Preview Questions Investment Banker | Role Specific Skill

Question 1: Which of the following best describes the WACC (Weighted Average Cost of Capital) in financial modeling?

Which action should you take?

Choose only one option

It is the interest rate at which a company can borrow from the market

It is used to determine the intrinsic value of a company based on future cash flows

It represents the return required by investors to accept the risk of the company's debt

It is a rate that reflects the overall cost of capital for a company, weighted by equity and debt proportions

Question 2: What is the primary goal of stress testing in financial institutions?

Which action should you take?

Choose only one option

Predict market crashes

Ensure competitive advantage

Assess risk management capabilities

Evaluate employee performance

Question 3: How do you adjust the net income in a three-statement model after considering a depreciation expense?

Which action should you take?

Choose only one option

Depreciation is subtracted in the cash flow statement and added back in the income statement

Depreciation is added back to cash flow, but subtracted in the income statement for tax calculations

Depreciation is adjusted on a net basis after considering both cash flow and tax effects

Depreciation has no impact on net income in a financial model because it is a non-cash item

Question 4: How does the use of debt financing impact the free cash flow projections in a LBO model?

Which action should you take?

Choose only one option

It reduces free cash flow due to interest payments

It increases free cash flow due to tax shield benefits

It has no impact on free cash flow

It affects only the working capital assumptions

Question 5: In a debt financing scenario, what is the primary risk associated with taking on too much debt in an investment banking model?

Which action should you take?

Choose only one option

It raises the market capitalization due to higher leverage

It dilutes the equity holders' share of ownership

It increases the cost of equity and reduces shareholder returns

It increases the likelihood of default and financial distress

Question 6: What does a high Sharpe Ratio indicate about an investment?

Which action should you take?

Choose only one option

High risk-adjusted return

Consistent losses

Low risk-adjusted return

High volatility