420 thoughts on “Comments / Suggestions / Questions…”

  1. Tyrone,
    While most senior level bankers do have an MBA, it is not always a requirement as some Analysts are promoted to Associate and then continue to move up without ever getting an MBA. It is definitely not necessary to obtain a CFA designation. While the knowledge you will learn studying for the CFA won’t hurt you of course, the CFA is really not helpful in terms of recruiting for investment banking. However, the CFA is very helpful for jobs in asset management and equity research, for example. The only certifications that are often required in investment banking are the NASD licenses (Series 7 and 63). However, you don’t need to have these prior to starting a job (the bank will sponsor you for these). Other than an MBA, there are really no certifications that will help you break into banking.

  2. Stacy,
    A combined MBA/CPA is a good combo for investment banking. When banks are recruiting Associates out of business school they tend to like CPAs because they obviously have strong accounting backgrounds. Just to be clear, though, I’m assuming not just a CPA but strong experience as well (say audit or transactional services experience at a Big 4). Just having the CPA without the experience is probably not all that valuable. As per my previous comment above, the CFA is not that useful for investment banking recruiting and a top MBA is pretty much the only way to break into banking once your more than a few years out of undergrad.

  3. Hi Andrew,
    First, thank you very much for your last answer to my question. Second, generally speaking, how long does it take for a vice president to become a Senior vice president? it seems like an analyst can be promoted to associate after 3 years, associate to vp after 3 years. is it safe to ASSUME that one could move from vp to svp/director in 3 years or is it based more on demonstrating client aquisition.

  4. Tyrone,
    It’s typically either 2 or 3 years from VP until the SVP promote. If you are a competent VP then it is not such a difficult promotion. To become an MD is harder and does usually require demonstration of an ability to bring in business.

  5. While going through the contents of this website, I am really pleased by the way, the questions have been drafted here and by their answers too. It will really help a lot to anyone who is going to face an Interview by providing him a quick insight & knowledge of the Investment Industry. Thanks a lot for doing this excecise for the benefit of all for their carriers.

  6. Andrew, I have been asked to provide a writing sample in order to progress to my second round interview. What would a good example be of what they are looking for, and if I don’t have something on hand, how should I go about preparing a sample for them?

  7. Ed,
    I haven’t heard of too many people being asked for a writing sample for investment banking jobs. If you are still in school or recently out of school then I would submit an essay/paper that are proud of and did well on. I don’t think it would have to be finance/business related, as long as the topic isn’t controversial. If you are currently in a field such as equity research or asset management, you could use a writeup of a stock or market commentary that you might have done (as long as it isn’t confidential/proprietary). If you don’t have anything on hand then perhaps you could do a writeup of a stock or M&A deal or something like that. Before I did any work, though, I would actually ask them to give you a little more detail on what they want.

  8. Andrew,

    Fantastic website. I have a question about how different firms (I Banks, PE Firms, Hedge Funds, etc.) view different graduate degrees. I am in the process of earning a BBA right now and have heard that many MBA curriculums are very similar to BBA curriculums (with more emphasis on team-work, networking, etc.).

    My question is whether it helps differentiate yourself to have an undergrad business degree and then something like a JD or a Masters in Finance, rather than an MBA? Where do people JDs or Masters in Finance typically fit into an I Bank- and at what level do they enter typically? Would you recommend applying for analyst positions first and then deciding which grad degree to pursue, or would it make sense to do a JD or Masters in Finance right after undergrad given that they dont usually require work experience?

    Thanks

  9. Hey Andrew,

    First of all, I’d like to say that you have a great website and it’s proven to be very helpful to me as I go through the interviewing process. I was just curious as to why you have question marks after Barclays when you list out the bulge bracket investment banks.

    Also, you mentioned that DCM/ECM are viewed as “Banking-Lite” and I was curious as to what you think the exit opps from these positions are.

    Thank you so much.

  10. Ian,
    Typically, anyone with a masters degree (including MBA) or JD who is recruiting straight out of school comes in as an Associate. The exception is someone who does a joint Bachelors/Masters who doesn’t have any work experience. They would probably start as an Analyst. If you want to do investment banking, the best thing for you to do is to get an analyst position out of undergrad. You can decide later whether it makes sense to get an MBA or JD or some other degree. While I happen to think a JD is very valuable (including in banking), I wouldn’t get one thinking you will be able to get an investment banking job straight out of school. While not impossible from certain schools, it is not likely since firms really only recruit for Associate investment banking positions from top MBA programs. The masters of finance is not very helpful for ibanking jobs but it is helpful for other jobs within finance.

