In this article
Statements and accounting
What is goodwill, and where does it appear?
Goodwill is an intangible asset that results from buying another business and represents the excess paid above the fair market value of that business's net assets (assets less liabilities), in the words of the U.S. Securities and Exchange Commission (SEC) glossary (SEC glossary, read October 2026). It sits on the acquirer's balance sheet as an asset. Say that it is created only in an acquisition and that it can be written down if the purchase underperforms.
Why it is asked: it is a common acquisition-accounting question and it filters out memorised definitions. Related: the walk-through questions on the investment banking hub. Read the full explanation: what goodwill is and how it arises in an acquisition.
What happens to the statements if the company buys back shares with cash?
Cash falls and shareholders' equity falls by the same amount, so the balance sheet still balances. The share count drops, and the SEC beginners' guide defines earnings per share as net income divided by outstanding shares (SEC, reviewed February 2017). Net income then falls a little, because the cash no longer earns interest, so earnings per share rise only if the earnings yield bought back (earnings divided by price) beats that lost after-tax interest.
Why it is asked: it tests whether you keep the three statements and the per-share view straight. Read the full explanation: how the three statements move together.
A company repays 50 of debt. What changes?
Cash falls by 50 and the debt liability falls by 50, so total assets and total liabilities both fall by 50 and equity is unchanged. The repayment is a financing outflow on the cash flow statement. Net income is untouched on the day, though future interest expense is lower, so net income rises slightly afterwards.
Why it is asked: it checks that you know principal repayments never pass through the income statement. Read the full explanation: how debt repayment flows through the three statements.
Inventory rises by 10, paid for in cash. What changes?
Inventory rises by 10 and cash falls by 10, so total assets are unchanged and net income is unchanged. On the cash flow statement the rise in inventory is a deduction in operating cash flow. The SEC guide says the cash flow statement adjusts net income for non-cash items and that cash flows are related to, but not equivalent to, net income (SEC, February 2017).
Why it is asked: it shows you separate profit from cash. Read the full explanation: why inventory changes hit operating cash flow.
What is working capital, and why does a growing business need more of it?
Working capital is the money tied up in running the business day to day: current assets such as inventory and customer balances, less current liabilities such as supplier balances. Accounts receivable are the amounts customers owe for goods or services bought on credit (SEC glossary). A growing company sells more on credit and stocks more inventory, so cash is spent before it comes back.
Why it is asked: it explains why fast-growing companies can need funding while profitable. Read the full explanation: working capital in the three statements.
What is the difference between capital expenditure and depreciation?
Capital expenditure is cash spent on long-lived assets such as equipment, and it is an investing outflow. Depreciation is the non-cash charge that spreads that cost over the years the asset is used; the SEC guide says it takes into account the wear and tear on assets. Depreciation lowers profit and is added back in operating cash flow, while capital expenditure is the real cash going out.
Why it is asked: free cash flow and operating profit measures both turn on this difference. Related: the three-statement walk-through on the investment banking hub.
What is EBITDA, and why do bankers use it?
Earnings before interest, taxes, depreciation and amortisation (EBITDA) is a measure of operating profit before financing, tax and non-cash charges, where amortisation is depreciation for intangible assets. Damodaran describes it as the cash flow generated by the operating assets before taxes and reinvestment needs (Damodaran, Relative Valuation chapter). Bankers use it to compare companies with different debt and tax. State its weakness: it ignores capital expenditure and working capital.
Why it is asked: it is the metric behind most multiples, so interviewers expect its limits too. Related: valuation multiples on the investment banking hub.
Valuation and multiples
How do you go from enterprise value to equity value?
Enterprise value is the value of the operating business to all capital providers, and equity value is what is left for shareholders after net debt. Add debt and subtract cash to move from equity value to enterprise value, and reverse it to go back. In the illustrative case, equity value 1,000 plus debt 300 less cash 100 gives enterprise value 1,200, which is 8.0 times EBITDA of 150 (a multiple is a value divided by a profit measure).1 Preferred stock (shares with priority claims) and minority interest (other owners' share of subsidiaries) are added too when they exist.
Why it is asked: every multiple and every DCF ends with this bridge. Related: the DCF section of the investment banking hub.
Why use EV/EBITDA instead of P/E to compare companies with different debt?
Enterprise value to EBITDA ignores how a company is financed, because both sides belong to lenders and shareholders together. Price to earnings is measured after interest, so a company with more debt shows different earnings for the same operations. Damodaran's consistency test says that an equity-value numerator needs an equity-value denominator and a firm-value numerator a firm-value one, which both multiples pass (Damodaran, Relative Valuation chapter).
