How to Use This Guide
This is the definitive list of technical questions you are most likely to encounter in investment banking interviews in 2026. We have organized them into five categories: Accounting, Valuation, DCF, M&A, and LBO. Each answer is concise enough to deliver in an interview setting, with links to deeper explanations where available.
Bookmark this page and use it alongside our IB Flash question bank to drill these questions until the answers become second nature.
Accounting Questions (1-10)
1. Walk me through the three financial statements.
The income statement shows revenue, expenses, and net income over a period. The balance sheet shows assets, liabilities, and equity at a point in time. The cash flow statement reconciles net income to actual cash generated, broken into operating, investing, and financing activities. They are linked: net income flows from the income statement to the cash flow statement and into retained earnings on the balance sheet.
2. How do the three statements link together?
Net income from the income statement flows to the top of the cash flow statement and into shareholders' equity on the balance sheet. Changes in balance sheet items (accounts receivable, inventory, accounts payable) appear as working capital adjustments on the cash flow statement. Cash from the cash flow statement flows into the cash line on the balance sheet. For a detailed walkthrough, see our three-statement model guide.
3. If depreciation increases by $10, what happens to each statement (assume 25% tax rate)?
Income statement: Pre-tax income decreases by $10, taxes decrease by $2.50, net income decreases by $7.50. Cash flow statement: Net income is down $7.50 but depreciation (a non-cash add-back) is up $10, so cash from operations increases by $2.50. Balance sheet: PP&E decreases by $10 (accumulated depreciation), cash increases by $2.50, and retained earnings decreases by $7.50. Both sides balance (assets down $7.50 = equity down $7.50).
4. What is working capital and why does it matter?
Working capital is current assets minus current liabilities. It measures a company's short-term liquidity. An increase in working capital (e.g., building inventory) uses cash; a decrease in working capital (e.g., collecting receivables faster) generates cash. In financial modeling, working capital changes directly impact free cash flow.
5. What is the difference between cash-based and accrual-based accounting?
Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands. Cash accounting recognizes revenue and expenses only when cash is received or paid. Public companies use accrual accounting under GAAP/IFRS. The cash flow statement reconciles accrual-based net income back to actual cash flows.
6. What is deferred revenue?
Deferred revenue is a liability that arises when a company receives cash before delivering the product or service. It sits on the balance sheet as a current liability. As the company delivers the product/service, deferred revenue is recognized as revenue on the income statement. Common in SaaS, subscription, and prepaid businesses.
7. What is goodwill and how is it created?
Goodwill is created in an acquisition when the purchase price exceeds the fair market value of the target's net identifiable assets. It sits on the balance sheet as an intangible asset. Goodwill is not amortized but is tested annually for impairment. If impaired, a non-cash write-down flows through the income statement.
8. What is the difference between capitalizing and expensing a cost?
Capitalizing records a cost as an asset on the balance sheet and spreads it over time via depreciation or amortization. Expensing records the full cost immediately on the income statement. Capitalizing increases near-term earnings but reduces future earnings through D&A. The cash impact is the same either way.
9. How does an inventory write-down affect the statements?
The write-down reduces inventory on the balance sheet and flows through COGS on the income statement, reducing pre-tax income. After tax, net income and retained earnings decline. On the cash flow statement, the write-down is added back as a non-cash charge in operating activities. Net cash impact: a tax savings equal to the write-down times the tax rate.
10. What is EBITDA and why is it used?
EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. It is used as a proxy for operating cash flow because it strips out capital structure (interest), tax jurisdictions (taxes), and non-cash charges (D&A). It allows apples-to-apples comparison across companies with different capital structures and accounting policies. However, it ignores capex, working capital changes, and is not true free cash flow.
Valuation Questions (11-22)
11. What are the three main valuation methodologies?
The three primary methods are comparable companies analysis (trading multiples of similar public companies), precedent transactions (multiples paid in prior M&A deals), and discounted cash flow (DCF) analysis (intrinsic value based on projected future cash flows). Each provides a different perspective and they are typically presented together in a football field chart.
12. When would you use each valuation methodology?
Comps are best when there are close public comparables and you want a market-based view. Precedent transactions are useful when evaluating M&A premiums and what buyers have historically paid. DCF is best when you have confidence in projections and want an intrinsic value independent of market sentiment. All three should be used together to triangulate a valuation range.