  11. John,
    With regards to Barclays, I put the question marks right after Barclays purchases Lehman assets. At the point, it remained to be seen if they would keep many of Lehman’s investment bankers and (become/remain) a bulge bracket bank. I’ve removed the question marks now as they have indeed stayed in investment banking.

    Exits ops for DCM/ECM tend to be much more limited than things like M&A or industry groups because you don’t get typically get the same kind of deal experience and you don’t typically do the same kind of analytical work such as modeling and valuation. Therefore, it is much much tougher to switch into things like private equity. Some folks to make the switch into the markets side of the business (sales and trading). Others go to hedge funds.

  12. Andrew,

    Thanks for your response. What sort of work do people who work as an analyst then get a law degree typically do? Is it mostly M&A advisory work? I’m not quite sure where the finance + law background typically places you.

    Thanks

  13. Ian,
    I can’t say that I know of too many people that have gone to law school after being an analyst, but I would think that most probably go into some kind of corporate law (could be M&A, could be something else like tax or antitrust or litigation). Or if they hated banking, they might do something in law totally unrelated (say, work for the district attorney’s office). I think I understand your question about finance+law. Basically, you don’t need a law degree to be in finance and you don’t need a finance degree to be an attorney. However, having both backgrounds certainly gives you a leg up over peers (especially at the senior levels of law or banking). Whether it is worth it is really up to you.

    For what it’s worth, I regret not getting a JD when I got my MBA. I still think about going back for a law degree but I might be getting a little too old to go back to school.

  14. Hi Andrew,

    Thank you for the great website and it’s really very helpful and interesting. I tried to answer the questions in “Brainteasers”,and I am afraid that I do not agree with the answer to the last question about “three envelopes”. As one letter has already been identified, it should be eliminated in our probability calculation, and it has nothing to do with whether you held one before or not (since it is not opened). I think the rest two letters should be treated as identical and with 50% probability of offer. So I won’t care whether to change or not.

    Thanks!

  15. Hi Andrew, this is an extremely informative website. I’m seriously considering breaking into banking at the Associate level from an MBA, but I have a couple of key thoughts, and they relate to life/opportunities at the different banking groups. I’m interested in M&A, ECM and DCM and High Yield – it seems that the first group is more competitive, gruelling and lucrative than the other three. As a result, I’m interested in comparing life as an Associate at each of the four (or three, if DCM/High Yield are merged), looking at: difficulty of entry, schedule, organizational shape (I’ve heard that ECM is extremely top-heavy), skillset, and progression into VP (what effect does the ‘shape’ have on the career track?). I’m aware that your main experience was in M&A, so I know it might be difficult to comment on what ECM/DCM are like at a bulge bracket, but if it’s possible to answer, I’m interested in some granularity between the two CM divisions. It seems like DCM would have a less erratic dealflow (more valuations, less pitches) due to the nature of the issuance, but with lower spreads, perhaps the bonuses are not quite as spectacular. Is the skillset different? Sorry, I know these are a lot of questions.

  16. Chi,
    My answer to that brainteaser is correct but many people do have to think about it a lot to really understand it. I’ve seen it explained many different ways but if you search the internet for “monte hall problem” you should find other explanations that might help you.

  17. JTBB,
    As you mentioned, I’m not an expert on ECM and DCM but they tend to have a somewhat better lifestyle than M&A (or industry groups), lower compensation over time, require less analytical work (little to no valuation and modeling work) and don’t have the same exit opportunities into things like PE and hedge funds. As I’ve said elsewhere on this site, they’re sort of considered banking-lite. They really are hybrid groups between IB and sales and trading. I think it is a good career option for folks who don’t want to make all of the same sacrifices as one needs to do in other areas of banking and also likes to follow the markets. They are not the best groups if you’re thinking of transitioning out of IB to go to the buyside. As far as dealflow, it really depends on the state of the debt and equity markets.

  18. Hi Andrew,

    This site is very useful! I have a few questions I hope you can answer:

    If an interviewer asks to name a stock that you are interested in and describe it, how should I go about answering the question if I have never invested (or “speculated”) in stocks. What multiples/ market data should I look at, what other ways can I tell if a stock will go up?

    Also, what current events I should be aware of for an upcoming interview? (for example, I’ve been hearing a lot about TALF and increasing IPOs)

    Finally, do you think the economy is recovering and why?

    I truly appreciate your response.

    -Patricia

  19. Hey Andrew,
    The website is fantastic. I’m now in my last year in my undergraduate university and I really want to pursue my career in IB. But I have some questions about the structures in IB. I’ve been told that typically, there are “buyside” and “sellside” in IB; is that similar to what you mentioned as “product” and “industry”?

