IB
INVESTMENT BANKING · INTERVIEW PREP
Comprehensive IB Notes
for Interview Season
Core concepts, formulas, MCQ traps, and real interview examples compiled from
practice sessions.
01 Valuation Fundamentals 📊
High Frequency DCF Multiples EV
DCF — Discounted Cash Flow WACC — Weighted Avg. Cost of Capital
Values a company by estimating its future free cash The blended rate a company pays to finance its assets.
flows and discounting them back to the present using Serves as the discount rate in DCF. Includes cost of
WACC. equity and after-tax cost of debt.
Value = Σ FCF / (1 + WACC)ⁿ + Terminal WACC = (E/V)×Ke + (D/V)×Kd×(1−T)
Value
Rule: ↑ WACC → ↓ Valuation. Higher discount rate =
Key insight: Terminal Value accounts for 60–80% of lower present value of cash flows.
total DCF value — it is the single biggest driver of
valuation.
Enterprise Value (EV) EV/EBITDA Multiple
Total theoretical takeover price. Capital-structure The best multiple for comparing companies with
neutral — used in comps to compare companies with different capital structures. EV is pre-debt, EBITDA is
different debt levels. pre-interest → both are capital-structure neutral.
EV = Market Cap + Debt − Cash + Minority Use case: Comparable company analysis (Trading
Interest Comps) and Precedent Transactions. Preferred over
P/E for cross-company comparisons.
Why EV over Equity? Allows apples-to-apples
comparison regardless of how a company is financed.
Terminal Value Sensitivity Analysis
Captures all cash flows a business generates beyond Tests how valuation changes when key inputs (WACC,
the forecast window. Calculated via Gordon Growth growth rate) shift. Produces a valuation range rather
Model or Exit Multiple Method. than a single point estimate.
TV = FCF × (1+g) / (WACC − g) Standard output: A sensitivity table with WACC on one
axis and Terminal Growth Rate on the other — shows
bull, base, and bear cases.
Interview trap: Terminal Value = 60–90% of total DCF
value. Always stress-test your growth rate and WACC
assumptions.
Three Core Valuation Methods (know these cold):
1. DCF — intrinsic value based on future cash flows
2. Trading Comps — relative value vs. publicly traded peers
3. Precedent Transactions — implied value from prior M&A deals
NOT a valuation method: Internal audit review, ROA, Current Ratio.
Q: Which is a valuation multiple?
ROA Current Ratio EV/EBITDA ✓ Debt/Equity
ROA & Current Ratio are performance/liquidity ratios. D/E is a leverage ratio. Only EV/EBITDA is a valuation multiple.
Q: In a DCF, cash flows must be discounted using…?
WACC ✓ ROE CAPM alone
WACC reflects the blended risk of all capital providers and is the correct discount rate for free cash flows to the firm (FCFF).
Q: Rising revenue but falling EBITDA — what happens to DCF valuation?
Increases Decreases ✓ Stays the same
Falling EBITDA = margin compression → lower projected FCF → lower DCF value. Revenue alone doesn't drive value; profitability
does.
02
Key Financial Metrics & Ratios 📈
High Frequency EBITDA FCF EPS
EBITDA Free Cash Flow (FCF)
Earnings Before Interest, Taxes, Depreciation & Actual cash generated after maintaining/expanding the
Amortization. Approximates operating cash flow. Strips asset base. The purest measure of a company's
out capital structure, taxes, and accounting charges. financial health.
EBITDA = Net Income + Interest + Taxes + FCF = EBITDA − CapEx − ΔNWC − Taxes
D&A
Negative FCF: Company spends more than it
Why used: Allows comparison of operating generates. Common in high-growth startups investing
performance across companies with different debt or in CapEx — not automatically bad.
tax profiles.
EPS — Earnings Per Share Working Capital (NWC)
Portion of net profit allocated to each outstanding Measures short-term liquidity. Rising NWC "drains"
share. Key metric for equity investors and M&A cash — it's a use of cash in FCF calculations.
accretion/dilution analysis.
NWC = Current Assets − Current Liabilities
EPS = Net Income / Shares Outstanding
Interview note: Only operating current items count
Accretive deal: Combined EPS > acquirer's standalone (exclude cash & short-term debt). ΔNWC going up =
EPS. negative FCF impact.
Dilutive deal: Combined EPS < acquirer's standalone
EPS.
Depreciation — Non-Cash Expense Normalised Earnings
Accounting charge for asset wear — no actual cash Earnings adjusted to remove one-time, seasonal, or
leaves the company in the period recorded. Gets added unusual items (restructuring charges, asset sales, legal
back in cash flow statements. settlements). Reveals sustainable profitability.
Classic MCQ: Which is non-cash? Depreciation ✓ Use case: Always normalize before using comps or a
(Interest, Taxes, Inventory purchases are all real cash DCF — one-time items distort the true earnings power
outflows). of a business.
Q: Negative FCF but growing EBITDA — what does this signal?
