Before getting into the details of investment banking, let us first understand what the term investment stands for. An investment is nothing but an item or asset that is acquired to generate some form of appreciation or income. Investment is always concerned with the outlay of a certain resource today – be it effort, time, or money with the hope that there will be an increased payoff in the future than what was put in originally. With investment being a huge priority for everyone, investment banking is one of the most sought-after careers in the industry today.
Typically, one requires a bachelor’s degree at the minimum in economics, finance, business, or accounting to get at least an entry-level position with an investment bank. One can also enhance their prospects with a doctorate or a master’s degree. Working on enhancing one’s interpersonal skills is also beneficial. With all the degrees in hand, what will help you, in the end, is your passion for the job. Read on to understand more about investment banking, along with the investment banking interview questions and answers.
Investment banking is a role that many people are interested in since this profession provides excellent and high-profile compensation. However, the title of the job of an investment banker says very little about what an investment banker does. So, what do investment bankers do? Investment bankers generally have a key role in the introductions or launches of IPOs (Initial Public Offerings) by new organizations planning to go public. But this is just one example of an investment banker’s work assignment.
Fundamentally, investment bankers are the financial advisors to organizations, businesses and corporations and, in some cases, governments. They assist their clients in raising the capital required for their business. It could mean issuing stock, negotiating the acquisition of a competitor company, floating a bond, or organizing the organization’s sale. Thus, we can say that if the capital markets are performing well, then the investment bankers are inclined to do well. As an investment banker, you should be able to answer most stock market-related questions.
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Investment bankers have a huge role in various financial activities undertaken by organizations and governments. Following is an overview of the key types of deals investment bankers are involved in:
Thus, the job role of an investment banker can be summarized as follows:
Investment Banking is one of the most profitable and prestigious career options today in the Finance sector. Investment Bankers are also the most sought-after professionals, as they are the financial advisors of organizations and governments. The entry-level investment banking associates can earn reasonably well, with an average salary of ₹8 LPA. Investment bankers who are experienced can work their way up the ranks and earn upto ₹ 40.4 Lakhs. Investment bankers are in high demand in India and the rest of the world. One reason behind such lucrative compensation packages is that financial advisors offer certainty in investments and help increase organizations’ wealth.
Investment bankers are generally the highest-paid employees in the finance industry, and you must understand that high salaries are predominant even amongst younger employees. The beginning salary for a typical investment banker surpasses that of most other finance positions. Investment bankers work with government entities and organizations that raise capital, and bankers also offer advice regarding acquisitions, mergers, and reorganizations. In general, investment banking is an excellent path to take if you like crunching numbers, working with clients, and assisting others in accomplishing their objectives.
Also, a few years in investment banking opens up multiple opportunities, thus, making it a great career choice. Investment banking has a lot of pros, such as great compensation packages, transferable skills, and excellent growth opportunities. Once you gain some experience in investment banking, the career opportunities are so many, such as you can get into investing (hedge funds, private equity, venture capital) or get a job as an operator, which is becoming quite popular these days.
The best positive thing about getting into investment banking is the beautiful experience one gains. You may be working long and hard hours, but the knowledge and experience one gains in doing this are invaluable. Beyond excellent compensation, investment banking opens a host of opportunities and gives you great networking connections.
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If you are interested in making a successful career in the field of investment banking, then it is important that you crack the interview. We have collated a list of the most frequently asked investment banking interview questions for freshers and stock market-related questions. Read on.
What does WACC mean? Explain it.
WACC means Weighted Average Cost of Capital. This cost represents an organization’s average after-tax cost of capital from all sources, including common stock, preferred bonds, stock, and other types of debt. The WACC is, in fact, the average rate that an organization expects to give for the finance of its assets. WACC is the most common way to determine the required RRR (Rate of Return) as it represents a single number, the return that both shareholders and bondholders demand to offer the company with capital.
An organization’s WACC is mostly higher if its stock is quite volatile or its debt is considered risky since the investors need greater returns. In most cases, a lower WACC shows a healthy business that can attract investors at a lower cost. In contrast, a higher WACC typically coincides with organizations considered risky and required to compensate the investors with bigger returns.
What is the formula to calculate the cost of equity?
There are two key ways to calculate the cost of equity. The dividend capitalization model considers the DPS (dividends per share) for the coming year, which has to be divided by the CMV (current market value) of the stock, and then adds this number to the GRD (growth rate of dividends), in which case the Cost of Equity = DPS/CMV GRD.
Equally, the CAPM (capital asset pricing model) analysis is an investment that is appropriately valued, provided its risk and time value of money are connected to its expected return. This model uses the Cost of Equity=Risk-Free Rate of Return Beta×(Market Rate of Return–Risk-Free Rate of Return).
