16 IB Interview Questions

Net Income from the Income Statement flows into Retained Earnings on the Balance Sheet and is the starting line of the Cash Flow Statement. The Cash Flow Statement adjusts Net Income for non-cash items (add back D&A, stock-based comp) and changes in working capital (from the Balance Sheet) to get Cash Flow from Operations; subtracts Capex (Cash Flow from Investing) and debt/equity issuance or repayment (Cash Flow from Financing) to arrive at the net change in cash. That ending cash balance flows back onto the Balance Sheet's cash line, and D&A also reduces PP&E on the Balance Sheet while feeding the Income Statement as an expense. The Balance Sheet must balance every period (Assets = Liabilities + Equity), which is the check that confirms the three statements are actually linked correctly, not just individually correct.

Equity Value (market cap) is the value of just the equity claim: Share Price × Diluted Shares Outstanding. Enterprise Value is the value of the whole operating business, capital-structure-neutral: EV = Equity Value + Total Debt + Preferred Stock + Minority Interest − Cash & Equivalents. EV represents what an acquirer would have to pay to own the entire company debt-free and cash-free, which is why EV is the right numerator for capital-structure-neutral multiples like EV/EBITDA (EBITDA is also pre-financing), while Equity Value pairs with equity-only metrics like P/E (net income is post-interest, so it's already capital-structure-dependent).

Cash is a non-operating asset that could immediately offset debt or be distributed to shareholders; an acquirer effectively gets that cash back as part of the deal (or can use it to help fund the purchase), so it isn't really part of what's being 'bought.' Subtracting cash reflects that the true cost of acquiring the operating business is the total consideration paid minus the cash already sitting on the target's balance sheet. Note: some practitioners only subtract 'excess cash' above an operating minimum, since a business genuinely needs some cash to run day-to-day operations, a nuance worth flagging if asked.

Unlevered FCF = EBIT × (1 − Tax Rate) + D&A − Capex − Increase in Net Working Capital. Start from EBIT (not EBITDA) so you can tax-effect operating income the way it would be taxed absent any interest expense; that's what makes it 'unlevered,' capital-structure-neutral. Add back D&A since it's a non-cash expense; subtract Capex and the increase in NWC since those are real cash outflows not captured in the income statement. The result is the cash available to all capital providers (debt and equity) before any financing decisions, which is why it's discounted at WACC, the blended cost of all capital, not just the cost of equity.

WACC = (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 − Tax Rate)), where E and D are the market values of equity and debt and V = E + D. Cost of Equity typically comes from CAPM: Risk-Free Rate + Beta × Equity Risk Premium. Cost of Debt is the company's current market borrowing rate (often approximated by yield-to-maturity on existing bonds, or interest expense ÷ average debt as a rougher proxy). Debt is tax-effected because interest is tax-deductible: the after-tax cost of debt is cheaper than the stated rate. Use market values, not book values, for the weights: book value of equity understates what the market actually thinks the equity is worth.

Gordon Growth (Perpetuity Growth): Terminal Value = Final Year UFCF × (1 + g) ÷ (WACC − g), assuming cash flows grow at a constant rate g forever; g should be conservative, typically near long-run GDP/inflation (2–3%), since no company can outgrow the economy forever. Exit Multiple: Terminal Value = Final Year EBITDA × an assumed exit EV/EBITDA multiple, usually the current trading multiple of comparable companies. Exit multiple is more common in practice and easier to sanity-check against the market; Gordon Growth is more theoretically 'pure' since it doesn't rely on market pricing at all. Best practice is to calculate both and confirm the implied growth rate from the exit-multiple method (or implied exit multiple from the Gordon Growth method) is reasonable. A common interview trap is a Gordon Growth terminal value that implies an absurd exit multiple.

Standard discounting assumes cash flows arrive at the very end of each period, but in reality a company generates cash roughly evenly throughout the year. The mid-year convention discounts each period's cash flow back from the midpoint of that period (e.g., 0.5, 1.5, 2.5 years) rather than the period-end (1, 2, 3 years), which slightly increases the present value of near-term cash flows since they're discounted for less time. It's a modest refinement (typically adds low-single-digit percentage points to the valuation) but is considered best practice and worth mentioning to show precision, especially since terminal value (still usually discounted at the standard period-end convention, or adjusted separately) makes up the majority of DCF value anyway.

Trading comps value a company off the current public market multiples of similar publicly-traded companies (EV/EBITDA, EV/Revenue, P/E): a 'minority stake, no premium' valuation reflecting the price for buying a small slice of stock on the open market. Precedent transactions look at multiples paid in actual past M&A deals for comparable targets, which typically run higher because they include a control premium: an acquirer paying extra for the right to control the company's strategy, capture synergies, and take it private/consolidate it. As a rule of thumb, precedent transactions > trading comps > DCF-implied value is common, though DCF can swing either way depending on assumptions. This is exactly why a 'football field' presents a range across all three methodologies rather than picking one.

