Technicals
Free questions, explained like a friend would.
Every one ends with why a banker needs it, giving you the color that moves decisions.
Accounting
18 questions- Can you give examples of major line items on each of the financial statements?The main lines on each statement, from Revenue and Net Income through PP&E, Debt and Cash Flow from Operations — plus how to drill them until they're instinct.
- Could you ever end up with negative shareholder’s equity? What does it mean?Yes — most often after an LBO with a dividend recap, or when sustained losses drag Retained Earnings negative.
- How do Assets and Liabilities affect Cash FlowAn increase in assets decreases cash; an increase in liabilities increases it. Accounts Receivable and Accounts Payable show why.
- How do the 3 statements link together?Net income flows into Shareholders' Equity and the top of the cash flow statement, while Cash acts as the plug that ties all three back together.
- How do you decide when to capitalize rather than expense a purchase?If the asset has a useful life over one year it's capitalized onto the balance sheet, then depreciated or amortized across that life.
- How long does it usually take for a company to collect its accounts receivable balance?30-50 days is a safe moving average, but it swings with what's being sold — say so, and give an example that shows you know why.
- If depreciation is a non-cash expense, why does it affect the cash balance?Because it sits above taxes. Depreciation reduces taxable income, so the company pays less tax — and tax not paid is real cash kept.
- If you only had 2 statements to assess a company’s prospects, which 2 would you use?The income statement and the balance sheet — with prior-period versions of both, you can build the cash flow statement yourself.
- If you only had one statement what is the best financial statement to use when reviewing the overall health of the company?The cash flow statement — it captures what the income statement misses, including working capital swings and capital expenditures.
- Let’s say that a SaaS customer pays for their entire one-year subscription in cash at once, what would revenue look like in cash-based and accrual accounting?Under accrual it sits in Deferred Revenue until the service is delivered; under cash-based it hits Revenue immediately. A worked $120 example of both.
- Walk me through how depreciation going up by $10 would affect the three financial statementsOperating income falls $10, net income falls $6 at a 40% tax rate, cash rises $4 and PP&E drops $10 — leaving the balance sheet balanced.
- Walk me through how you create a revenue model for a companyBottoms-up from revenue per customer and acquisition cost, or top-down from TAM and market share — with a worked example of each.
- Walk me through how you create an expense model for a companyGroup the line items, ask whether each scales with revenue, and build personnel separately off an employee census.
- Walk me through the major items in SECommon Stock, Retained Earnings, Additional Paid-In Capital and Treasury Stock — what each tracks, and why it has to tie.
- What are examples of non-recurring add-backs and why do we use add-backs in valuation?Write-downs, one-time legal costs and above-market owner salaries — anything not core to operations, added back so it doesn't drag EBITDA.
- What does negative working capital mean? Is that a bad sign?Not always. It can signal trouble, or simply an efficient business collecting cash upfront — SaaS deferred revenue and retail are the common cases.
- What happens when inventory goes up by $10? Assuming you paid for it with cashNothing hits the income statement. Inventory rises $10, cash falls $10, and the expense only lands when the goods are actually sold.
- When would a company collect cash from a customer and not record it as revenue?When it's Deferred Revenue — cash received before the service is delivered, held as a liability until it's earned.
Business Logic
4 questions- Can you talk about a company you admire and what makes them attractive to you?Pick a company in the bank's coverage and build the case from first principles — moat, macro tailwind, why it holds. A Databricks example of the shape.
- Can you talk about a trend or company in the industry that has piqued your interest lately?Read a few industry reports from the large consulting firms or banks, take one idea and run with it — with a worked software example of what that sounds like.
- Pitch me a stockWhat the company does, its financial profile, why it's undervalued against peers, and the long-term trend in its favor — benchmarked on Revenue, EBITDA or P/E multiples.
- Tell me about an M&A deal that interested you recentlyCover buyer and seller with the strategic rationale, then price and multiples — Purchase Price / Revenue and Purchase Price / EBITDA. The press release has what you need.
DCF
26 questions- A company has a high debt load and is paying off a significant portion of its principal each year. How do you account for this in a DCF?You don't account for it. Principal repayment sits in Cash Flow from Financing, which never reaches Unlevered FCF.
- How could we adjust the CAPM formula to change our Cost of Equity?Add an Industry Premium if the sector is riskier than the market, or a Size Premium if the company is smaller than the market's weighted average.
- How do we factor dividend yield into the Cost of Equity calculation?A trick question — you don't. The equity returns behind Beta are total returns, so dividends are already in the Cost of Equity.
- How do you account for a company rapidly paying off its debt in a DCF?You don't. Unlevered FCF never touches Interest Expense, so a falling interest burden doesn't show up anywhere in the DCF.
