J.P. Morgan IB Interview Questions

Politely decline to name a stock to buy, and offer to walk through how you would evaluate one instead. Recommending stocks is usually the job of equity research analysts (people who publish buy, hold, or sell ratings for investors) and the buy-side (firms such as hedge funds and mutual funds that invest money). Investment bankers advise companies on deals, and banks keep that work separate from stock recommendations. Then show your judgment with a pitch framework: the business, the thesis, valuation, catalysts, and risks.

Give the Dow Jones Industrial Average (DJIA) level from that morning's close or the latest print, rounded to the nearest hundred points. Then add one line on where it has been heading and the main reason why. No fixed number is correct, because the index moves every trading day, so check it on the morning of the interview. The DJIA is a price-weighted index of 30 large U.S. companies: a stock with a higher share price counts for more, whatever the company's size.

Apple repatriated its cash (brought the cash held by its foreign subsidiaries back to the U.S. parent company) because the 2017 Tax Cuts and Jobs Act (TCJA) took away the option of putting off U.S. tax indefinitely. Section 965 of the tax code, as amended by the act, imposed a one-time, mandatory 'transition tax' on all accumulated foreign earnings the U.S. had not yet taxed: 15.5% on the part held as cash and 8% on the rest. It was owed whether or not the money ever came home. With the bill due either way, keeping the cash offshore saved nothing. Bringing it back freed it for share buybacks, dividends and U.S. investment.

Company A. Its $1.2bn enterprise value against $100mm of EBITDA is 12.0x EV/EBITDA. Company B's $2.5bn enterprise value against $200mm of EBITDA is 12.5x. A carries less debt too, 2.0x debt/EBITDA to B's 2.5x. Two otherwise identical businesses, and with A you pay less per dollar of earnings and take on less leverage risk.

No. A lower P/E does not make a company more attractive on its own. Equity value is what the shareholders own; enterprise value is the whole business, debt included. P/E is equity value per share over earnings per share, so it moves with leverage as much as with operating performance. Test whether the drop reflects genuine undervaluation or just added debt and a different earnings base, then check EV/EBITDA, which strips out capital structure, before calling anything cheap.

The curve is inverted. It slopes downward. The one-year rate is 6.00% (100 grows to 106). The two-year rate is 5.83% per year, because 112 is 12% cumulative over two years and 1.12^(1/2) - 1 = 5.83% annualized. The rate for year 2 by itself is the implied forward rate: 1.12 / 1.06 - 1 = 5.66%.

Adding debt typically lowers WACC at first, then raises it past a certain point. Plot WACC against leverage and you get a U. WACC is the blended return a company must pay its lenders and shareholders, weighted by how much of each it uses. Debt is usually cheaper than equity, and interest is tax-deductible, so moving from equity to debt pulls the blended cost down. As debt keeps rising, so does bankruptcy risk. Lenders then want higher interest rates and shareholders want higher returns, and eventually that outweighs the benefit.

For years, most of Apple's cash sat with overseas subsidiaries. Bringing that cash back to the US (repatriating it) would have triggered a large US tax bill, so borrowing in the US at low interest rates was cheaper. The 2017 US tax reform largely removed that repatriation penalty. Today the case is cheap, tax-deductible debt, and borrowing lets Apple keep its cash for flexibility.

20x. In an all-debt, no-tax deal the transaction is neutral when the earnings yield acquired offsets the interest cost incurred, and earnings yield is the inverse of the multiple paid. Set 1 / (P/E paid) = 5% and the maximum is 1 / 0.05 = 20x B's earnings. Neither A's own 15x nor B's standalone 10x sets the ceiling. With 100% debt funding, the borrowing cost does it alone.

Apple's cost of equity is roughly 10.5–11%. With CAPM, start from an illustrative risk-free rate of about 4.25% (the 10-year U.S. Treasury yield, which moves daily). Add Apple's beta of about 1.2 times an equity risk premium of about 5.5%: 4.25% + 1.2 × 5.5% ≈ 10.85%. Cost of equity is the annual return shareholders expect for owning the stock. It sits above Apple's borrowing cost because equity holders are paid after lenders and carry more risk.

Net debt is negative $2: the company holds $2 more cash than debt. Enterprise value is equity value plus net debt, and net debt is debt minus cash. Enterprise value ($8) sits below equity value ($10), so net debt has to be negative. The company is in a net cash position.

A biotech startup's WACC (weighted average cost of capital, the blended return that a company's investors require) is high: typically somewhere around 12% to 20%, and often in the mid-teens. These companies usually carry little or no debt, so WACC sits close to the cost of equity. That cost is high for two reasons. The stock moves sharply with the wider market (a high beta), and the company is small. A bank's risk-adjusted NPV model already handles trial risk through probabilities of success, so the rate there tends toward the lower part of that range. Venture investors who do not adjust their cash flows for risk often use hurdle rates of 30% or more.