13. What is Enterprise Value?
Enterprise value (EV) represents the total value of a company's operations, regardless of capital structure. EV = equity value + total debt + minority interest + preferred stock - cash. It is the theoretical takeover price because an acquirer assumes the debt and receives the cash.
14. Walk me through the Enterprise Value to Equity Value bridge.
Start with enterprise value. Subtract total debt, subtract minority interest, subtract preferred stock, and add cash and cash equivalents. The result is equity value. Divide by diluted shares outstanding to get implied price per share. For a detailed walkthrough, see our EV bridge guide.
15. Why do we use EV/EBITDA instead of P/E for comparisons?
EV/EBITDA is capital structure neutral because EV includes debt and EBITDA is pre-interest. P/E is affected by leverage, tax rates, and D&A policies. Two identical companies with different capital structures would have the same EV/EBITDA but different P/E ratios. EV/EBITDA is preferred for comparing companies with different debt levels.
16. What multiples would you use to value a bank?
Banks are valued on P/E and Price/Book Value (P/BV) rather than EV-based multiples. This is because debt is an operating item for banks (deposits are effectively "inventory"), making EV and EBITDA meaningless. Common metrics include P/TBV (price to tangible book value) and ROE (return on equity).
17. How do you select comparable companies?
Select companies in the same industry with similar size (revenue, market cap), growth profile, margins, geographic exposure, and business model. Start with direct competitors and expand to adjacent companies if needed. The goal is to create a peer set where differences in multiples reflect genuine valuation differences rather than business model differences.
18. How would you value a company with negative earnings?
Use revenue-based multiples (EV/Revenue), EV/Gross Profit, or other positive metrics. You could also use a DCF with projections showing a path to profitability. For pre-revenue companies, consider EV/subscriber, EV/user, or other operational metrics. Precedent transactions in the sector can also provide useful benchmarks.
19. What is a Leveraged Buyout (LBO) valuation used for?
An LBO analysis determines the maximum price a financial sponsor can pay while achieving a target return (typically 20-25% IRR). It serves as a "floor" valuation because PE firms are disciplined, returns-focused buyers. If the LBO value is above the current share price, the company could be an attractive acquisition target.
20. What is a Sum-of-the-Parts (SOTP) valuation?
SOTP values each business segment separately using the most appropriate methodology and multiples for each segment, then adds them together. It is used for diversified conglomerates where a single multiple does not capture the value of each segment. SOTP can reveal a "conglomerate discount" if the combined value exceeds the market cap.
21. What is a Fairness Opinion?
A fairness opinion is a letter from a financial advisor (usually an investment bank) stating that the price in an M&A transaction is "fair from a financial point of view" to the shareholders. It is supported by multiple valuation analyses and provides legal protection to the board. It does not say the price is the best possible price, only that it is within a fair range.
22. What are the pros and cons of a DCF?
Pros: based on intrinsic fundamentals, not market sentiment; highly customizable; captures company-specific growth and risk. Cons: highly sensitive to assumptions (growth rates, margins, discount rate, terminal value); small changes in WACC or terminal growth rate can dramatically change the output; requires confident long-term projections. See our DCF walkthrough for more.
DCF Questions (23-32)
23. Walk me through a DCF.
Project free cash flows for 5-10 years. Calculate a terminal value (using the perpetuity growth method or exit multiple method). Determine the WACC as the discount rate. Discount all future cash flows and the terminal value back to present value. Sum them to get enterprise value, then bridge to equity value and implied share price. See our full DCF guide.
24. How do you calculate Free Cash Flow?
Unlevered Free Cash Flow = EBIT x (1 - tax rate) + D&A - CapEx - change in working capital. This represents cash available to all capital providers (debt and equity) before financing costs. Levered FCF starts from net income and subtracts mandatory debt repayments.
25. What is WACC and how do you calculate it?
WACC (Weighted Average Cost of Capital) = (E/V) x Cost of Equity + (D/V) x Cost of Debt x (1 - Tax Rate). Cost of equity is typically calculated using CAPM: Risk-free rate + Beta x Equity risk premium. E/V and D/V represent the target company's capital structure at market values.
26. How do you calculate Terminal Value?
Two methods: (1) Perpetuity Growth Method: Terminal Value = Final Year FCF x (1 + g) / (WACC - g), where g is the long-term growth rate (typically 2-3%, near GDP growth). (2) Exit Multiple Method: Terminal Value = Final Year EBITDA x Exit EV/EBITDA Multiple. Most bankers use both and cross-check.