- How do you calculate Beta?Look it up for a public company. For a private one, unlever the comps' betas, take the median, and relever it on your company's capital structure.
- How do you calculate the WACC for a private company?Cost of Debt comes off the actual debt and rates. Cost of Equity needs Beta from comps, unlevered and relevered on the private company's structure.
- How do you get from Revenue to FCF?Down to EBIT, tax it to EBIAT, add back D&A and other non-cash items, then subtract CapEx and the change in Working Capital.
- How do you select the appropriate exit multiple when calculating Terminal Value?The same way as comps or precedents: take the median of the set, then add a sensitivity table showing how moves off it swing the valuation.
- How does an increase in current assets or an increase in current liabilities affect a DCF?Assets up raises Working Capital and cuts FCF; liabilities up lowers it and lifts FCF. A worked example moving FCF from 20 to 18 and to 22.
- How would you get to FCF from Cash Flow from Operations?CFO minus CapEx gives Levered FCF. For Unlevered, add back tax-adjusted Interest Expense and subtract tax-adjusted Interest Income.
- Is interest an operating expense?No. Interest belongs to how the business is funded, not how it operates.
- Should the Cost of Equity be higher for a $250mm or $3B market cap company?The $250mm company. It's smaller, so it carries a Size Premium and is deemed riskier.
- Should the WACC be higher for a $250mm or $3B market cap company?Ask whether capital structure and Cost of Debt match. If they do, the smaller company's higher Cost of Equity carries it. If not, there's no way to know.
- There are two companies with identical financial profiles, but one has debt and one does not, which one would have a higher WACC?The one without debt has the higher WACC — debt is cheaper. The caveat is that an over-levered company sees its rates climb sharply.
- Walk me through a DCFProject the financials and Unlevered FCF, calculate Terminal Value, discount both back at WACC, and sum to Enterprise Value — with the phrasing to say it out loud.
- Walk me through a Dividend Discount ModelMechanically a DCF on dividends: project EPS, apply a payout ratio, discount the dividends and a P/E-based terminal value at Cost of Equity.
- What is an alternative to CAPM to calculate the Cost of Equity?Dividends per Share over Share Price, plus the growth rate of dividends. Useful when dividends drive returns, or when CAPM's inputs aren't available.
- What is the flaw with the Multiples Method?It values a business in the future using what public companies trade at today — and sector multiples routinely move 40-50% over five years.
- What is the optimal time frame to forecast for a DCF and why?Five to eight years. Less is too short to be useful, more is too far out to defend — and terminal value is already two thirds of the answer.
- What would happen if you used Levered FCF instead of Unlevered FCF in a DCF?You'd land on Equity Value instead of Enterprise Value, because Levered FCF is struck after interest payments.
- What’s the relationship between debt and Cost of Equity?More debt means more risk, which raises levered beta, which raises the Cost of Equity through CAPM.
- When would you use the Cost of Equity in a DCF?When you're solving for Levered FCF and therefore Equity Value rather than Enterprise Value — banks being the usual case.
- Which has a greater impact on a company’s DCF valuation – a 10% change in revenue or a 1% change in the discount rate?Usually revenue — it moves every forecast year and the terminal value with it. Narrow the gap to 1% each and the discount rate takes over.
- Why would you use Gordon Growth rather than Multiples Method to calculate Terminal Value?Mostly you wouldn't — banking defaults to Multiples. Reach for Gordon Growth when there are no good comps, or future growth looks genuinely volatile.
- Why wouldn’t you use a DCF for a bank or other financial institutions?Banks use debt to build products rather than fund operations, and working capital dominates the balance sheet. Use a Dividend Discount Model instead.
- Would a technology company or a consumer conglomerate have a higher Beta?The technology company. Salesforce against General Mills — subscription revenue reads as riskier than entrenched brands behind real barriers to entry.
LBO
12 questions- Can you explain how the Balance Sheet is adjusted in an LBO model?Old equity is wiped and replaced with sponsor equity, new debt goes on, cash is adjusted for the deal, and Goodwill plugs the gap so it balances.
- Do you need to fully project all three statements to complete a basic LBO?No. A condensed income statement, a section for the FCF items and a debt schedule will carry a basic model.
- How could a PE firm boost returns in an LBO?Enter lower, exit higher, lever up more, grow revenue faster, or widen margins — the five levers you can watch move in a model.
- How do you pick purchase multiples and exit multiples in an LBO model?Comps and precedents, with a sensitivity table. The tell is setting the exit a turn below entry to handicap returns — after checking it flat first.
- Let’s say we’re analyzing how much debt a company can take on, and what the terms of the debt should be. What are reasonable leverage and coverage ratios?It depends on health, industry norms and debt comps — screened like any comps analysis. Rough guardrails run to a handful of turns of EBITDA.
