A collection of real questions asked in IBD at MBA levelSource: EfinancialCareersBelow are a collection of real questions that were asked of investment banking candidates at the MBA level, along with suggested answers that they later put together. If you find yourself on a superday interview at a big bank, you can bet that youll be asked at least of few of these questions. Disagree with an answer? Let us know in the comments below.Explain an LBO (leveraged buyout) to my grandmother, who knows nothing about financeAn LBO is a transaction in which a party purchases a business and brings it private. The transaction is funded using a large portion of debt. Three main characteristics of LBOs 1) high debt, which is intended to be paid down, 2) incentives, managers are given greater stake in business, 3) private ownership, many LBOs go public again once debt has been paid down.If a company was looking to raise debt or equity, what are the 3 most important questions to ask?1) Whether they will generate enough cash flows to cover interest obligations. How many multiples in excess of current interest payments is their operations generating in cash flow?2) What is their current capital structure and can they bring on more debt and leverage the company further without being too levered versus industry and peers so that their credit rating and stock price isnt negatively impacted.3) What is the current equity value? If the stock price is appropriately valued or has a potentially high value, then equity might be better.How does FED change the interest rates?The FED can adjust the Federal Funds Rate which is the interbank overnight rate at which the FED lends money. The lower the Federal Funds Rate, the lower real interest rates. The FED can also adjust the money supply through the purchase or sale of government bonds, whereby affecting inflationary expectations which will adjust nominal interest rates.What would be the difference between the interest coverage rate of a senior board vs. junior debt?Interest coverage rate is operating income divided by interest expense (EBIT/interest). This basically measures how much leadway a company has between its earnings and interest payments (a hurdle they must keep jumping to avoid default).In event of bankruptcy, the senior debt would have to be paid before the junior. However, when using the interest coverage ratio to analyze a companys ability to keep up with their debt payments, I would look at the EBIT divided by ALL forms of debt as a failure to make payments for any form of debt results in default.How does Net Income flow into the Balance Sheet, Income Statement and Statement of Cash Flows?The Net Income on the bottom line of the income statement gets added into the retained earnings on the balance sheet. The net income from the income statement is also the starting line of the statement of cash flows.How do you value a company?There are five common valuation methodologies. Trading Range (the range the stock has been trading in during the past 52weeks). If we trust the market we should assume this is a reasonable place to start our analysis. Discounted Cash Flow (DCF), also called Intrinsic Value, seeks to find a present value of all future cash flows of the firm that are available to stakeholders. This can be done using WACC (weighted average cost of capital) or APV (adjusted present value). Public Comparables looks at peer companies to determine how the market values companies in the same or similar businesses using multiples including P/E and EV/EBITDA. Acquisition Comparables, also called Deal Comps or Precedent Transactions, looks to see how much acquirers recently paid for similar businesses. Asset Value, also called liquidation or breakup value, examines what you can sell the companys assets for (including real estate).In addition, valuation can be framed through: Leveraged Buyout looks at what a financial sponsor could pay considering a target IRR (internal rate of return) and the debt capacity of the firm. Merger Consequences Analysis is actually an affordability analysis (what can an acquirer pay) rather than an analysis of the value of a target.Describe how to value a privately held companyValuation for a private company is the same as the valuation of a public company with some complications, particularly as it relates to DCF (discounted cash flow). Because a private company has no publicly traded equity, a beta cannot be directly computed.To find the cost of equity (KE)1. Estimate the total value of the private company based on comparables (use average EV/EBITDA)2. Deduct the value of the debt to get estimated “market” value of equityor internal use only3. Get the average levered beta from the comparables and unlever it4. Re-lever the beta for the private company based on the target D/E (debt-to-equity) ratio5. Calculate Ke based on CAPM (capital asset pricing model)To find the cost of debt (Kd)1. Some privately held companies have pub