27. Why does terminal value often represent 60-80% of a DCF value?
Because you are only explicitly projecting 5-10 years of cash flows, but the company is assumed to operate in perpetuity. The terminal value captures all value beyond the projection period. If terminal value dominates, it signals that the near-term cash flows are relatively small compared to the long-term value, which is typical for growth companies.
28. What discount rate do you use for an unlevered DCF?
WACC, because unlevered free cash flows represent cash available to all capital providers. WACC blends the cost of equity and after-tax cost of debt, weighted by the target capital structure. For a levered DCF (rare in IB), you would use cost of equity.
29. How does increasing the discount rate affect the DCF output?
Increasing the discount rate decreases the present value of all future cash flows and the terminal value, reducing the implied enterprise value. The terminal value is particularly sensitive because it is the furthest out in time and typically the largest component.
30. What is the mid-year convention and why use it?
The mid-year convention assumes cash flows are received at the midpoint of each year rather than the end, which is more realistic since companies generate cash throughout the year. It increases the DCF value by approximately WACC/2 percent because cash flows are discounted for less time. The discount factor uses (n - 0.5) instead of n.
31. How do you handle a company with cyclical cash flows in a DCF?
Project through a full cycle (peak to trough to peak) rather than just the current phase. Use a normalized mid-cycle margin for the terminal year rather than a peak or trough margin. Alternatively, use a longer projection period (10+ years) to capture the cycle. Be explicit about where you are in the cycle and how that affects your projections.
32. How do you sensitize a DCF?
Create sensitivity tables varying the two most impactful inputs: typically WACC vs. terminal growth rate, or WACC vs. exit multiple. Also test key operating assumptions like revenue growth and EBITDA margins. Present the output as a range of implied share prices rather than a single point estimate.
M&A Questions (33-42)
33. Why would a company acquire another company?
Common reasons include: gaining market share, acquiring technology or IP, achieving cost or revenue synergies, entering new markets or geographies, acquiring talent, diversifying revenue streams, and eliminating a competitor. Financial sponsors acquire companies to generate returns through leverage, operational improvements, and multiple expansion.
34. What is accretion/dilution analysis?
Accretion/dilution analysis determines whether an acquisition increases (accretive) or decreases (dilutive) the acquirer's earnings per share (EPS). If the target's P/E is lower than the acquirer's P/E in an all-stock deal, the deal is typically accretive. Synergies, financing costs, and foregone interest on cash also affect the result.
35. Walk me through a merger model.
Build standalone models for both the acquirer and target. Determine the purchase price (offer price per share x diluted shares). Calculate goodwill (purchase price minus fair value of net assets). Choose a financing mix (cash, debt, stock). Combine the income statements, adding the target's revenue and expenses. Layer in synergies, financing costs, and foregone interest. Calculate pro forma EPS and compare to the acquirer's standalone EPS. For our full guide, see the merger model walkthrough.
36. What are synergies and give examples of each type.
Synergies are the incremental value created by combining two companies. Cost synergies (more predictable): eliminating duplicate corporate functions, consolidating facilities, renegotiating supplier contracts, reducing headcount. Revenue synergies (less predictable): cross-selling products, accessing new distribution channels, bundling offerings. Synergies typically take 1-3 years to fully realize and are discounted by buyers.
37. Why might an acquirer prefer cash vs stock as consideration?
Cash: faster, simpler, no dilution to existing shareholders, signals confidence in the value. Stock: preserves cash, shares risk with target shareholders, may be preferred in high-valuation environments, can be tax-deferred for target shareholders. Mixed consideration is common for large deals where 100% cash would require excessive leverage.
38. What is a Fairness Opinion and when is it required?
A fairness opinion is delivered by the seller's financial advisor to its board, stating the price is "fair from a financial point of view." It is not legally required but is standard practice because it provides the board with protection against shareholder lawsuits. The opinion is supported by DCF, comps, and precedent transactions analysis.
39. What is a hostile takeover?
A hostile acquisition occurs when the acquirer goes directly to the target's shareholders after the target's board rejects the offer. Methods include a tender offer (buying shares directly from shareholders) or a proxy fight (convincing shareholders to replace the board). Hostile deals typically require a significant premium and are more common in public company M&A.
40. What anti-takeover defenses exist?
Common defenses: poison pill (shareholder rights plan that dilutes the acquirer), staggered board (prevents replacing the entire board at once), white knight (finding a friendlier acquirer), crown jewel defense (selling the most attractive asset), golden parachutes (expensive severance for management), Pac-Man defense (counter-acquiring the acquirer), and super-majority voting requirements.
