Investment banking group interview questions, FIG, TMT, healthcare, energy, real estate, restructuring

For a bank, debt is the product. That one idea explains most FIG questions.

1. Why

   Debt is operations

   A bank borrows from depositors and lends at a spread, so interest expense is its cost of goods sold. There is no line between operating and financing, so EV/EBITDA and an unlevered DCF don't work. Value the equity directly.

2. The multiple

   P/TBV, read against ROE

   Price to tangible book is the main multiple, with P/E beside it. Tangible book strips out goodwill and intangibles, which can't absorb losses. What sets the multiple is return on tangible equity against the cost of equity.

3. Worked

   Justified P/TBV: 0.75 times

   (ROTCE − g) / (cost of equity − g). At a 9% ROTCE, an 11% cost of equity and 3% growth: (9 − 3) / (11 − 3) = 0.75 times. Below book, because each retained dollar earns less than shareholders want. At a 15% ROTCE it is 12 / 8 = 1.5 times.

4. The model

   Dividend discount model

   Project the balance sheet and risk-weighted assets. Hold back the capital needed to keep the target CET1 ratio, call the rest dividend capacity and discount it at the cost of equity, not WACC.

5. Capital

   CET1

   Common equity after deductions, over risk-weighted assets. Basel III sets a 4.5% minimum plus a 2.5% conservation buffer, so 4.5% + 2.5% = 7% before bank-specific add-ons. It caps payouts and growth, and deal goodwill comes straight off it.

6. Earnings

   Net interest margin

   Net interest income over average earning assets. Whether higher rates help depends on what reprices faster: floating-rate loans or deposit costs.

7. Insurers

   Combined ratio: 95%

   Losses plus expenses over premiums. $650 of losses and $300 of expenses on $1,000 of premiums is 65% + 30% = 95%, so $50 of underwriting profit. Add $80 earned on the float and pre-tax operating income is $130.

Fast-growing software spends ahead of revenue, so profit multiples come later.

1. Why

   Growth spend hides profit

   Sales and marketing is expensed up front, so a company growing 40% can show no EBITDA at all. Value it on EV to NTM revenue or ARR, and only against peers with similar growth, gross margin and retention.

2. Revenue terms

   Bookings, billings, revenue, ARR

   Bookings are contract value signed, billings what is invoiced, revenue what is earned, ARR the yearly recurring run rate. Billings = revenue + the change in deferred revenue.

3. Worked

   Net revenue retention: 105%

   A cohort starts at $100 million of ARR, expands $15 million, downgrades $4 million and churns $6 million. Net retention is (100 + 15 − 4 − 6) / 100 = 105%. Gross retention ignores expansion: (100 − 4 − 6) / 100 = 90%. New customers count in neither.

4. Shortcut

   Rule of 40

   Revenue growth plus free cash flow margin should reach 40%. It weights growth and margin the same, though the market usually pays more for growth, and the score moves with how you treat stock-based pay.

5. Worked

   LTV to CAC: 3 times

   $12,000 a year at an 80% gross margin is $9,600 of gross profit. At 20% churn, LTV = $9,600 / 20% = $48,000. Against $16,000 to win the customer that is 3 times, paid back in $16,000 / $800 a month = 20 months.

6. Telecom

   EBITDA minus capex

   A telco is mature and capital heavy. EV to EBITDA minus capex, leverage, ARPU, churn and spectrum matter more than the growth rate.

Drug value depends on odds and patent dates. Services value depends on who pays.

1. Why

   The pipeline is the value

   A biotech may have no revenue. Value it drug by drug through loss of exclusivity, with each year's cash flow weighted by the odds of getting there. No perpetuity.

2. Phases

   Clinical trial phases

   Phase 1 tests safety and dose, Phase 2 is the first test of whether it works, Phase 3 is the large pivotal trial, then a filing and review. Value steps up each time a readout passes.

3. Worked

   rNPV: $500 million

   A Phase 3 drug worth $1,000 million if approved, with a 60% chance of approval and $100 million of costs spent now: 60% × $1,000 − $100 = $500 million. The costs are not risked, because they are spent either way.

4. Pharma

   Patent cliff

   When a big drug loses exclusivity, generics or biosimilars take share fast. Today's EBITDA overstates the future, so model each drug to its expiry with an erosion curve. That is why the multiple looks cheap.

5. Services

   Payer mix

   Hospitals and clinics earn volume times rate. Commercial insurers usually pay more than Medicare, and Medicare more than Medicaid, while the cost of a visit barely changes. A small shift in mix moves EBITDA a lot.