Which is usually higher – the cost of debt or the cost of equity?
The cost of equity is described as the amount shareholders should make due to their investment in an organization, while the cost of debt is described as the rate of return that bondholders can expect after investing. Thus, the cost of equity is generally higher since shareholders are not guaranteed any fixed payments, and they undertake a higher risk while investing.
Differentiate between commercial and investment banking
Commercial banks make loans, take deposits, safeguard assets, and also work with various different types of clients, including general businesses and the public. Investment banks, on the other hand, offer services to major institutional investors and corporations. An investment bank can also help in merger and acquisition (M&A) transactions, offer finance for large-scale business projects, and issue securities.
What are the different financial statements? Explain each briefly.
Financial statements provide a potential creditor or investor with the information and can seriously impact a business’s ability to get the funds or the financing it requires. Following are the four financial statements:
What do you know about equity value and enterprise value?
Enterprise value is the whole value of the organization, without considering its capital structure, whereas equity value is the total value of an organization which is attributable to its shareholders.
How do you value a company?
This is one of the popular BFSI interview questions. The value of a company can be calculated by multiplying its share price by the total number of shares that are outstanding. This is one of the most common stock-related questions.
How do you calculate beta for a company?
To calculate the beta of a company, divide the covariance by variance, where covariance is the measure of a stock’s return relative to that of the market, and variance is the measure of how the market moves relative to its mean.
What is a deferred tax asset?
When we speak of the term deferred tax asset, it refers to an item on the organization’s balance sheet that decreases its taxable income for the future.
What is CAPM?
CAPM stands for Capital Asset Pricing Model. This is a model that describes the relationship between the expected return and risk of making investments in security. CAPM displays that the return expected on a security is the same as or equal to the risk-free return that includes a risk premium, which is dependent on the beta of that specific security. Note that this is another of the popular BFSI interview questions.
When should a revenue multiple be used to determine a company’s worth rather than EBITDA?
Revenue is a Generally Accepted Accounting Principles (GAAP) measure, whereas EBITDA is, in fact, a non-GAAP measure. The EBITDA multiples consider enterprise value and EBITDA, while revenue multiples calculate the relationship between sales and enterprise value and also the relationship between sales and market cap.
What happens to EPS if an organization decides to issue debt to repurchase its shares?
This is one of the most commonly asked investment banking interview questions. When a company uses debt to repurchase shares, then the debt will come at a cost. Therefore, the EPS only increases if the earnings can yield, which means that the earnings per share, or the price per share, is more than the after-tax cost of the debt. When the after-tax cost of the debt is the same as the earnings yield, the EPS remains the same.
Which company would you advise investing in if the two had comparable financial performance but were priced at different price-to-earnings multiples?
The price-to-earnings ratio, also known as P/E, is one of the most commonly used systems of measurement for analysts and investors to analyze stock valuation. Organizations that grow better than average have higher P/Es, such as tech companies. Investors use the P/E ratio to also analyze a stock’s market value and determine future earnings growth. Thus a company with a higher P/E ratio are a better investment.
What are the requisites for a good financial model?
The following factors make for a good financial model:
What is the PEG ratio?
The PEG price/earnings-to-growth ratio is an organization’s stock price-to-earnings ratio that is divided by the growth rate of what it earns for a specific period of time.
What are ‘Mergers and Acquisitions?
Mergers and acquisitions (M&A) is a term that refers to the alliance or merging of organizations or companies or their prime business assets within financial transactions between organizations. An organization could purchase and absorb a different organization outright, consolidate with it to develop a new company, or acquire a few or all of its prime assets. The terms mergers and acquisitions are often used interchangeably; however, they have slightly different meanings.
What is a fairness opinion?
A fairness opinion is nothing but a report that calculates the facts of an acquisition, merger, spin-off, buyback, carve-out, or a different kind of business purchase.
What do you know about a leveraged buyout?
A leveraged buyout, also termed an LBO happens when the buyer of an organization takes on a huge amount of debt that is a part of the acquisition. The buyer uses the assets of the company purchased as collateral and plans to pay the debt using the future cash flow.
Make a huge jump in your career by pursuing a UGC-accredited online MBA in BFSI course from Manipal University Jaipur. The university has the facility of both live and recorded classes for you to learn from top-class experienced trainers as and when you want. This course will teach you comprehensive skills that will help you to gain insight related to all the nuances of investment banking. It also gives you a wide understanding of various financial structures and risk management techniques.
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This article provides you with all the details related to investment banking interview questions and answers. Do go through these questions and answers to ace your interview. You can enroll in the MBA in BFSI course from Manipal University Jaipur to successfully launch your career as an investment banker.
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