ratio like Inventory Days.
  • Depreciation can be calculated very simply using a percentage of the prior years’ PP&E or can be calculated at the individual asset level using different schedules, useful lives, etc.
  • Capex is normally projected as a percentage of revenues, or from company guidance you will have a relatively good idea of what capex requirements are going forward.

Investment banking interview questions can be more technical like the one above, or challenge you with tricky fit questions or brainteasers. Make sure you understand the concepts behind the technical questions and have at least five to seven personal stories you can use for the behavioral portion of the interview. We recommend at least five mock interviews with friends or a professional to ensure success.

Private Equity

What is a leveraged buyout and walk me through a model?

An LBO is the acquisition of a company where the buyer contributes some of its own money (equity) along with a lot of borrowed money (“debt” or “leverage”) to fund the purchase.

Debt makes up 50 – 80% of the purchase price of a typical LBO. The buyer uses the cash flow of the target company to make interest payments on the debt and pay down the principal over time. If the buyer is a PE firm, it will hold (own) the target for ~5 years and then look to sell it for a profit. By using debt to fund the acquisition, the PE firm risks only a fraction of the purchase price and increases the return on its equity.

Consider the following simplified example below:

Example PE Acquisition without Debt

Example PE Acquisition with Debt

Most private equity interviews will not only expect you to know what an LBO is, but will actually give you an LBO modeling test, to ensure

Hedge Fund

Pitch me a stock.

The open ended nature of this question drives many applicants crazy, but you have to remember to stay calm. Some of our top hedge fund professionals have specific advice on how to do your research and how to present it in an actual interview. In particular:

“You’re going to be up against candidates who have spent months preparing for their pitches. Start now in creating a rough valuation model. In a stock pitch essentially everything comes down to valuation, timing and the contrarian case. I recommend making a slide deck and handing it to your interviewers so you look as professional as possible. Lots of graphs = money. Slides to think about include – Sector positioning, ’13/’14 PE multiples, EPS forecasts, emerging market exposure, lead indicators, volume/price trends, downstream market trends, key themes (oil, china, QE, elections, currency, debt crisis, equity flows), cost pressure, M&A, CDS spreads, key catalysts, etc.”

…that doesn’t mean you should hand them a dictionary:

“Even after I’ve spent weeks learning a company, my final writeup is rarely more than a few pages. If you come in with a massive slide deck, we will immediately stereotype you as sell-side material. A good analyst can process a ton of data/material and come away with a succinct and accurate conclusion. Displaying a bunch of data points without meaningful analysis is useless. My firm pays $10s of millions to the sell-side for trading & research… we have no reason to bring on someone internally to do that. We need people who can think like investors.”

Overall, you should be in good shape if you follow this outline:

    1. Introduction – briefly explain the business, competitors, major industry metrics, etc.
    2. General recommendation – are we looking at this as a short or a long, what’s our time frame
    3. Why Now – what makes it attractive now, why does the market love/hate the stock all the sudden
    4. Commentary/Catalysts – is the market justified in its love/hate, what could happen to make stock rise/fall, what would the metrics look like if each catalyst happened
    5. Explanation – why is the catalyst in favor of your recommendation most likely, why is the other unlikely, what research has gotten you to this conclusion
    6. Valuation – briefly explain historic valuation, industry multiple, earnings growth potential, and what kind of return you think we can get (and over what time horizon), and the same for if downside catalyst happens

Whether you find yourself preparing for an investment banking interview or a competitive buyside interview, don’t forget to lose site of the most important point: No matter how “right” you are with your technical answers, if the person interviewing you doesn’t like you, you are out of luck.

This is why we always stress the importance of non-verbal cues and mastering the fit portion of the interview as well.

Patrick Curtis is the Chief Monkey and Founder of WallStreetOasis.com.

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