A producer sells what it owns until it runs out. Valuation follows from that.

1. Why

   Reserves deplete

   A NAV model produces each reserve category until it is gone under a price deck, risks the undeveloped ones, discounts and subtracts net debt. No terminal value, because there is nothing left to sell.

2. Reserves

   PDP, PUD, 1P, 2P

   Proved developed producing reserves flow today. Proved undeveloped need new wells and capex. 1P is proved, 2P adds probable. The less certain the category, the lower its risk weight.

3. The multiple

   EV/EBITDAX

   EBITDA before exploration expense. Successful efforts companies expense dry holes and full cost companies capitalize them, so adding exploration back puts both on the same basis.

4. Disclosure

   PV-10

   The pre-tax present value of proved reserves at 10%, on SEC pricing. A NAV uses your own price deck, adds risked unproved reserves and hedges, and ends at equity value.

5. Worked

   A $10 move in oil

   10,000 barrels a day × $10 × 365 = $36.5 million of revenue a year. With 60% of the year hedged, only 40% moves: $14.6 million.

6. Beyond producers

   Midstream and refining

   Pipelines earn fees on volume, so EV/EBITDA and distributable cash flow. Refiners earn a cyclical crack spread, so EV to mid-cycle EBITDA.

Buildings lose value on paper and often gain it in life, so net income misleads.

1. Why

   Depreciation misleads

   Real estate is depreciated every year while many buildings hold their value, so net income understates cash earnings. REITs trade on FFO and AFFO, and on NAV.

2. Worked

   Value = NOI / cap rate

   $5 million of NOI at a 5% cap rate is $100 million. At 5.5% it is $5 / 5.5%, about $90.9 million: 9% off the value from half a point.

3. Worked

   FFO $160 million, AFFO $130 million

   FFO = net income + real estate depreciation − gains on sales: $100 + $80 − $20 = $160 million. AFFO also takes out $25 million of recurring capex and leasing costs and $5 million of straight-line rent: $130 million.

4. NAV

   Net asset value

   Cap each property's NOI, add other assets and subtract debt. A REIT that issues shares above NAV adds value, below NAV it gives value away.

5. Debt

   LTV and DSCR

   Lenders size a loan to the tighter of loan to value and debt service coverage. On a $50 million building with $3 million of NOI, 65% LTV allows $32.5 million, but a 1.25 times DSCR at 8% debt service allows $3 / 1.25 / 8% = $30 million.

6. The rule

   The 90% payout

   A US REIT must distribute at least 90% of its taxable income and pays no corporate tax on what it distributes. It keeps little cash, so it grows with outside capital.

The question under every RX question: what is the business worth, and who owns it after?

1. Why

   Value decides recoveries

   Each class gets paid in order of priority, so every dollar of value moves someone's recovery. That is why debtors and creditors argue hardest about valuation.

2. Court

   Chapter 11 or Chapter 7

   Chapter 11 reorganizes: the company keeps operating under the automatic stay and exits with a plan creditors vote on. Chapter 7 liquidates: a trustee sells the assets and pays creditors in order.

3. Financing

   DIP loan

   A loan to a company in Chapter 11. The court can grant it superpriority and liens, even ahead of existing ones, and a plan usually has to repay it in full in cash.

4. Sale

   363 sale

   A court-approved sale during Chapter 11 that passes the assets free and clear, with claims moving to the proceeds. A stalking horse bid sets the floor, then an auction.

5. Out of court

   Exchanges and amend and extend

   Swap bonds for new paper worth less but often more senior, or push maturities out. Cheaper and faster than court, but outside court a holdout can't be forced to take less.

6. Worked

   A recovery waterfall

   $600 million of value. Pay the $50 million DIP and $10 million of admin claims: $540 million left. The $300 million first lien and $200 million second lien are paid in full, leaving $40 million for $200 million of unsecured claims: 20 cents on the dollar. Unsecured is the fulcrum and equity gets nothing.

Banks and insurers. Start every valuation answer from equity.

1. 1

   How would you value a bank, and why not with EV/EBITDA?

   What a strong answer does

   Deposits and borrowings are the bank's raw material, so value the equity: P/E, price to tangible book and a dividend discount model at the cost of equity.

   • “Why the cost of equity and not WACC?”
   • “What does it mean when a bank trades below tangible book?”
   • “Which numbers matter most in bank comps?”
2. 2

   A bank earns a 9% return on tangible equity, has an 11% cost of equity and grows 3%. What P/TBV should it trade at?

