Today's Investment Banking Interview Question?

Today, I had an investment banking interview for an analyst position. One of the questions I have never been asked before and I thought it was very challenging. The question was "walk me through what happens to the financial statement if you are given $10 of depreciation?". The interviewer explained the answer afterward but I still didn't understand.

Also, another question was "what financial statement is the best for understanding the health of a company?" I said the income statement but the interviewer said cashflow statement. Can someone please explain why?

 

He’s right they all tell different stories.

What if a company is loaded with debt or has liabilities that ruin value - maybe pension liabilities or if it’s an industrial a major environmental thing.

They all tell a different story.

 

Flow through the financial statements to address the impact of depreciation:

Income Statement 1. Depreciation is expensed so a $10 increase in depreciation yields a $10 decrease in EBIT

FCF 1. Assume some tax rate (let's use 30%) which means net income decreased by $7 but depreciation increased by $10 which nets to a FCFO increase of $3

Balance Sheet 1. Cum Dep. increased $10 which means net PP&E decreased $10. From FCF above we know Cash increase $3 and the $7 decrease of net income from IS caused Retained Earnings to decrease by $7.

You can check because the BS ties, Assets decrease $7, RE decreased $7 as well.

These are very basic interview prep questions that, if you aren't trolling, you should really become familiarized with.

 
Funniest

in fair play to you, the interviewer made a mistake in the second question. the best statement to look at when trying to gauge the financial health of a company is actually the statement of retained earnings.

i also wouldn't worry about the $10 depreciation question. more difficult questions such as that are typically reserved for PE associate recruiting technical grill-fests. your interviewer was most likely having a bad day and chose to take it out on you.

 

Anyone worth their salt in IB will know these questions. As someone who performed interviews for PE, I can tell you that we used to laugh when kids couldnt get these. Our rule was you need to be swinging around 80% on those for a follow up interview and i think we were nice compared to some other pe tests i saw. A new trend ive seen is making people model a transaction completely outside of their background - including some firms that have dramatically ramped up their hires from college. If you dont know how basic accounting works, you have no chance of breaking into a good ib or pe.

 

How come they asked you such questions for an analyst position? You must have messed something beforehand, and the interviewer felt it incumbent upon him or her to confirm you were sitting there by mistake.

 

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