Same industry/sector and business model (what actually drives revenue and margins), similar size (revenue/EBITDA scale; smaller companies often trade at a discount for lower liquidity and higher risk), similar growth profile and margin structure, comparable geographic footprint and end markets, and similar capital structure/leverage if using equity-value multiples. In practice you rarely find perfect comps: the skill is picking the closest available set and explicitly flagging where they diverge (e.g., 'these comps skew larger/faster-growing, so our target may warrant a discount to the group median') rather than pretending the set is perfectly clean.

A deal is accretive if the acquirer's pro forma EPS after the transaction is higher than its standalone EPS pre-deal; dilutive if lower. The main driver is the relationship between the target's earnings yield (Net Income ÷ Purchase Price, roughly the inverse of the P/E paid) and the acquirer's cost of the consideration used: cash funded by debt (cost = after-tax interest rate) or stock (cost = acquirer's own earnings yield). If the target's earnings yield exceeds the cost of the funding source, the deal is accretive; if the acquirer overpays (low target earnings yield) relative to its funding cost, it's dilutive. Synergies (cost or revenue) can flip a marginally dilutive deal to accretive. Always ask whether the accretion/dilution is being shown with or without synergies.

Cash/debt-funded deals are typically more accretive when the acquirer's cost of debt is low relative to the target's earnings yield, and avoid diluting existing shareholders' ownership percentage, but they increase leverage and financial risk, and require the acquirer to actually have (or be able to borrow) the cash. Stock-funded deals conserve cash and share risk with the target's shareholders (who become part-owners of the combined company, useful if the acquirer is uncertain about standalone integration risk or wants target management's continued alignment), but they dilute existing shareholders and signal the market may interpret as 'acquirer thinks its own stock is fully or overvalued,' which can pressure the acquirer's share price on deal announcement. Many real deals use a mix of both to balance these tradeoffs.

Negative working capital (current liabilities exceed current assets) usually means a company collects cash from customers faster than it pays its suppliers: common in subscription/software businesses (deferred revenue is a current liability recognized before the service is delivered) and retail/restaurant businesses (customers pay immediately, suppliers are paid on 30–60 day terms). Far from being a red flag, it's often a sign of a strong, cash-generative business model: the company is effectively financed by its own operating cycle rather than needing external capital to fund growth. It becomes concerning only if it stems from an inability to pay suppliers on time (financial distress) rather than a structurally favorable business model. Context matters more than the sign of the number.

In an acquisition, Purchase Price Allocation (PPA) requires the acquirer to write the target's assets and liabilities up (or down) to fair value on the combined balance sheet, and identify intangible assets (customer relationships, technology, trade names) that may not have been on the target's own books. Goodwill is the plug: Purchase Price − Fair Value of Net Identifiable Assets Acquired. It captures everything the acquirer paid for that isn't a specifically identifiable asset: synergies, workforce quality, market position, or simply overpayment. Goodwill sits on the balance sheet indefinitely (not amortized under US GAAP, only tested annually for impairment). A large impairment charge later is effectively an admission that the acquirer overpaid or the expected synergies didn't materialize.

A revolver is typically modeled to draw automatically when the cash balance would otherwise fall below a minimum cash threshold, and sweep (repay) automatically when there's excess cash above that threshold. But the ending cash balance depends on interest expense (which depends on how much revolver/debt is outstanding), and the revolver balance itself depends on the cash flow available to repay or requiring a draw: a genuine circular loop, same root cause as the LBO cash-sweep circularity. The standard fix is the same: enable iterative calculation with a circularity breaker switch, or approximate interest off the beginning-of-period balance to avoid the loop entirely, a reasonable simplification for a model whose primary purpose isn't precision debt scheduling.

P/E (Price ÷ EPS) is based on Net Income, which is after interest expense and taxes, so it's directly affected by how much debt a company carries and its tax situation, making it a poor way to compare operating performance across companies with different leverage. EV/EBITDA pairs a capital-structure-neutral numerator (EV, which already includes debt) with a capital-structure-neutral denominator (EBITDA, calculated before interest, taxes, D&A), so it isolates operating performance and lets you compare a heavily-levered company to an unlevered one on an apples-to-apples basis. P/E is still useful, particularly for comparing companies within the same capital structure norms (e.g., banks, where leverage is part of the business model itself and EV/EBITDA is less meaningful).

A football field is a horizontal bar chart showing the implied valuation range from each methodology used: trading comps, precedent transactions, DCF (often shown across a sensitivity range of WACC and terminal growth/exit multiple assumptions), and sometimes a 52-week trading range or LBO analysis (the highest price a financial sponsor could pay and still hit target returns), stacked so a client can see where the ranges overlap. No single method is 'correct': comps depend on which peer set you pick, DCF is highly sensitive to terminal value assumptions, and precedent transactions reflect deal-specific premiums that may not repeat. Presenting the overlap across methodologies, rather than a single point estimate, is both more defensible and more honest about the genuine uncertainty in any valuation.