41. What is a break-up fee and why does it exist?
A break-up (termination) fee is paid by one party if the deal falls through under specific circumstances. A target break-up fee (1-3% of deal value) compensates the buyer if the target's board accepts a superior offer. A reverse break-up fee compensates the target if the buyer cannot close (e.g., financing falls through, regulatory block).
42. What are the key differences between buying assets vs buying stock?
Asset purchase: buyer selects specific assets and liabilities, can step up the tax basis of assets (creating future depreciation tax shields), does not assume unknown liabilities. Stock purchase: buyer acquires the entire entity including all liabilities, simpler and faster, no asset step-up (unless a 338(h)(10) election is made), often preferred by sellers for capital gains treatment.
LBO Questions (43-50)
43. Walk me through an LBO.
A financial sponsor acquires a company using significant debt (typically 50-70% of the purchase price). The company's cash flows service the debt over 5-7 years. The sponsor exits by selling the company (to a strategic, another sponsor, or via IPO). Returns are driven by: debt paydown (deleveraging), EBITDA growth, and multiple expansion. See our LBO model guide.
44. What makes a good LBO candidate?
Stable and predictable cash flows, strong market position, low capex requirements, opportunities for operational improvement, manageable existing debt, experienced management team, clear exit path, and a sector with healthy M&A activity. The key is the ability to service significant debt while growing the business.
45. What are the main return drivers in an LBO?
Three primary return drivers: (1) EBITDA growth through revenue increases and margin expansion. (2) Debt paydown using free cash flow to reduce leverage, increasing equity value. (3) Multiple expansion if the exit EV/EBITDA multiple exceeds the entry multiple. Most LBOs target a 20-25% IRR and 2.5-3.5x money-on-money return over 5 years.
46. How do you calculate IRR in an LBO?
IRR is the discount rate at which the present value of the sponsor's equity investment equals the present value of the exit equity proceeds. In practice: the sponsor invests equity at entry (negative cash flow), may receive dividends during the hold period, and receives exit equity proceeds at sale. The IRR is solved iteratively. Higher IRR = better return.
47. What is the typical capital structure in an LBO?
Senior secured debt (bank debt/Term Loan B): 3-4x EBITDA. Subordinated/mezzanine debt: 1-2x EBITDA. Total debt: 4-6x EBITDA. Equity contribution: 30-50% of total sources. The mix depends on credit market conditions, company risk profile, and lender appetite. In 2026, typical leverage for a mid-market LBO is 4.5-5.5x total debt/EBITDA.
48. How does leverage affect returns in an LBO?
Higher leverage amplifies returns when things go well (more of the value increase accrues to equity holders) but also amplifies risk (less margin for error on debt service). The ideal leverage level maximizes returns while maintaining a comfortable debt service coverage ratio (DSCR > 1.5x) and leaving room for economic downturns.
49. What is a dividend recapitalization?
A dividend recap occurs when the portfolio company takes on additional debt to pay a special dividend to the PE sponsor. It allows the sponsor to extract returns without selling the company, reducing risk and potentially achieving a partial return of capital. Critics argue it overleverages companies; sponsors argue it is efficient capital management.
50. How does a PE firm exit an investment?
Three main exit routes: (1) Strategic sale to a corporate buyer (most common, often highest price due to synergies). (2) Secondary buyout sale to another PE firm. (3) IPO taking the company public. Less common exits include dividend recaps and management buyouts. The exit route depends on market conditions, company size, and buyer interest.
How to Prepare Effectively
Knowing these 50 questions is a strong start, but interview success requires being able to deliver these answers conversationally, handle follow-ups, and apply concepts to specific scenarios. Here are our recommendations:
- Practice out loud: Reading answers is not the same as saying them. Record yourself answering these questions and listen for clarity and confidence.
- Understand the "why": Interviewers will push beyond the textbook answer. If you say WACC, be ready to explain every component.
- Build the models: The best way to understand a DCF, merger model, or LBO is to build one from scratch.
- Stay current: Be ready to discuss recent deals and market conditions. Link technical concepts to real-world examples.
Use our IB Flash question bank to practice these questions in a timed, interview-like format. Our adaptive system identifies your weak areas and drills them until you achieve mastery. Start with accounting fundamentals, build up to valuation and DCF, then tackle M&A and LBO -- the same progression you will see in actual interviews.
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