   What a strong answer does

   (9 − 3) / (11 − 3) = 0.75 times. Then say why it sits below book, and that growth makes it worse here.

   • “What if ROTCE rises to 15%?”
   • “Why tangible book rather than total book?”
3. 3

   Walk me through a bank's balance sheet.

   What a strong answer does

   Loans net of the allowance, securities and cash on one side. Deposits, borrowings and a thin slice of equity on the other. Point out how levered it is.

   • “The bank raises its provision by $100 million. Walk me through the statements.”
   • “Why does available for sale versus held to maturity matter when rates rise?”
4. 4

   What is CET1, and why does it matter in a bank merger?

   What a strong answer does

   Common equity after deductions over risk-weighted assets. The goodwill and intangibles a deal creates are deducted, so a cash deal can pull the buyer's ratio down.

   • “Would paying in stock change that?”
   • “What is the leverage ratio, and why have both?”
   • “What are tangible book dilution and earnback?”
5. 5

   What happens to a bank's earnings when interest rates rise?

   What a strong answer does

   It depends on what reprices faster. A bank with floating-rate loans and slow-moving deposit costs gains. One holding long fixed-rate assets gets squeezed.

   • “What is deposit beta?”
   • “Is the bank with the highest net interest margin the best bank?”
6. 6

   An insurer runs a 95% combined ratio on $1,000 of premiums and earns $80 on its investments. What is its pre-tax operating income?

   What a strong answer does

   $50 of underwriting profit + $80 = $130. Then say why the float lets an insurer make money even above 100%.

   • “What if the combined ratio were 103%?”
   • “How would you value a property and casualty insurer?”
   • “How is an insurance broker different?”

Software, internet and telecom. Know the revenue words cold.

1. 7

   Why value a high-growth software company on EV/Revenue and not EV/EBITDA?

   What a strong answer does

   Sales and marketing is expensed up front, so EBITDA hides what is being built. Compare only with peers that grow, retain and earn gross margin alike.

   • “Isn't sales and marketing just an expense?”
   • “When does the market move to EBITDA and free cash flow?”
2. 8

   Customers start the year at $100 million of ARR, expand $15 million, downgrade $4 million and churn $6 million. What are net and gross retention?

   What a strong answer does

   Net is 105%, gross is 90%. Gross retention can never pass 100%, and new customers count in neither.

   • “How can net retention above 100% still hide a problem?”
   • “Add $20 million of new customers. What is ARR growth?”
3. 9

   What is the Rule of 40, and where does it break?

   What a strong answer does

   Growth plus free cash flow margin of at least 40%. It weights the two the same, moves with how you treat stock-based pay and fits scaled companies best.

   • “Would you use it for a company growing 80%?”
   • “What does stock-based pay of 10% of revenue do to the score?”
4. 10

   A customer pays $12,000 a year at an 80% gross margin, churns at 20% a year and costs $16,000 to win. Good business?

   What a strong answer does

   LTV = $9,600 / 20% = $48,000, so 3 times CAC with a 20 month payback. Healthy, before any discounting.

   • “What if churn falls to 10%?”
   • “How would you measure CAC?”
5. 11

   How would you value a tech company with negative EBITDA?

   What a strong answer does

   EV to NTM revenue against similar-growth peers, plus a DCF long enough to reach steady margins. Most of the value sits in the terminal year, so show scenarios. Practice it, see a model answer

6. 12

   How would you value a telecom operator differently from a software company?

   What a strong answer does

   The telco is mature and capital heavy: EV to EBITDA minus capex, leverage, ARPU and churn. Software: revenue or ARR while it grows fast, EBITDA and free cash flow once it slows.

   • “How is ARPU calculated?”
   • “Why can EBITDA flatter a telco?”

Pharma, biotech and services. Odds, patents and payers.

1. 13

   How is a biotech DCF different from a normal DCF?

   What a strong answer does

   Value drug by drug, weight each year's cash flow by the odds of reaching it, run to loss of exclusivity with no perpetuity, then subtract corporate costs and add net cash.

   • “Where do the probabilities come from?”
   • “Why not raise the discount rate instead?”
2. 14

   A Phase 3 drug is worth $1 billion if approved. It has a 60% chance and $100 million of costs left, spent now. What is it worth today?

   What a strong answer does

   60% × $1,000 − $100 = $500 million. Only the payoff is risked, because the costs are spent either way.

