Two companies are almost exactly the same in every way, except Company A is trading at 20 P/E and Company B is trading at 18 P/E. Which would you invest in?
P/E is the price-to-earnings ratio, which demonstrates the cost per $1 of earnings. In this situation, it’s best to invest in Company B because a lower price/earnings ratio is a better investment — you are paying less for each $1 of earnings.
What is enterprise value versus equity value?
Enterprise value is the overall current value of the company while equity value is the value of the company’s shares and loans, which can give an idea of the company’s current and future value.
Example “Finance” Questions in Investment Banking Interviews
“Finance” means concepts such as the Time Value of Money, the Discount Rate, Present Value, and the Internal Rate of Return (IRR).
QUESTION: “How much would you pay for a company that generates $100 of cash flow every single year into eternity?”
ANSWER: It depends on your Discount Rate, or “targeted yield.”
If your Discount Rate is 10%, meaning you could earn 10% per year in companies with similar risk/potential return profiles, you would pay $100 / 10% = $1,000.
But if your Discount Rate is 20%, you would pay $100 / 20% = $500.
QUESTION: “A company generates $200 of cash flow next year, and its cash flow is expected to grow at 4% per year for the long term.
You could earn 10% per year by investing in other, similar companies. How much would you pay for this company?”
ANSWER: Company Value = Cash Flow / (Discount Rate – Cash Flow Growth Rate), where Cash Flow Growth Rate < Discount Rate.
So, this one becomes: $200 / (10% – 4%) = $3,333.
QUESTION: “What might cause a company’s Present Value (PV) to increase or decrease?”
ANSWER: A company’s PV might increase if its expected future cash flows increase, its expected future cash flows start to grow at a faster rate, or the Discount Rate decreases (e.g., because the expected returns of similar companies decrease).
The PV might decrease if the opposite happens.
QUESTION: “What does the internal rate of return (IRR) mean?”
ANSWER: The IRR is the Discount Rate at which the Net Present Value of an investment, i.e., Present Value of Cash Flows – Upfront Price, equals 0.
You can also think of it as the “effective compounded interest rate on an investment” – so, if you invest $1,000 today, end up with $2,000 in 5 years, and contribute and earn nothing in between, the IRR is the interest rate you’d have to earn on that $1,000, compounded each year, to reach $2,000 in 5 years.
8) Discuss risks that you have taken if your life?
By nature, I am very conservative and don’t like to take too much risk. However, that surely does not mean that I never take my chances. So, when I do take chances, it is always based on the rational analysis. It allows me to ensure success and also understand the risks involved before taking the plunge.
As an Investment Banker most of the time you should take tough decisions. Before taking decision you need to account political changes and the market trends. Therefore, you need to show your ability to take calculated risks and demonstrate adequate analytical skills.
Here, you also need to highlight the logical assumptions made by you while taking any risky decision. Investment Banking is more about “roughly right” instead of “precisely accurate.”