Why it is asked: it tests whether you can pick a multiple for a reason. Related: choosing a multiple, in the hub's valuation section.
Why is price divided by EBITDA a poor multiple?
It mixes an equity value in the numerator with a firm-level measure in the denominator. Price is what shareholders own after debt, while EBITDA belongs to all capital providers before interest, so two companies with the same operations and different debt give different ratios. Damodaran uses it as his example of an inconsistently defined multiple, noting that indebted firms look cheap on it (Damodaran, Relative Valuation chapter). Use enterprise value over EBITDA instead.
Why it is asked: it separates people who apply a rule from people who understand it. Related: multiples and enterprise value on the investment banking hub.
What is the difference between trading comparables and precedent transactions?
Trading comparables value a company from the current market prices of similar listed companies. Precedent transactions value it from the prices paid in past acquisitions of similar companies, which usually include a premium for control. So precedents tend to give higher values than trading comparables for the same business. Both rest on the idea in Damodaran's chapter that you value an asset by how similar assets are priced.
Why it is asked: it tests whether you know why two methods give different ranges. Read the full explanation: comparables versus precedent transactions.
Why do forward and trailing multiples differ?
A forward multiple divides today's value by next year's forecast, and a trailing multiple divides it by last year's actual. When earnings are rising, forward multiples come out lower than trailing ones. Damodaran notes that a bullish analyst will favour the forward version and a bearish one the backward-looking version (his "current" price-to-earnings ratio, last fiscal year), so the first step in any discussion is to agree on the definition (Damodaran, Relative Valuation chapter).
Why it is asked: it checks that you state which version you mean. Related: valuation multiples in the hub's markets summary.
Knowing it is half the job. Saying it is the other half.
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What is WACC, and how do you calculate it?
The weighted average cost of capital (WACC) is the average of the costs of a company's financing sources, weighted by their market values, and it is the usual discount rate for enterprise value. Damodaran says the weights are based on the market values of each component (Damodaran, Investment Valuation, chapter 8). Illustratively, equity 600 at 10% and debt 400 at 6% pre-tax with a 25% tax rate gives 0.6 times 10% plus 0.4 times 4.5%, or 7.8%.1
Why it is asked: it is the core of every DCF. Read the full explanation: the DCF discount rate and WACC.
Why is the cost of debt multiplied by one minus the tax rate?
Interest is tax-deductible, so the company's real cost of borrowing is lower than the rate it pays. Damodaran gives the after-tax cost of debt as the pre-tax cost times one minus the tax rate (Damodaran, chapter 8). At 6% and a 25% tax rate the after-tax cost is 4.5%.1 The benefit exists only if the company has taxable profit to deduct the interest from.
Why it is asked: it shows you understand the tax shield, not just the formula. Related: the discount-rate section of the investment banking hub.
How do you estimate the cost of equity?
Use the capital asset pricing model (CAPM): expected return equals the riskless rate (the yield on a long-term government bond) plus beta (how strongly the share moves with the market) times the risk premium (the extra return investors demand for owning shares), as Damodaran writes it (Damodaran, chapter 8). With an illustrative riskless rate of 4%, a risk premium of 5% and a beta of 1.375, the cost of equity is 10.875%.1 Say that beta is estimated from past returns, so it is an estimate, not a fact.
Why it is asked: cost of equity is the hardest input to defend. Related: the DCF discount rate on the investment banking hub.
What are levered and unlevered beta, and how do you convert them?
Unlevered beta is the risk of a company's business without debt, and levered beta is the risk to shareholders once debt is added. Damodaran's formula is levered beta equals unlevered beta times one plus (one minus the tax rate) times debt to equity (Damodaran, chapter 8). With an unlevered beta of 1.0, debt to equity of 0.5 and a 25% tax rate, levered beta is 1.375.1
Why it is asked: it is how bankers borrow betas from comparable companies with different debt. Related: the hub's DCF walk-through, where the discount rate is applied.
Deals and capital markets
How does an IPO work, and what do underwriters do?
In a traditional initial public offering (IPO), a private company files a registration statement with the SEC, then sells newly issued shares to investment banks, the underwriters, which build a book of orders from large institutional investors, set the price and allocate the shares. The SEC says an underwriter's help covers marketing and managing initial trading volume, and notes that transaction costs are high and the process takes a long time (SEC, reviewed April 2026).
Why it is asked: it is a common capital-markets question for an analyst. Related: markets and deals summary on the investment banking hub.
What is accretion or dilution, and how do you test a deal?