The company is failing Heavy CapEx / Working Capital drag ✓
Growing EBITDA = profitable on paper. Negative FCF = heavy cash spending, usually on CapEx or receivables/inventory buildup.
Common in scaling businesses like Amazon in its early years.
03
M&A Concepts 🤝
Interview Favourite Accretion/Dilution Synergies
ACCRETIVE DEAL ✓ DILUTIVE DEAL ✗
Combined EPS increases post-deal Combined EPS decreases post-deal
Acquirer paid a fair or low price Acquirer overpaid OR funded with equity at too high a
Target generates more profit per dollar than acquisition price
cost Target generates less EPS than the shares issued to buy
Good for acquirer's shareholders it
Destroys acquirer shareholder value short-term
IPO — Primary vs. Secondary Market Investment Banker's Primary Role
An IPO is a Primary Market transaction — the company Underwrite securities and advise on transactions. Acts
sells new shares directly to the public for the first time as intermediary between capital-seeking corporations
to raise capital. After the IPO, shares trade on the and investors.
Secondary Market (stock exchange) between investors.
Core services: Equity/debt underwriting, M&A
Key distinction: Primary = capital goes to the advisory, corporate restructuring, IPO management,
company. Secondary = capital goes to the selling private placements.
shareholder.
Q: A deal is considered dilutive when…?
EPS increases Debt decreases EPS decreases ✓ Margin increases
Focus solely on EPS impact. A deal can be dilutive even with good synergies if the acquirer overpaid or issued too many shares.
04
Leveraged Buyouts (LBO) ⚖️
PE Interviews IRR Debt Paydown
LBO Mechanics
A PE firm acquires a company using mostly debt (~60–80% of purchase price). The acquired company's own cash flows
are used to repay that debt over time. As debt falls, the equity stake grows in value.
Returns = f(Entry Multiple, Exit Multiple, Leverage, EBITDA Growth, Debt Paydown)
Primary return driver: Debt Paydown (Deleveraging) — the core mechanic.
Biggest IRR booster: High leverage + Multiple Expansion (buying at 7x, selling at 10x EBITDA).
Example: Buy company at 7x EBITDA for $700M (70% debt). Company repays $300M of debt in 5 years. Exit at 9x EBITDA →
equity value triples even with flat EBITDA.
LBO IRR Drivers ranked (interview answer):
1. Multiple Expansion (most impactful in the right market)
2. Debt Paydown (most reliable, mechanical)
3. EBITDA Growth (operational improvement)
4. Cash Dividends / Recap (secondary)
05
Equity Research & Market Ratios 🔍
High Frequency P/E Beta PEG
P/E Ratio — Price to Earnings PEG Ratio
How much investors pay per $1 of earnings. High P/E = Adjusts P/E for expected earnings growth. PEG < 1 =
high growth expectations OR overvaluation. undervalued relative to growth. More nuanced than raw
P/E.
P/E = Stock Price / EPS
PEG = P/E Ratio / Annual EPS Growth Rate
(%)
High P/E example: Tesla (~60x P/E) reflects growth
bets. A mature utility at 12x reflects stability.
Example: Company with P/E = 20 and 25% growth →
PEG = 0.8 → potentially undervalued.
P/B Ratio — Price to Book P/S Ratio — Best for Early-Stage
Compares market value to book (accounting) value. Price-to-Sales is preferred for early-stage or pre-profit
Used most in banking & financial services where companies where EPS is negative. Focuses on revenue
assets are mostly liquid/mark-to-market. growth and market share capture.
P/B = Market Cap / Book Value of Equity Example: A SaaS startup with no profit but 100% YoY
revenue growth would use P/S, not P/E.
Industry: Banks, insurance companies. P/B < 1 signals
the market thinks the bank's assets are impaired.
Beta Unlevering Beta — D/E Ratio Matters Most
Measures systematic (market) risk of a stock. Used in When unlevering beta, the Debt-to-Equity ratio is the
CAPM to calculate Cost of Equity. most critical input. It strips out financial risk to isolate
business/operating risk.
Beta = 1.0: Moves with market.
Beta > 1: More volatile (e.g., tech stocks). βu = βl / [1 + (1−T) × (D/E)]
Beta < 1: Defensive (e.g., utilities).
Unlevered Beta: Removes debt's effect to compare
Why: Allows fair comparison of risk across companies
pure business risk across firms.
with different capital structures (e.g., in Trading
Comps).
Market Cap vs. Enterprise Value — Quick Recap:
Market Cap = Share Price × Shares Outstanding (equity value only)
Enterprise Value = Market Cap + Net Debt (total business value, debt included)
Always use EV when comparing companies across different capital structures.
Q: Which industry uses P/B most frequently?
Technology Banking & Financial Services ✓ Healthcare Consumer Goods
Banks hold mostly liquid assets (loans, securities) whose book value closely tracks fair market value — making P/B a meaningful
signal.
