Bank of America IB Interview Questions

I would value a company three ways: trading comparables, precedent transactions, and a discounted cash flow (DCF) analysis. Each method gives a range of values. I would put the three ranges side by side on a 'football field' chart and settle on a triangulated value range. The relative methods show what the market and past buyers pay for similar companies. The DCF shows what the company's own future cash flows are worth. With all three, one method's weakness does not decide the answer.

Net income increases $40mm, cash increases $140mm, and total assets and shareholders' equity each increase $40mm. The gain is $50mm: the $150mm sale price less the $100mm book value, which is what the asset is carried at on the balance sheet after accumulated depreciation. At a 20% tax rate that gain adds $40mm to net income and sends $10mm out the door as tax. Cash picks up the full $150mm of proceeds less that $10mm. The balance sheet still balances, because cash is up $140mm while the PP&E line comes off at its $100mm book value.

At inception the income statement doesn't move: you borrow $500 and spend it on the stand, so on the balance sheet PP&E (property, plant and equipment, the long-lived physical assets) goes up $500 and debt goes up $500. In Year 1, $100 of depreciation and $50 of interest cut pre-tax income by $150. After a 25% tax rate that is $112.50. Assuming the loss saves taxes now, cash falls only $12.50, because depreciation is a non-cash expense and gets added back.

NOI is effective gross income (the rent and other income a property actually collects after vacancy and bad debt) minus the property's operating expenses. It is measured before debt service (mortgage interest and principal), capital expenditures, depreciation and amortization, and income taxes. It shows what the property earns on an unlevered basis. That is why investors use it to value real estate through the cap rate.

Give a short, balanced view built on three drivers: growth, inflation, and interest rates. Then show how that view moves deal activity. A 2023 view, for example: inflation had cooled from its peak, central banks were near the end of raising rates, and growth was slowing but still positive. If that holds, financing costs settle, buyers and sellers find it easier to agree on price, and M&A and IPO activity come back gradually. Name the main risk to your view, and say it in your own words.

Term loans are usually senior secured: lenders have first claim on specific company assets. They pay a floating rate, can typically be repaid early with little penalty, and are bought mainly by banks (Term Loan A) and CLOs (Term Loan B). High yield bonds are usually unsecured or junior. They pay a fixed coupon, run longer, and are protected against early repayment. Because they sit lower in the capital structure and cost more, their main buyers are high yield bond funds, insurance companies, pension funds, and hedge funds.

NOI, or net operating income, is a property's rental and other operating revenue less its operating expenses: property taxes, insurance, utilities, repairs and maintenance, and property management. Depreciation is excluded. NOI is an unlevered, pre-tax, cash-based measure of what the asset itself earns. Non-cash charges like depreciation stay out of it, and so do items that belong to the capital structure or the owner rather than to operations: debt service, income taxes, and capital expenditures.

An IPO pitch book is the slide deck a bank presents to a private company to win the job of leading its initial public offering (IPO), the first sale of its shares to public investors. It typically runs from the bank's view of the market and the company's equity story, to a valuation range and proposed offering structure, to how the bank will market the shares and the deal timeline. It closes with the bank's credentials and team.

WACC is up, typically by about 200-300 basis points (bps; 100 bps = 1 percentage point). The main driver is the risk-free rate. The 10-year US Treasury yield was about 1.5% in 2021 and has been about 4-4.5% since 2023, so the gap holds as long as the 10-year stays near that level. That higher base rate raises both the cost of equity and the cost of debt. The equity risk premium and the 21% US federal tax rate have stayed roughly where they were.

A DCF values a company as the present value of the cash it will generate in the future. You project unlevered free cash flow (cash available to all investors, debt and equity alike) for about five to ten years. You estimate a terminal value for the years after that, then discount both back at the weighted average cost of capital (WACC). The sum is enterprise value. Subtract net debt to get equity value, then divide by diluted shares for an implied share price.

Answer in three slots, in this order. Business: the company's name and sector, plus one line on what it sells and to whom. Financials: its market cap (the total value of its shares) and one or two valuation multiples, such as EV/EBITDA (the value of the whole business, including debt, divided by its operating earnings) or P/E (share price divided by earnings per share), and whether it trades above or below its peers. Interest: two reasons you like it, one tied to an M&A deal and one tied to a macro trend. That way any follow-up leads into material you've prepared.

A capital ratio puts capital over risk-weighted assets, so a safe asset like a Treasury adds little or nothing to the denominator. A leverage ratio puts capital over total exposure, unweighted, so every dollar of assets counts the same whatever its risk. Banks call the pair contradictory because safe, low-return assets help the capital ratio while eating leverage-ratio capacity. When the leverage ratio is the binding rule, holding safe assets gets expensive, and that can push a bank toward riskier, higher-yielding assets.