    I’m interested in hedge fund, so which department do you suggest that I should begin my career with? Also, I wonder what the task of the operation department is in an IB. Is that related to the market?

    I sincerely appreciate your response. Thanks.

    Panny

  20. Hi Andrew,

    This site is fantastic! I really learned a lot through those questions and answers.

    I am now a final-yesr finance student and very interested in pursuing a career in ibanks. I just have some questions concerning the etiquette during the interview. When given the name card, do I need to put it in my pocket after reading it or can I put it on the table in front of me until the end of the interview.

    Another question is that could you give some tips on the dining etiquette when invited to a super day when the candidate will have dinner with the directors?

    Thanks a lot!

    Janet

  21. Patricia,
    It is unlikely that you will be asked to pitch a stock for an investment banking position but you certainly should expect that question interviewing for equity research, asset management, hedge fund, etc. In these types of jobs, they are looking for people who have passion for the markets. If you’ve never invested or don’t follow any stocks, they will probably get the impression that you don’t have that passion. So, you need to pretend that you do. It is okay to say you haven’t invested because you don’t have the funds (certainly understandable with the cost of tuition, etc.) but you should do some research on a few companies that you can discuss. Generally you should know about the company’s business and business strategy (pick an easy company to understand such as one in the consumer space), recent news about the company and how they are currently valued (on a P/E multiple or EV/EBITDA multiple or other industry specific metric). You should have a view on whether you think the company is a good buy, hold or sell. Again this isn’t really for investment banking positions but for the other types of positions that I mentioned. The best way to do this research is to get a recent equity research report for the company (which if you’re in school you probably can get for free).

    I really can’t tell you in a quick comment how to decide if a stock will go up or down (if you read my comment on market efficiency you know that I believe that this is near impossible). However, what you want to do is demonstrate your understanding of a stock and the company and have a good story for why you like it or dislike it.

    As for general news, know that the equity and credit markets have certainly improved in the last few months. As you mention, the IPO market and M&A market have certainly seen a little more activity. You should try to read something like the Wall Street Journal or NY Times business section daily leading up to your interviews so you are knowledgeable about current economic events.

    Finally (and very briefly in response to your last question), I am still quite pessimistic about the economy given that we haven’t solved any of the problems that caused this mess. By printing massive amounts of money the Fed (and other central banks) have flooded the markets and caused equity and capital markets to reflate. This has had a positive affect on the economy, which has certainly stopped deteriorating (at least for now) though not yet growing. In short, I believe that this is a short-term fix which will lead to worse consequences down the road. Whether down the road is weeks, months or years, I can’t say.

  22. Panny,
    All investment banking (product and industry groups) is considered sell-side. Anytime you are marketing and selling your firm’s services it is considered sell-side. Most of the other areas within an investment bank (sales/trading, equity research, private banking) would also be considered sell-side. Buy-side refers to functions that are investing money (or making investment decisions) such as private equity, hedge funds, mutual fund companies and other asset managers.

    Hedge funds are so broad (they do many different things) and positions within hedge funds are so broad that’s it is hard for me to give you advice without knowing specifically with what areas you are interested. Many functions within finance could lead to working at a hedge fund.

    Operations within an investment bank has many different functions such as information technology. These positions are generally not considered to be finance (not to say at all that they are bad jobs) but they don’t have the same compensation, exit ops, lifestyle sacrifices, etc.

  23. Janet,
    In the U.S. or Europe it really doesn’t matter what you do with the business card. You can put it away in your pocket or bag or put it in front of you so you remember the person’s name (just don’t glance at it more than once or twice!). If you’re in Asia, then you must treat the business card with much more respect but if you are in Asia you probably know that already.

    With regards to dining etiquette before super days, most advice is just common sense. Relax and enjoy the dinner and use the networking time to your advantage but treat it also as an interview. Try to get advice about the next day’s interviews if you can but don’t be too pushy or aggressive. Ask the bankers what they like about that bank so you have good answers for the interviews when you are asked “why do you want to work at this bank.” Try to remember all of the names of the people that you talked to if you can. Definitely don’t make a fool of yourself by drinking too much, making a mess with your food, saying inappropriate things, etc. (all common sense stuff). One last piece of advice, even if the diner goes wonderfully and you think you’ve got the job for sure, don’t be over confident in the interviews. The dinner is important but much less important than the actual interviews.

  24. Great Website!!! I finally have some direction in terms of where to start studying for my interviews!!! You do know what we need to know and ask. Please keep it up and Thank you.