   • “What if the chance of approval were 50%?”
   • “Would the stock fall by the whole $600 million on a failed trial?”
3. 15

   Walk me through the clinical trial phases and what each one does to value.

   What a strong answer does

   Safety, then whether it works, then the large pivotal trial, then filing. Phase 2 is where most drugs fail, and value steps up as each readout passes.

   • “Would you use the same odds for every drug?”
   • “How would you show the step up in a model?”
4. 16

   How does a patent cliff affect a pharma company's valuation?

   What a strong answer does

   Today's EBITDA overstates the future. Model each big drug to its loss of exclusivity with an erosion curve, then add the risked pipeline.

   • “Why do biologics usually erode more slowly?”
   • “What would it cost to buy back the lost EBITDA?”
5. 17

   A clinic operator makes $3.2 million of EBITDA on 100,000 visits. 5,000 visits move from commercial insurance at $200 to Medicaid at $80. What happens?

   What a strong answer does

   Revenue falls 5,000 × $120 = $600,000 and costs don't move, so EBITDA drops to $2.6 million, about 19%. Payer mix gets its own diligence page for this reason.

   • “What is that worth at 10 times EBITDA?”
   • “Why use EBITDAR for providers?”
6. 18

   Why do big pharma companies pay such high premiums for biotechs?

   What a strong answer does

   To refill a pipeline before their own patents expire. Late-stage drugs are scarce, a big sales force makes a drug worth more, and auctions push the price up.

   • “What is a contingent value right?”
   • “Why not license the drug instead?”

Oil and gas. Reserves, prices and hedges.

1. 19

   How would you value an oil and gas producer?

   What a strong answer does

   Mainly a NAV: produce each reserve category under a price deck, risk the undeveloped ones, discount, subtract net debt. Cross-check with EV/EBITDAX and value per barrel.

   • “What does price to NAV tell you?”
   • “Why might a producer trade above its NAV?”
2. 20

   Why is there no terminal value in a NAV model?

   What a strong answer does

   The reserves run out. Value from future discoveries isn't in the NAV, which is one reason a stock can trade above it.

   • “Is NAV before or after tax?”
   • “Why discount at 10%?”
3. 21

   What is EBITDAX, and why use it?

   What a strong answer does

   EBITDA before exploration expense. It puts successful efforts and full cost companies on the same basis, since one expenses dry holes and the other capitalizes them.

   • “Which method shows higher net income in a heavy exploration year?”
   • “Would you use EBITDAX for a pipeline company?”
4. 22

   What do PDP, PUD, 1P and 2P mean?

   What a strong answer does

   Producing now, needs new wells, proved, and proved plus probable. Each step down in certainty gets a lower risk weight in the NAV.

   • “Why risk PUD reserves if they are proved?”
   • “What is the reserve life index?”
5. 23

   A producer makes 10,000 barrels a day with 60% of next year hedged. Oil drops $10. What happens to revenue?

   What a strong answer does

   Unhedged it would be $36.5 million a year. Only 40% is exposed, so about $14.6 million. Hedges protect near-term cash and cap the upside.

   • “How does a put differ from a swap?”
   • “Strip pricing or a house price deck?”
6. 24

   How do upstream, midstream and downstream differ for valuation?

   What a strong answer does

   Upstream carries price risk: NAV and EBITDAX. Midstream earns fees on volume: EV/EBITDA and distributable cash flow. Refiners earn a crack spread: mid-cycle EBITDA.

   • “What risk does a midstream company still carry?”

REITs and buildings. Every answer runs through NOI.

1. 25

   What is a cap rate, and what happens to property values when rates rise?

   What a strong answer does

   Value is NOI over the cap rate. $5 million at 5% is $100 million, at 5.5% about $90.9 million. Cap rates follow rates, but not one for one.

   • “There is a $60 million loan on the building. What happens to the equity?”
   • “What goes into NOI?”
2. 26

   A REIT has $100 million of net income, $80 million of real estate depreciation and a $20 million gain on a sale. What is its FFO, and why use it?

   What a strong answer does

   $100 + $80 − $20 = $160 million. Depreciation understates what buildings are worth, and a one-time gain isn't recurring income.

   • “What is AFFO with $25 million of recurring capex and $5 million of straight-line rent?”
   • “What is P/FFO at a $2.4 billion market cap?”
3. 27

   How do you value a REIT?

   What a strong answer does

   P/FFO and P/AFFO against peers in the same property type, plus a NAV built from capped NOI less debt.

