What happens if you reduce the tax rate in a DCF analysis?
Intermediate Investment Banking Interview Questions
A practical article-style question list for candidates who know the definitions and need to connect the mechanics.
OFFERGOBLIN/12 min read/12 sample questions
Intermediate investment banking interview questions test linkage. The interviewer wants to know whether a change in one assumption flows through accounting, valuation, capital structure, and deal math in the right direction.
The examples below are representative rows from the OFFERGOBLIN question bank. The goal is not to sound complicated; it is to give the result, explain the mechanism, and name the trap.
What this level tests
- DCF assumption sensitivity
- WACC and discount rate logic
- Enterprise value versus equity value
- Working capital and free cash flow
- Basic accretion/dilution math
Free sample questions from the question bank
Use this intermediate list when the basic definitions are stable. Each answer should state the direction of impact and then explain why.
Reducing the tax rate increases enterprise value because higher after-tax operating cash flows (EBIT × (1 − t)) more than offset the slight WACC increase caused by a smaller interest tax shield on debt.
Would a lower P/E company acquiring a higher P/E company be accretive or dilutive (assume all stock, but can talk about consideration)? Is this always the case, and what could change that answer?
In an all-stock deal, a lower P/E acquirer buying a higher P/E target is dilutive because each share issued carries more earnings than the target's earnings received; however, sufficient synergies, switching to cash consideration, or rapid target earnings growth can flip the result to accretive.
Why do we use EV/Revenue as a valuation multiple?
We use EV/Revenue when earnings-based multiples like EV/EBITDA are meaningless—typically for unprofitable or early-stage companies—because Revenue is almost always positive and capital-structure-neutral, though it implicitly embeds assumptions about future margins.
Suppose you invest $100 upfront for the chance to flip a coin once every year for 10 years, where heads earns you $100 and tails earns nothing. After valuing this coin using a DCF approach, a client asks: why do we need to apply a discount rate when valuing this coin? How do you explain it to them?
The discount rate accounts for the time value of money, a risk premium for the uncertainty of each coin flip, and the opportunity cost of deploying capital here instead of the next-best alternative investment.
Which one has the most impact on free cash flow: revenue up 10, depreciation down 10, or capex down 10?
CapEx down 10 has the greatest impact, boosting FCF by a full 10, since it flows dollar-for-dollar with no tax friction, whereas revenue up 10 only adds 6 after tax and depreciation down 10 actually hurts FCF by 4.
Why do you subtract the change in Working Capital when calculating Free Cash Flow to the Firm (FCFF)?
Because NOPAT is an accrual measure, and an increase in net working capital means cash was tied up in operations (e.g., uncollected receivables or inventory buildup) that the income statement doesn't reflect, so you subtract it to convert accrual profits into actual cash.
What is WACC and how do you calculate it?
WACC is the weighted average cost of capital—the blended required return across equity and debt investors—calculated as (E/(E+D)) × Ke + (D/(E+D)) × Kd × (1−t), using market-value weights and CAPM for cost of equity.
Company A has EV/EBITDA 8x, EBITDA 200, leverage ratio 3x, and 100 shares outstanding. Company B has EV/EBITDA 6x, EBITDA 100, leverage ratio 4x, and 50 shares outstanding. If Company A buys Company B in an all-stock deal and pays 7x EBITDA, what is the price per share?
The price per share is $6.00, calculated as the deal equity value of Company B [(7 × $100 EBITDA) − $400 debt = $300] divided by its 50 shares outstanding.
WACC of 12%, post-tax cost of debt 7%, tax rate 30%, 50-50 debt and equity. What is the cost of equity?
Using WACC = (0.50 × Ke) + (0.50 × 7%), set 12% = 0.50Ke + 3.5%, solve to get Ke = 8.5% / 0.50 = 17%.
Company A has 10 shares outstanding, a share price of $25, net income of $10, and a 40% tax rate. Company B has a $150 market cap, net income of $10, and a 40% tax rate. If A buys B and finances the acquisition with 100% stock, is the deal accretive or dilutive?
The deal is accretive: pro forma EPS rises to $1.25 from $1.00 because Company A's P/E (25×) exceeds Company B's P/E (15×), meaning A issues fewer shares per dollar of acquired earnings.
Company A has UFCF of 100 and LFCF of 95. Company B has UFCF of 100 and LFCF of 100. Can you tell me the difference in EV and equity value between Company A and Company B?
You can only say that, all else equal, the companies would have the same Enterprise Value because EV is based on unlevered free cash flow, which is 100 for both. But from the information given alone, you cannot determine the exact difference in Equity Value. The lower LFCF at Company A suggests more cash is going to debtholders or other financing claims in that period, so Company A's Equity Value would generally be lower than Company B's if operating outlook and EV are otherwise the same. However, the exact equity value difference cannot be inferred from a one-period 5 LFCF gap.
If accounts payable days goes from 60 to 90, how does that affect your valuation in a DCF?
Increasing AP days from 60 to 90 reduces net working capital, creating a one-time boost to free cash flow in the transition year, which increases the present value of cash flows and raises your DCF valuation.
Beginner vs. intermediate vs. advanced question types
| Level | Question types | Example prompts | Ready when |
|---|---|---|---|
| Beginner | Definitions, accounting basics, basic valuation walkthroughs, fit vocabulary | What does an investment bank do? What is enterprise value? Walk me through a DCF. | You can explain the concept cleanly before the first follow-up. |
| Intermediate | DCF sensitivities, WACC, working capital, EV bridge, accretion/dilution | What happens if taxes fall in a DCF? How do AP days affect valuation? | You can connect formulas to valuation direction and name the trap. |
| Advanced | LBO returns, sponsor logic, synergy sharing, sector valuation, terminal value edge cases | Calculate the LBO IRR. Why would a buyer not pay away all synergy value? | You can answer under pressure and defend the assumption set. |