  25. I love the new layout. Thank you for your efforts and help. Your site has been a wonderful tool for me during my search.

  26. I hate the new layout, it’s awful compared to what it was before. The questions are great and very helpful – but the site is now very confusing and poorly laid out. Definitely needs major work.

    1. John,
      Thanks for the feedback. I’m sorry that you don’t like the new layout. I’d certainly be interested if you have any specific comments. I’m not really sure why you find it more confusing than the old site, as the layout is very similar to the old one. The only two substantive changes to the layout are (1) I added a third column and moved the FAQ categories to the left column from the right and (2) I separated the technical interview questions into their 5 categories. Any more detailed feedback is certainly welcome.

  27. I absolutely love this website. When I went through the investment banking recruiting process last year this was my bible. I used it for everything from very last minute interview prep to a cheat sheet for phone interviews. It’s absolutely great and I honestly owe a lot of the fact that I am working currently in investment banking to you. Thanks for all of your time and for doing this. I’m really excited that you have a space to leave a reply, since I’ve always wondered who the life saver who made this website was.

    If you could- add some more brainteasers! Everyone hates getting those.

    1. James,
      Thanks for your nice note. I’m really glad that the website was helpful to you. I’ll try to add some more brainteasers. However if you (or anyone else) have any examples of other brainteasers that you have been asked in interviews please let know. The same goes for any technical questions.

      1. Andrew- Here’s one that a friend told me he was asked.

        You have 20 balls, 10 black and 10 white, and 2 buckets. You have to arrange the balls in such a manner in the two buckets so that when I turn back around and stick my hand randomly into one of the two buckets I have the highest probability of picking out a black ball. How would you do it?

        A: Put 19 balls in one bucket, and one black ball in the other.

  28. How often do lateral-hire analysts receive sign-on bonuses? Do you know if this is at all conventional?

    Thanks,
    Pat

    1. I believe it is unusual for lateral analysts to receive sign-on bonuses (especially at bulge brackets). However, it can’t hurt to ask once you’ve got the offer, especially if you are highly desirable (say, for example, a 3rd year from a top bank). It is more common to receive a stipend for relocation if you are moving geographies.

  29. Andrew-

    How would you rank (or what is your opinion) of BAML relative to other investment banks? (Specifically their healthcare group).

    Also, how would you compare BAML to a smaller (at least in US) bank like Societe General?

    Thanks,
    John

    1. I’m really not knowledgeable enough to give you an informed opinion on BAML’s healthcare group. With regards to BAML versus a bank like Societe General (in the U.S.), I would expect a lot more dealflow at BAML. Societe General really isn’t in the same league in the U.S. With regards to healthcare specifically, Cowen & Co, which used to be part of SG (but no longer is) has a highly regarded healthcare practice.

  30. Awesome, very professional website and very practical!

    Seriously, it’s not BS, this site helps IBankers to be prepared for interviews!
    Thank you Andrew!

    PAC

  31. Hi Andrew,

    Brilliant web site, many thanks, most helpful! As I am doing interviews right now, I would like to add a question many of my friends got at bulge bracket firms. Could you give a simple example on how to consolidate the balance sheets after an acquisition? Would be very helpful,

    thank you,

    Frederik van Boven

    1. Frederik, thanks for the kind words about the website. I’ll add that question to the site shortly. I’ve been swamped the last few weeks trying to finish up a financial modeling self study program that I will be releasing soon.

  32. Andrew, thank you for very helpful and informative site!
    I’ve got a question. What is meant by saying that interest is tax-deductible? Do we pay taxes on interest or not if we are an ussuer of bond? Is it accounting rule of IAS or GAAP? Why do we deduct taxes from interest calculating WACC? And why do we take tax-effected EBIT (NOPAT) calculating FCFF and not simply EBIT
    Thank you!

    Kind regards,
    Steven

    1. Steven, for tax purposes, interest is treated like any other expense. Interest reduces the income from which you calculate the amount of taxes that are owed. For example, let’s say a company had $100 of operating income (EBIT) and no interest expense. At a tax rate of 40%, the company would owe the government $40. Now, lets say that the same company had some debt and therefore had $10 of interest expense. Now the company owes the government only $36 (100 – 10) * 40%. The company owes the government $4 less in taxes because of the interest. This is what it means for interest to be “tax deductible” or equivalently for there to be a “tax shield.” This is the way it works regardless of the type of debt (bonds or otherwise). This is not an accountable rule. It is a tax rule/law.

      In the WACC formula, we must multiply our cost of debt times 1 minus the tax rate for exactly this reason (that interest is tax deductible). We do not do this to our cost of equity because dividends are not tax deductible.