Accretion is a rise in the acquirer's earnings per share after a deal, and dilution is a fall. Test it by adding the target's net income to the acquirer's, subtracting the after-tax interest on any new debt, and dividing by the new share count. In the illustrative deal (acquirer net income 100 on 50 shares priced at 40, target earnings 20 bought for 300, debt at 6% before a 25% tax), a debt-funded purchase raises earnings per share from 2.00 to 2.13, up 6.5%, and a stock-funded one to 2.087, up 4.35%.1
Text description of the diagram
- Funding the illustrative purchase with debt raises earnings per share by 6.5 percent.
- Funding it with new shares raises earnings per share by 4.35 percent.
Why it is asked: it is a common merger-model question. Read the full explanation: accretion and dilution step by step.
Is there a shortcut for whether a stock deal is accretive?
Yes: compare price-to-earnings ratios. If the acquirer pays with shares and its P/E is higher than the P/E it pays for the target, the deal is accretive, because it issues fewer shares per unit of earnings bought. In the illustrative deal the acquirer trades at 20 times earnings and pays 15 times, so the stock deal is accretive.1 For a cash deal, compare the target's earnings yield (earnings divided by the price paid, the inverse of P/E) with the after-tax interest the cash was earning; for a debt deal, with the after-tax cost of debt.
Why it is asked: it shows you can reason without a spreadsheet. Read the full explanation: the P/E accretion shortcut.
What is a leveraged buyout, and what drives its return?
A leveraged buyout (LBO) is the purchase of a company funded largely with borrowed money, where the investor's equity return comes from three drivers: EBITDA growth, debt paydown and multiple change. The exit multiple is the multiple of EBITDA at which the company is sold, and the sponsor is the investor providing the equity. Holding the multiple flat is the conservative base case in an interview.
Why it is asked: it is a common opening question in LBO rounds. Read the full explanation: how a leveraged buyout works.
How do you do a paper LBO?
Lay out sources and uses first: the price on one side, debt plus sponsor equity (the buyer's own money) on the other. Then grow EBITDA, apply the exit multiple, subtract the remaining debt, and divide exit equity by entry equity. Illustratively, EBITDA of 100 at 8 times is an enterprise value of 800, funded by 400 of debt and 400 of equity. If EBITDA reaches 140, the multiple stays at 8 and 150 of debt is repaid, exit equity is 870, a 2.175 times return, about 16.8% a year over five years.1
Why it is asked: it tests mental arithmetic and structure under time pressure. Read the full explanation: a paper LBO worked through.
How are synergies treated in a merger model?
Cost synergies are savings from combining operations, and revenue synergies are extra sales from combining products or customers. Bankers treat cost synergies as more reliable, because the buyer controls them, and revenue synergies as less certain. Show the deal with and without synergies and say what the buyer must achieve to break even on its premium.
Why it is asked: it tests judgement on how much of the premium is justified. Read the full explanation: synergies in a merger model.
Follow-up questions
Is there a 400-question guide for investment banking interviews?
Question lists of that size exist, but a long list teaches recall, not reasoning. Prepare the families instead: statements, valuation, cost of capital and deal mechanics. If you can explain each family's logic with one small number, you can answer variants you have not seen. See the investment banking hub for the learning path.
Do I need to build a model in an investment banking interview?
Practice differs by bank and level, so ask the recruiter which format your round uses: some rounds are spoken only, others add a paper exercise such as the paper LBO above or a timed modelling test. Prepare both the spoken logic and the arithmetic. The interview loops hub shows how rounds are staged in general.
How long should a technical answer be?
Give the one-line answer first, then the mechanism with a small number, then stop and let the interviewer follow up. Rehearse out loud, because a correct answer that takes three minutes loses the room. Pair it with a clear story for the fit questions on the tell me about yourself page, the behavioural interview hub and the questions to ask the interviewer.
- Move between enterprise value and equity value by adding debt and subtracting cash.
- Match the numerator and denominator of a multiple: enterprise value over EBITDA and price over earnings pass, price over EBITDA does not.
- WACC uses market-value weights and an after-tax cost of debt.
- Test a deal by its earnings per share, and lay out sources and uses first in a paper LBO.
- Give the one-line answer, then one small number.
Sources
- Beginners' Guide to Financial Statements — U.S. Securities and Exchange Commission, 6 Feb 2017
- Glossary (goodwill, balance sheet, accounts receivable), small business resources — U.S. Securities and Exchange Commission, 2 Feb 2024
- Types of registered offerings — U.S. Securities and Exchange Commission, 24 Apr 2026
- Chapter 4, Relative Valuation — NYU Stern (Aswath Damodaran), 1 Apr 2009
- Chapter 8, Estimating Risk Parameters and Costs of Financing, Investment Valuation 3rd edition — NYU Stern (Aswath Damodaran), 2 Dec 2011