   • “Why might a REIT trade below its NAV?”
   • “Why do REITs pay such high dividends?”
4. 28

   Two office buildings trade at the same cap rate. How do you decide which is worth more?

   What a strong answer does

   Look past this year's NOI: lease rollover, rents against market, tenant credit and capex needs. Leases that roll soon to lower rents make the same cap rate a worse deal.

   • “What is WALT?”
   • “How would a buyer price that risk?”
5. 29

   How does a lender size a loan on a building?

   What a strong answer does

   To the tighter of loan to value and debt service coverage. On $3 million of NOI, 1.25 times DSCR at 8% debt service allows $30 million, less than 65% of a $50 million value.

   • “What if debt service rises to 9% of the loan?”
   • “How is that different from sizing debt in an LBO?”
6. 30

   Why do REITs pay out 90% of their taxable income, and how do they grow?

   What a strong answer does

   It is the condition for paying no corporate tax on what they distribute. With little cash kept, they grow by issuing shares and debt, which adds value only above NAV.

   • “How would a REIT check that a purchase adds to FFO per share?”

Chapter 11, liability management and who recovers what.

1. 31

   What do restructuring bankers do?

   What a strong answer does

   Work out how much cash and time the company has, what the business is worth and which deal enough creditors will sign. Then say whether you'd sit with the company or a creditor group.

   • “What is a 13-week cash flow?”
   • “Why is restructuring countercyclical?”
2. 32

   What is the difference between Chapter 11 and Chapter 7?

   What a strong answer does

   Reorganize or liquidate. A company files Chapter 11 when it is worth more running than sold off in pieces.

   • “What is a prepackaged Chapter 11?”
   • “What is the exclusivity period?”
3. 33

   A company in Chapter 11 is worth $600 million. It has a $50 million DIP, $10 million of admin claims, $300 million of first lien, $200 million of second lien and $200 million of unsecured claims. Who recovers what?

   What a strong answer does

   Both liens are paid in full, leaving $40 million for the unsecured: 20 cents on the dollar. Equity gets nothing.

   • “Add $100 million of subordinated notes. What changes?”
   • “Where would the unsecured claims trade if the market agreed?”
   • “What if some trade creditors are critical vendors?”
4. 34

   What is the fulcrum security, and why does it matter?

   What a strong answer does

   The most senior class not paid in full. It usually ends up owning the reorganized company, which is why distressed investors buy it.

   • “What does in the money mean for a class of debt?”
5. 35

   What is DIP financing, and why would anyone lend to a bankrupt company?

   What a strong answer does

   The court can give it superpriority and liens, even priming ones, and a plan usually has to repay it in full in cash. Short, tightly controlled and well paid.

   • “What is adequate protection?”
   • “What is a roll-up?”
6. 36

   What is a 363 sale?

   What a strong answer does

   A court-approved sale during Chapter 11 that passes the assets free and clear, with claims moving to the proceeds. A stalking horse sets the floor, then an auction.

   • “Why would anyone be the stalking horse?”
   • “What is a credit bid?”
7. 37

   Why try an out-of-court restructuring first?

   What a strong answer does

   Cheaper, faster and private. The catch is holdouts, so companies use exit consents, minimum participation or a prepack to bind them.

   • “What is an amend and extend?”
   • “What can Chapter 11 do that an exchange can't?”
8. 38

   How do you value a company in distress?

   What a strong answer does

   The usual DCF, comps and precedents on a realistic plan with a post-exit cost of capital, plus a liquidation analysis as the floor.

   • “Why do senior and junior creditors disagree on value?”
   • “What happens to the NOLs?”

Every group interview has these. Keep them consistent with each other.

1. 39

   Why do you want to cover this group?

   What a strong answer does

   Tie it to something real: a deal, a company, a class, a job. Then show you know what the work in that group is.

   • “What would you do if we placed you in another group?”
   • “Who in the group have you spoken to?”
2. 40

   Walk me through a recent deal in this group.

   What a strong answer does

   Who bought what, the rough price and multiple, why the buyer did it and one risk. One deal you know well beats three headlines.

   • “Was the price fair?”
   • “Who else could have bought it?”
3. 41

   Why investment banking?

   What a strong answer does

   The group answer sits on top of this one. Make sure the two tell the same story. Practice it, see a model answer

4. 42

   Why this bank?

   What a strong answer does

   Read the bank's own page on the group: what it covers and the deals it lists. Say how that matches what you want to learn. Practice it, see a model answer