      To derive free cash flow for our DCF, we do subtract taxes from our EBIT (just as you said) because we do have an obligation to pay the government, which does reduce cash flow.

  33. For the group of 12 balls containing 1 heavier ball brain teaser, would this alternate approach work?

    Weigh 6 balls on either side for the first weighing. Whichever side is heavier contains the the ball we are looking for. Of the 6 balls that we choose, we will then pick 2 to weigh on each side leaving a total of 2 on the sidelines and 4 on the weighing machine. Whichever side is heavier contains the heavy ball and one will just weigh those two balls for the last weight to find out which one is the heavier one. If the two sides equal, then the heavy ball must be one of the 2 on the sidelines. One would way those two for the third weighing to find the heavier one.

    Thanks

  34. Andrew,

    A wonderful site. I read the novel by Joe Jett “Black and White on Wall Street” and realized that MD in Trading has their desk on the Trading floor. Do VP, SVP have offices or do they work in cubicles?

    1. Bill, basically all traders regardless of title have their desks on the trading floor (with lots of computer monitors and lots of phones). The folks that the traders report to (their bosses) tend to have offices that surround the trading floor. In contrast, in investment banking, VPs and above tend to have offices and the junior bankers (analysts and associates) are usually in cubicles.

  35. Thank you, Andrew, but I have not clearily understood, I got another question concerning tax and FCFF
    By definition FCFF is the amount that goes to all suppliers of capital after all investments into capex and opex have been made.
    We have 3 traditional items – D&A-Capex-change in NWC and the amount that goes to shareholders and debtors is NI+Int expense
    Let’s consider your example. 1. without debt – NI = 60 (100*(1-40%)) 2. The same company with debt – Int expense 10, NI =54 (10 of 60 went to debtors, but we got 4 as tax shield)
    We have formula FCFF = EBIT*(1-T)+ D&A-Capex-change in NWC => EBIT*(1-T) = the amount that goes to all suppliers of capital => EBIT*(1-T) = NI + Int expense. Mathematically this is not equal, but common sense tells us that actually we pay to our debtors 10 (not 6), why should we multiply int expense by (1-T) to equate this formula? We got 10 (%) + 50(NI)+4 (tax-shield) + 36(taxes) = 100 (EBIT)
    Consider that we have negotiable interest bearing debt with 10% rate, why should we subsctract 4% in WACC and where does it goes? is it a tax on int or what? What Economic sense in it? Why don’t we do that with equity cost?
    Thank you very much!

    1. You are correct that the company pays its creditors 10% ($10 in the above example). But the cost to the company is only $6 because the government subsidizes the interest (by it being a pre-tax expense). Remember, WACC measures the cost of capital to the company. We don’t do it with the cost of equity because equity is not subsidized by the gov’t (dividends are not a pre-tax expense). You ask a brilliant question, “does this make economic sense?” No, not really, it doesn’t make much sense for debt and equity to be treated differently. But until the rules change, that’s the way it is.

  37. Great and helpful site, Andrew.

    I am an ex-banker who went into operations / business development and, believe it or now, looking to go B2B (back to banking). I left as an associate and have over 10 yrs gross work experience and would be looking to go back as an VP or above.

    Besides the questions on your site, any tips / typical interview questions for ex-bankers who have been out of the game and looking to go back?

    Thanks!
    Andy

    1. Andy, it is definitely a challenge to go back into banking having left the industry. Though the opportunities will probably depend highly on how relevant your recent work experience is to banking (i.e. if you were doing any m&a in your bizdev job or if you’ve got really good high-level relationships within the industry that you worked). You’re certainly going to be asked why are you going back to banking and why did you leave it in the first place. You’ll need to have convincing answers for these. I would expect very different interviews than the typical analyst or associate interview. To go back as a VP or above, you’ll need to convince people that you bring something to the table. Happy to discuss further if you want to email me.

  38. Andrew,

    Do you have any insights on the Oil and Gas industry? I am applying for several energy industry coverage positions as a summer analyst. I would love to hear your thoughts, anything from a high-level overview to specific deals.

    Thanks,
    Annie

    1. I have done some work in the oil and gas industry but I am not means an expert. I can give you only some general advice about how to prepare for the interview. First, anyone interviewing for a specific industry group should be able to demonstrate that they have a basic understanding of the industry (e.g. major players, key trends, recent transactions, etc.) as well as an interest in that sector (i.e. be able to answer the question, “why are you interested in oil and gas?”). However, nobody will expect you to be an expert in that industry when applying for a summer analyst (or associate) position. The best way to quickly learn about an industry is to read some equity research reports about the industry and some of the large public companies in that industry (assuming you have access to equity research through your school library or career center). It is also helpful to read publications like the Wall Street Journal, Financial Times, NY Times or the Economist which will talk both about transactions in the industry as well as general oil and gas news and trends.