06
Macro Indicators & Qualitative Factors 🌐
LEADING INDICATORS (PREDICT FUTURE) LAGGING INDICATORS (CONFIRM TRENDS)
Manufacturing PMI ⭐ GDP growth
Stock market returns Inflation (CPI)
Building permits Unemployment rate
Consumer confidence index Corporate profits
Yield curve shape Outstanding loans
Interest Rate Rise → Equity Valuation Falls
Higher interest rates increase WACC (cost of equity via CAPM goes up; risk-free rate rises). Higher WACC → lower
present value of future cash flows → lower equity valuation. Also increases borrowing costs, hurting margins.
Classic chain: Fed raises rates → 10-yr Treasury yield rises → risk-free rate ↑ → CAPM cost of equity ↑ → WACC ↑ → DCF
value ↓ → stock prices fall.
Qualitative Factors in Valuation
Non-numeric factors that affect a company's true worth and can justify premium or discount to quantitative valuation.
Key examples: Management quality, Brand strength, Competitive moat (cost advantage, network effect, switching costs,
intangibles), Corporate culture, Regulatory environment, ESG factors.
A moat = durable competitive advantage that protects market share from rivals over time.
Q: Among GDP, Inflation, Unemployment, Manufacturing PMI — which is a leading indicator?
GDP Inflation Unemployment Manufacturing PMI ✓
PMI reflects current purchasing manager sentiment and forward production plans — it leads the economic cycle. GDP, inflation, and
unemployment are all lagging.
07
Income Statement & Profitability 📄
Income Statement Waterfall
Revenue (Top Line)
− COGS
= Gross Profit
− Operating Expenses (SG&A, R&D)
= EBIT (Operating Income)
+ D&A → back to EBITDA
− Interest
= EBT
− Taxes
= Net Income (Bottom Line)
Top Line = Revenue (Gross Sales).
Bottom Line = Net Income.
Gross Profit = Revenue − COGS (e.g., Revenue $500M − COGS $300M = Gross Profit $200M).
Capitalising R&D → Higher Valuation High Leverage → High Equity Risk
When R&D is capitalised instead of expensed, costs Highly leveraged companies have large mandatory
move from Income Statement to Balance Sheet. This interest obligations. In downturns, equity holders
inflates EBITDA and EBIT, increasing Terminal Value in absorb losses first. Debt holders are senior in
a DCF. liquidation.
Trick: Cash outflow is identical — only accounting Effect: Higher leverage → higher beta → higher cost of
treatment changes. Creates optically higher but not equity → higher WACC → lower valuation. Amplifies
fundamentally higher value. both upside and downside for equity.
Q: Which is a profitability ratio?
Current Ratio Debt/Equity Gross Profit Margin / Net Margin / ROE ✓ Interest Coverage
Profitability ratios measure how efficiently a company generates profit. Liquidity ratios (Current Ratio), Leverage ratios (D/E), and
Coverage ratios are distinct categories.
08
SaaS & Sector-Specific Metrics 💻
Most Important SaaS Metric Valuing Early-Stage Companies
ARR (Annual Recurring Revenue) — total predictable When earnings are negative, traditional P/E and
annual revenue from subscriptions. The north star EV/EBITDA break down. Use P/S (Price-to-Sales) or
metric for SaaS valuation. EV/Revenue to capture growth potential.
Also critical: NRR (Net Revenue Retention) — Hierarchy by maturity:
measures revenue expansion from existing customers. Early stage → P/S or EV/Revenue
NRR > 100% = negative churn, which dramatically Growth stage → EV/EBITDA (once EBITDA positive)
increases valuation multiples. Mature → P/E or Dividend Yield
⚡ Interview Quick-Fire Cheat Sheet 🎯
Must-know one-liners for rapid-fire interview rounds:
• EBITDA stands for: Earnings Before Interest, Taxes, Depreciation, Amortization
• WACC increases → Valuation: Decreases (inverse relationship)
• DCF largest value driver: Terminal Value (60–90% of total)
• Non-cash expense: Depreciation
• LBO primary return driver: Debt Paydown (Deleveraging)
• IPO is a: Primary Market transaction
• EV/EBITDA best for: Comparing different capital structures
• P/B used most in: Banking & Financial Services
• P/S used most for: Early-stage / pre-profit companies
• Leading indicator among GDP/Inflation/Unemployment/PMI: Manufacturing PMI
• Accretive deal: Combined EPS increases post-acquisition
• Dilutive deal: Combined EPS decreases post-acquisition
• PEG < 1: Stock is undervalued relative to growth
• High leverage → High equity risk / High beta
• Capitalise R&D → Higher EBITDA → Higher valuation (optics)
• Top line: Revenue | Bottom line: Net Income
• Revenue − COGS = Gross Profit
• Moat = Durable competitive advantage (cost, network, switching costs, intangibles)
Investment Banking Interview Notes · Compiled from Practice Sessions · Use, review, repeat.