- Walk me through a basic LBO modelAssumptions, then Sources & Uses to get Sponsor Equity, adjust the balance sheet with new debt and Goodwill, project FCF, and exit on a multiple.
- What does a company need for an LBO to be reasonable?Stable, predictable cash flows above all, and ideally low CapEx needs to scale — which is really the same requirement stated twice.
- What is a Sources & Uses table in an LBO?The table organizing where the money for a transaction comes from and what it pays for — how a banker tracks a sponsor's cash in and out of a deal.
- Which variables impact an LBO the most?Purchase and exit multiples first, then the debt / equity ratio. Move each 20% in a model and the sensitivity is obvious.
- Why does a strategic acquirer prefer to purchase in cash, but a financial sponsor uses an LBO?Cash signals strength and synergies to a strategic's shareholders. A sponsor wants the debt sitting on the target, amplifying returns before an exit.
- Why is Goodwill used in an LBO?It's the plug. The premium paid over fair market value lands in equity, and Goodwill goes on the asset side so the balance sheet still ties.
- Why would a private equity firm buy a company in a “risky” industry, such as software or biotech?Because stability isn't the only thesis. Consolidation, turnarounds and growth all pay — the last one accepting risk for a much bigger exit.
Valuation
19 questions- Give me some example comparable company screensIndustry classification, financial similarity and geography - with three worked screens, from facility management to profitable US ERP software.
- Give me some example precedent transaction screensThe same criteria as comps plus recency, with two to four years preferred - and three worked screens to show the shape.
- How do you apply the 4 valuation methodologies to actually get a value for the company you’re looking at?Median multiples for comps and precedents, sensitivities for the DCF and LBO, then a range across all four - typically 10-15% wide, never a single number.
- How do you factor in a competitive advantage or disadvantage to a company’s valuation?Never take the straight median. Move within the comps range on growth, profitability and advantage - a worked case for setting it at the 60th-70th percentile.
- How would you value an apple tree?Like any other business: extrinsically, what are people paying for apple trees, and intrinsically, how valuable are the apples that fall from this one.
- Is valuation an art or a science?An art supported by science-like tools. The data and models are the easy half; selecting comps, reading results and adjusting for the qualitative is the job.
- Rank the 4 valuation methodologies from highest to lowest expected valuationA pseudo-trick question - lead with 'it's variable'. In general Precedents beat Comps on the control premium, a DCF can go either way, and LBOs sit lowest.
- Tell me a couple of flaws with Precedent TransactionsEvery deal is unique, with synergies and premiums baked into the multiple - and private transaction data is often too opaque to see why the price was paid.
- The EV / EBIT, EV / EBITDA and P / E multiples all measure a company’s profitability. What’s the difference between them, and when do you use each one?EV / EBIT where D&A and CapEx matter, EV / EBITDA as the default, and P / E when Enterprise Value won't work - as with banks carrying negative EV.
- What are some flaws with Comparable Companies?No company is truly comparable, and the market is emotional day to day. Push further and it's capital structure and differing competitive advantages.
- What are the most common multiples used in valuation?EV / Revenue, EV / EBITDA, EV / EBIT, P / E and P / Book - what each one is for, and why EV / EBITDA is the one you'll actually reach for.
- What is a Sum of the Parts valuation?Valuing each division on its own multiple, then adding them up. A worked software-plus-services example landing at $450mm and a blended 15x.
- What would you use in conjunction with free cash flow multiples – Equity Value or Enterprise Value?Unlevered FCF pairs with Enterprise Value, Levered FCF with Equity Value - because Levered is struck after interest, so only equity has a claim on it.
- When do you use an LBO Analysis as part of your valuation?Whenever a leveraged buyout is on the table, and always as a test - solved to minimum PE returns it gives you the absolute floor an acquisition could clear.
- When would you not use a DCF in a valuation?When cash flows aren't predictable or stable - biotech and software startups - or when debt and working capital play a different role, as at banks and FIs.
- Where exactly are valuations used?Pitch decks and client presentations mostly, plus defense analyses and merger models. Knowing what something is worth turns out to be broadly useful.
- Why don’t we use Equity Value multiples instead of Enterprise Value multiples?Enterprise Value covers the whole business, which is what's being bought. Equity Value only shows what's left for shareholders once debt holders are paid.
- Why would a company with similar growth and profitability to its Comparable Companies be valued at a premium?Hype, a competitive advantage, a better product that supports higher pricing, or a more durable user base - a Netflix and HBO example of how it plays out.
- Would a DCF or LBO give a higher valuation?Usually the LBO comes in lower: it sweeps most of each year's cash flow into paying down debt, so you're left with the terminal value alone.