      Specifically to oil and gas, I would learn a little bit about the Exxon/XTO deal which was recent and very significant in the industry. Also, know where oil and gas prices are today and be able to articulate a little bit about what drives those prices.

  39. Andrew,

    I’d like to thank you for all of your help and guidance with this website. I mastered all the technical/accounting questions and killed my final round interview. I now have a job as an analyst at a bulge bracket bank!

    As a side question, is there an increase in base salary from year 1 to year 2? Or is just the bonus that may increase?

    Thanks so much. Best of luck in the new year.

    Thanks!
    Mike

    1. Mike, Congrats on your job offer! I believe that most banks do increase base salaries from year 1 to year 2 (probably around $10k). Most of the increase in compensation comes from the bonus. Keep in mind that everything depends on market conditions. You might want to ask some current or recent analysts this question as well.

  40. Andrew,

    Great site and thank you for the abundance of information you’ve presented here. Do you have any sources that would prove useful for real estate specific education? I realize the focus of this site is on preparing for a career in investment banking, but I was curious if you may know of any sources to prep for a future in real estate private equity.

    Thanks again.

    1. I don’t know of any sites similar to this one that focus on real estate investing. However, there are plenty of sites that do focus on real estate news that may be useful to you (www.globest.com, http://www.crenews.com). If you search around, you can find more. There are also plenty of books that teach you about real estate finance that might be helpful, though I can’t make any specific recommendations since I’m not familiar with any of them. The mainstream business news (e.g. WSJ, NYTimes) also has decent real estate coverage.

  41. Hi Andrew,

    First of all, I would like to applaud your initiative.

    I am currently preparing for interviews at some of the major Canadian banks here in Toronto. I do not have a strong finance background as my specialization is in Math and Economics. I have been reviewing the various valuation methods that are a key component of the interviews. Most of my focus has been on comps and the DCF. There have been mixed opinions as to whether questions regarding LBO’s and precedent transactions will be emphasized during the interviews. I just wanted your opinion on what exactly should I be focusing my technical preparations. Also, any particular technicals that are likely to be tested on besides the fundamental valuation principles?

    1. I wouldn’t expect too many questions on precedent transactions but I would know that it is one of the 3 main valuation methodologies and that the results from it include a “control premium” so it tends to give you a higher value than does public comps. Most valuation questions (especially in interview for analyst spots) tend to focus more on DCF but you never can be sure what the interviewer will ask. As you said, I agree that I wouldn’t expect a lot of questions on LBOs or M&A (such as accretion/dilution) but you may want to have an understanding of the general concepts. Not having a strong finance background you might be better of focusing a little on some general accounting type questions (like the variations of how does something impact the 3 financial statements), in addition to valuation.

  42. Hi Andrew,

    I just got the interview question to value Ernst & Young, my previous employer from Goldman. What would you answer. I am interviewing with Barlays next. There are no public comparables really, at least EY, PWC, KPMG aren’t public. I suggested sum of the parts. I wasn’t sure what the WACC would be but they asked me what discount rate I would have but didn’t provide me with any financials. I thought that was pretty hard. Suggested yield of bonds EY might have issued (but I dont know about that) and that their D/V is pretty low as they do not own real estate, machinery etc, biggest expense is personell.

    What do you think?

    Anna

    1. You can still use public comparables to value E&Y even if the other 3 big accounting firms are private. You just need to expand your universe of comps (with an understanding that the analysis is not going to be as “accurate” since your comps won’t be quite as comparable). Off the top of my head, I would look for other publicly traded professional services firms such as smaller accounting firms, consulting firms, maybe pure advisory investment banks or rating agency like Moodys. You can also do the other two main valuation methodologies: precedent transactions (similarly, you may have to expand the universe to get recent transactions) as well as DCF. Most professional services firms don’t have a lot of debt, as you mentioned, so the capital structure will be mostly equity. You can still do a WACC analysis using estimates of beta (to plug into the CAPM to get cost of equity) and cost of debt from your comps. And when in doubt, for a large mature company, you’re usually pretty safe saying WACC is around 10%.

