Advanced Investment Banking Interview Questions

An LBO is the acquisition of a company primarily with debt, repaid by the target's own cash flows, amplifying equity returns; non-PE firms use it to minimize cash outlay or as a valuation floor benchmark.

The IRR is approximately 17.6%, derived from a 2.25x MOIC ($1,800mm exit equity on $800mm invested) over a 5-year holding period: (2.25)^(1/5) − 1 ≈ 17.6%.

EBITDA must grow at approximately 14% per year (~92% cumulative over 5 years) to achieve a 25% IRR, driven entirely by EBITDA growth and debt paydown with no multiple expansion.

Under the standard interview simplification, adding $100mm to EBITDA has the bigger impact because it is capitalized at the exit multiple, while paying down $100mm of debt increases equity value by exactly $100mm. For example, at an 8.0× exit multiple, $100mm of incremental EBITDA would increase enterprise value — and therefore equity value, assuming no other changes — by about $800mm, versus only $100mm from debt paydown.

Sources include debt tranches (for example, revolver if drawn, term loans, senior notes, mezzanine), rollover equity or seller financing, excess target cash if it is used to fund the deal, and sponsor equity as the plug. Uses include the equity purchase price paid to shareholders, repayment or refinancing of existing debt, transaction fees, financing fees, and any minimum cash left on the balance sheet.

You could pursue sale-leasebacks of owned assets for immediate cash proceeds, defer discretionary capex, elect accelerated depreciation to maximize tax shields, and optimize working capital by tightening receivables, extending payables, and reducing inventory.

The strategic deal is better: 15× pro forma EBITDA (10% margin + 2% synergies = 12% of revenue) equals 1.80× revenue, which exceeds the sponsor's 1.70× revenue offer by roughly 6%.

Because paying 100% of the PV of synergies makes the deal NPV-zero for the buyer, offering no compensation for bearing execution risk, integration costs, and the uncertainty that projected synergies may never fully materialize.

Use a risk-adjusted NPV: probability-weight each pipeline asset's projected cash flows by stage-specific success rates, discount at a high rate, sum across the portfolio, then cross-check with comparable transactions and cash runway analysis.

A pre-revenue biotech that cannot raise traditional debt would typically look to hybrid or contingent financing instruments such as convertible notes, SAFEs, royalty financing, and warrant-linked securities. In later-stage biotech, you may also see structured financings tied to future milestones or product revenues. If the interviewer means 'not common stock' rather than literally non-equity, convertible preferred is also a very common answer.

Forecast annual production over the mine's finite life until reserve depletion, project revenue using gold price times ounces produced, subtract operating costs, capex, and taxes to get unlevered FCF each year, then discount all cash flows plus a terminal salvage value net of environmental remediation costs back at the mining-appropriate WACC—there is no perpetuity-based terminal value since the resource is finite.

Closer to 90%, because negative or zero free cash flows in years 1–4 contribute no positive value, pushing nearly all—and often more than all—of the enterprise value into the terminal value.