Lazard IB Interview Questions

You usually get the cost of equity from the Capital Asset Pricing Model (CAPM): cost of equity = risk-free rate + beta × equity risk premium. The risk-free rate is typically a long-term government bond yield. Beta is how much a stock moves relative to the overall market. The equity risk premium is the extra return investors expect for holding stocks over risk-free bonds.

The cost of equity is 17%. WACC (weighted average cost of capital, the blended return a company's lenders and shareholders require) is 50% × cost of equity + 50% × 7%, and that has to equal 12%. The 7% is already after tax, so the 30% tax rate does not get applied again. Debt contributes 3.5%, equity has to contribute the remaining 8.5%, and 8.5% ÷ 0.50 = 17%.

Audit peer selection for relevance, verify the EV bridge (diluted shares, all debt components, unrestricted cash), ensure numerator-denominator consistency (equity metrics with equity value, enterprise metrics with EV), normalize financials uniformly, calendarize fiscal years, and use median multiples while trimming outliers.

On price, with other terms comparable, the strategic's bid is better: 1.80x revenue against the sponsor's 1.70x. Synergies add 2% of revenue to the 10% EBITDA margin, so the strategic pays 15x on 12% of revenue: 15 × 0.12 = 1.80x revenue.

There is no single correct answer. The interviewer wants a short, structured view you can defend. Cover four points: growth, inflation, central bank policy and interest rates, and the main risks. Use one or two recent data points. Then say what it means for M&A and capital markets, because that is the part a banker cares about.

On risk grounds, all else equal, an acquirer usually has to pay a higher premium when it pays in stock. Cash gives target shareholders a fixed, certain value at closing. Stock makes them part-owners of the combined company, so they carry the risk that the acquirer's share price falls and that the merger misses its promised benefits. They usually ask for a bigger premium to cover that risk. Retained upside and possible tax deferral pull the other way.

Exit EBITDA is $375mm. The sponsor (a private equity firm buying the whole company) pays 6.0x $250mm, so $1,500mm of enterprise value, split $750mm of debt and $750mm of its own equity. A 200% MoM, meaning the cash it takes out is 2.0x the cash it put in, turns that $750mm into $1,500mm of equity at exit. The question gives no cash flow to repay debt, so debt stays at $750mm. Exit enterprise value is $1,500mm + $750mm = $2,250mm, and $2,250mm over the same 6.0x is $375mm.

You need $200 of EBIT synergies. EBIT is operating profit before interest and taxes; synergies are the extra profit from combining the two companies. At A's $100 share price, B's $2,000 of equity costs 20 new shares. Now 30 shares split $150 of combined net income, so EPS is $5.00 against A's standalone $10.00. The deal is dilutive: it lowers the buyer's EPS. Getting back to $10.00 on 30 shares takes $300 of net income. That is a $150 after-tax gap, and $150 ÷ (1 − 25%) = $200 before tax.

Share price equals earnings per share (EPS, net income divided by shares outstanding) times the P/E multiple (the price investors pay for each $1 of earnings). That gives a company three ways to lift its share price: grow net income, cut the share count, or get investors to pay a higher multiple. A higher multiple usually comes from faster expected growth or lower perceived risk.

Divide EV/Revenue by EV/EBITDA and you get EBITDA margin: about 42% for A (8 / 19) and about 35% for B (6 / 17). A's higher margin explains much of why it trades at a higher revenue multiple. But A also trades at a higher EBITDA multiple (19x vs 17x), so investors pay more for each dollar of A's profit too. That leftover premium usually reflects faster expected growth, lower risk, or better cash conversion.

The return is 15%. The company puts in $50 of its own cash (its equity) and borrows the other $50. When it sells for $110, it repays the $50 loan plus $2.50 of interest (5% of $50, assuming a one-year hold). That leaves $57.50, a $7.50 gain on $50 invested. The asset rose 10%. Borrowing at 5% to earn 10% lifts the return on the company's own cash to 15%.

The deal is about 43.3% accretive, meaning it raises A's earnings per share (EPS), the profit attributable to each share. A trades at $20 a share ($2,000 of market capitalization over 100 shares) and B at $10, so a 100% premium puts the offer at $20 per B share, or $1,000 of equity value. Paid entirely in stock at $20, that is 50 new A shares and a pro forma count of 150. Pro forma net income is $215: A's $100, B's $15, and the after-tax effect of $300 of revenue synergies less $60 of cost to achieve and $40 of incremental depreciation, which is $200 pre-tax and $100 after the 50% tax rate. EPS goes from $1.00 to about $1.43.