  43. Another question I once got was how to value a private company (you have no financials, and how to derive WACC)

    Then another question I got from DB was “What is the enterprise value of $1 bill”

    Thanks for your thoughts

    1. Anna, without any financial information whatsoever, it is essentially impossible to value a company. Maybe you can get a very rough estimate of value by using some non-financial metric such as EV/#employees or something like (in other words, still use comparable companies methodology). If you do have financials then valuing a private company is no different than valuing a public company. You’d use the 3 typical methods (public comps, precedent transactions, DCF). To estimate WACC, use estimates for BETA, Cost of Debt and optimal capital structure that come from your comps.

      The EV of a $1 bill should be $0. Remember that EV measures the value of the operations of the firm (cash is not considered an operating asset). So, no operations equals no enterprise value.

      1. Andrew,

        For the question from Anna, wouldn’t enterprise value be negative (-$1 bln)? I’ve been asked if enterprise value could be negative, and I’ve always been told that it could be if the equity got hit continously by losses to Retained Earnings or if the company had huge cash reserves (like with Bear Stearns right?). Would it be correct to say that it could be -$1 billion?

        Thanks,

        Dev

        1. Dev,
          With regards to Anna’s question, I would assume that since cash is $1, equity value is also $1 and therefore EV is $0. You ask a good question about negative EV. You are correct that EV can be negative (or at least appear to be negative). Mathematically, it it happens anytime cash is greater than the sum of debt and equity value. This happened to a lot of companies back in the dot com boom and I wouldn’t be surprised (though I don’t remember for certain) if it happened to financial companies (including Bear Stearns) during the height of the credit crises.

          Theory tells you that it should be impossible for EV to be negative because there is an arbitrage opportunity to buy 100% of the company’s equity, pay off any debt and then take the cash. However, that’s often impractical or impossible. So, one of the reasons why EV can be negative is if the market believes that the company needs to raise more money in order for its operations to have any value. Another reason would be that there are other liabilities not accounted for in Debt or that the company’s cash has likely decreased since the last publicly reported figure. For these two reasons (both of them probably true of Bear Stearns) EV could appear to be negative (though in reality, it really means that our calculation of EV is faulty).

  45. Hi Andrew
    I got an interview question from equity research team, choose one ratio to analyse the finance structure of a company, which one will you choose, why is that ratio?
    BTW,currently,is there any big news for GS.

    1. Jennifer, I am going to assume that by “finance structure” of a company you are referring to the company’s capital structure (which is the company’s mix of debt and equity that it uses to fund its business). If I had to pick one ratio to understand a company’s capital structure I would choose its Debt/Equity ratio or Debt/Total Capitalization. Okay, that’s two ratios but they give you the exact same information since Debt/Total Cap = Debt/Debt+Equity. Another very important ratio for analyzing a company’s capital structure (at least for most non-financial companies) is its Debt/EBITDA or leverage ratio.

      I’m not sure if you are referring to something specific about Goldman Sachs. The only big news I’ve seen in the last couple days was the rumor (denied by the firm) that GS’s CEO, Lloyd Blankfein was going to get paid a $100 million bonus this year.

  46. Hi Andrew
    Thank you so much. It’s really helpful.
    Could you tell me what kind of work usually involved in due diligence.
    What I ‘ve paticipated is focus on the research of client’s business model, including the management structure, IT, HR, operation of it’s branches (our client is a bank), and also include the revenue stream, their financial statement.
    When I was asked of that question, what have you did in due diligence, I can’t give a satisfied answer, because it’s too general, and I’ve already forgot the important datas, like the capital adequacy ratio, non-performing loans, I can’t provide them with more evidence that I really did this job before.
    If I have used DCF method to evaluate a company or say detailing projected cash flows, is that a knid of financial modeling?
    For the small business loans company in U.S, what will they usually do to evaluate a company and arrange the loans.

    1. Jennifer,
      Due diligence for an investment banker involves learning enough about a company to be able to do whatever work needs to get done for that particular deal (e.g. writing an offering memorandum or building a model). Mostly, it is understanding the company’s business model, the key drivers of its business, the industry trends affecting the business, its financial statements (generally much more detail than is publicly available), etc. However, more specific areas may be focused on if they are important to the transaction.

      If you are asked about your experiences in an interview, you need to be able to talk about what you did. You should’t be expected to remember every ratio but you should be able to talk generally about a particular deal or two on which you worked. Building a DCF is indeed a kind of modeling. Small business loans tend to be asset based loans so the lender will evaluate the quality of the assets (e.g. accounts receivable, inventory) and they also are often guaranteed by the business owner so the lender will evaluate the credit worthiness of the owner. This is definitely different from what happens when large companies borrow money.

  47. Hi Andrew,

    I am new to this website and I am impressed by the immense amount of generous help you’re offering to people. I was wondering if you could kindly offer me advice on an upcoming interview that I have. I will be interviewing for a Trading position for high yield credit products (in Fixed Income).

    I was wondering if you have any advice on how I should answer “Why do you wanna be a trader but not sales/structuring/research?” Given my limited knowledge, I know that each role is very different and require different personality/skills, and I like the fast pace, upbeat environment of trading and I think I can thrive under pressure. (I dont think this is convincing enough, might you have any advice for me?)

    Also, I have some middle office experiences (I worked in Fixed Income Ops in a BB before). How should I apply my Ops skills to this trading position? (I couldnt find too many connections)

    Any help you offer will be much appreciated.
    All the Best, Joe W.

    1. Joe, thanks for the kind words. Please keep in mind that my expertise is in investment banking rather than trading so take my comments with a “grain of salt”. Having said that, I think that the answers that you mention for “why trading” are fine. But you are correct that those answers in and of themselves are not differentiating enough. You need to give those generic answers but give examples from your experiences (internships, school, etc.) that support those answers. So if you say you like trading because of the fast paced, pressure filled environment you need to talk a little about experiences where you’ve thrived in fast paced, pressure filled environments. I would talk about your passion for the markets, which you can also demonstrate in an interview but showing that you are somewhat knowledgable about markets. At the very least, have a general sense for market conditions and recent issuances in high yield (or whatever desk with which your interview is). It’s hard for me to give you advice with regards to how to best talk about your fixed income ops positions since I’m not that familiar with the skillsets you would have used in that job and their relevance to trading. If there are some commonalities with regards to skills then talk about them. If not (as you mention you have a hard time finding connections) maybe you can mention how your experience in fixed income ops made you realize that (a) you have a strong interest in fixed income and learned about the product and (b) being in ops made you realize that you wanted to be a trader (did you have the opportunity to interact with traders?). Anyway, just some sugggestions…

  48. Hi Andrew,

    Wonderful website mate, thank you! I am going to have an interview with Nomura Global markets in Asia, and I am curious what do you think about its performance? I know it’s very strong in Asia in M&A (from Thomson Reuters) but I couldnt find much info about its performance in the fixed income markets. Any thoughts or ideas?

    1. Christine, I really don’t know enough about Nomura’s performance in Asia to be able to provide any insight. I do know that they recently announced that they are looking to grow the business (both headcount and revenue). If you do a google search for “Nomura fixed income Asia” you should find a few articles talking about Nomura’s expansion plans and some of the recent fixed income deals that they’ve done. If you have access to Thomson Reuters you might want to see where they are in the league tables in Asia for the various fixed income products.

  49. Hi Andrew,

    I was wondering if you could tell us about some place where we could practice some more financial statement and how certain transactions would flow through the three statements.

    I seemed to encounter a lot of these types of questions in my banking interviews. Should we just practice it ourselves?

    1. Teddy, other than the handful of examples of these types of questions that I’ve got posted on this site, I don’t know of any other places that have sample interview questions. Perhaps some of the interview guides that you can purchase have some more examples. The best way I know how to learn how the financial statements fit together is to either take some accounting classes (pretty tedious) or practice financial modeling. In order to balance a financial model, you need to understand how the 3 statements flow together so that’s a good way to learn. Otherwise, just go through a financial statement line by line and ask yourself how that particular line item affects that other 2 statements. In other words, how does revenue affect the BS and CF? How does Depreciation or Capex affect the IS and BS? etc. I do have plans to release a self study accounting module which should help teach these concepts (similar to the financial modeling module that I’ve recently introduced) but this probably won’t be available soon enough for you. Hope that helps a bit.

  50. Andrew,
    Thanks for all the useful advice this site provides. I will soon be entering banking at the associate level, after graduating for a top MBA program. I am in the process of choosing between a top Bulge Bracket’s Chicago and NYC offices. I prefer the Chicago office, but I am slightly worried about hampering my career and future opportunities by starting my banking career there. The bankers in the Chicago office do all say that they execute their own deals. Please give me some of your thoughts on the subject, it would be greatly appreciated. Thanks.

    1. Kyle,
      Congrats on your banking offers. I don’t think there is a right or wrong answer but here are my thoughts. If you are happy long term in Chicago (or in the midwest) then I would definitely lean towards the Chicago position. If your goal is ultimately to wind up in NY then I would lean towards NY. As long as you are getting a good experience in Chicago I wouldn’t worry about being in a satellite office. This is especially true if you are covering industrials/transportation which are often covered out of Chicago. Bottom line (to me at least) if you like the bankers in the Chicago office, think you’ll get good deal experience and are happy living in Chicago, then I would definitely take the Chicago position.

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