# Banking Technical Interview Preparation: [Your name, target banks and recruiting cycle] > A preparation workbook for the technical part of investment banking interviews, written for MBA candidates aiming at > summer associate and full-time associate roles in investment banking (coverage and product groups), and useful for > corporate development, equity research and leveraged finance interviews. It covers the accounting core (how the > three statements link, with every step of the classic "walk me through" questions computed at a stated tax rate), > enterprise value and equity value and the bridge between them, the four valuation methods (trading comparables, > precedent transactions, discounted cash flow and the leveraged buyout floor) with computed examples and a football > field, accretion and dilution for an all-stock and an all-cash deal, and a routine for market awareness. Original > practice questions come with a separate answer key. Source basis: standard corporate finance and valuation theory > (Modigliani and Miller 1958; Gordon 1959; Kaplan and Ruback 1995; Liu, Nissim and Thomas 2002), IAS 33 for earnings > per share, IFRS 16 for leases and IFRS 18 for the new income statement subtotals, written in original words with > fictional companies (Northfield Outdoor Co. and invented peers). Replace every [bracketed] value and every row marked > *Example*. This is a learning aid, not investment, legal or tax advice. ## Document control | Field | Value | |---|---| | Candidate | [Your name] | | Target banks and groups | [Bank A, coverage group / Bank B, M&A product group] | | Interview stage | [Coffee chat / first round / superday] | | Interview dates | [YYYY-MM-DD] | | Accounting framework practised | [IFRS / US GAAP / both] | | Spreadsheet used | [Excel / Google Sheets / LibreOffice Calc] | | Reviewed by | [Second-year student, club mentor or banker contact] | | Version | [0.1] | | Last updated | YYYY-MM-DD | ## Contents - [1. How technical interviews work](#1-how-technical-interviews-work) - [2. Accounting: how the three statements link](#2-accounting-how-the-three-statements-link) - [3. Enterprise value, equity value and the bridge](#3-enterprise-value-equity-value-and-the-bridge) - [4. Valuation methods with computed examples](#4-valuation-methods-with-computed-examples) - [5. Accretion and dilution](#5-accretion-and-dilution) - [6. Market awareness preparation](#6-market-awareness-preparation) - [7. Practice questions](#7-practice-questions) - [8. Preparation plan and tracker](#8-preparation-plan-and-tracker) - [9. Common mistakes](#9-common-mistakes) - [10. My notes and next steps](#10-my-notes-and-next-steps) - [Sources and further reading](#sources-and-further-reading) - [Answer key](#answer-key) ## 1. How technical interviews work Investment banking interviews for MBA candidates mix fit questions (why banking, why this bank, why this group, a leadership story) with technical questions. For associates the technical bar is usually lower than for analysts in memorised detail but higher in judgement: the interviewer wants to see that you understand why a number moves, can reason from first principles when you do not know an answer, and can connect the mechanics to a client situation. Formats vary by bank, group and region, so check each bank's current careers page and ask second-year students who recruited in the last cycle. The technical questions fall into five families, and this workbook follows the same order: | Family | Typical question shape | What the interviewer listens for | |---|---|---| | Accounting | "Walk me through what happens when..." | Correct order (income statement, cash flow, balance sheet), the tax effect, a balance sheet that balances | | Enterprise value | "Why do we add debt and subtract cash?" | The idea that enterprise value belongs to all capital providers, consistent numerators and denominators | | Valuation | "How would you value this company?" | Choice of method for the situation, which methods give higher values and why, the main drivers | | Mergers | "Is this deal accretive or dilutive?" | The relative cost of each currency against the target's earnings yield, synergies needed to break even | | Markets and deals | "Tell me about a deal you followed" | A structured view with numbers, a point of view, and awareness of what you do not know | Expect follow-ups that change one assumption ("now assume the asset is sold for a gain"). Treat each follow-up as a new walk-through rather than trying to recall a memorised answer. When you are unsure, state the assumption you are making (for example the tax rate or whether a charge is tax deductible) and reason forward: interviewers reward a clear assumption far more than a fast guess. The process view below shows how a technical answer should be built. Use it while you practise until it becomes a habit. ```mermaid flowchart TD A["Question asked"] --> B{"Which family?"} B -->|Accounting| C["State assumptions: tax rate, cash or non-cash, deductible or not"] C --> D["Income statement: pre-tax effect, tax, net income"] D --> E["Cash flow statement: start from net income, adjust non-cash items and working capital"] E --> F["Balance sheet: cash, the affected asset or liability, retained earnings"] F --> G{"Assets equal liabilities plus equity?"} G -->|No| D G -->|Yes| H["Summarise in one sentence"] B -->|Valuation or deal| I["Frame: method, key drivers, direction of the result"] I --> J["Compute with round numbers and say the answer"] J --> H ``` ## 2. Accounting: how the three statements link ### 2.1 The links you must know The income statement records revenue and expenses for a period and ends in net income. Net income flows to two places: to the top of the cash flow statement (indirect method), and into retained earnings in shareholders' equity on the balance sheet, net of dividends. The cash flow statement starts from net income, adds back non-cash expenses such as depreciation, amortisation, impairment and stock-based compensation, adjusts for changes in working capital, and then adds investing and financing flows. Its last line, the net change in cash, reconciles the opening and closing cash balances on the balance sheet. Investing flows change long-term assets (capital expenditure raises property, plant and equipment); financing flows change debt and equity. Under IFRS 18, which replaces IAS 1 for annual reporting periods beginning on or after 1 January 2027 (as of October 2026, check the IFRS Foundation page), the income statement presents two new defined subtotals, operating profit and profit before financing and income taxes, and companies disclose management-defined performance measures with a reconciliation. The linking logic in this section is unchanged, but expect interviewers in IFRS markets to ask how an "adjusted EBITDA" figure reconciles to the new subtotals. US GAAP is not affected by IFRS 18. | Statement | Starts with | Ends with | Links to | |---|---|---|---| | Income statement | Revenue | Net income | Cash flow statement (first line), balance sheet (retained earnings) | | Cash flow statement | Net income | Net change in cash | Balance sheet (cash), via investing and financing lines to assets, debt and equity | | Balance sheet | Assets | Liabilities plus equity | Opening balances for the next period | ### 2.2 Worked walk-through A: depreciation rises by USD 10 Assumptions: the tax rate is 25%, the depreciation is deductible for tax, and nothing else changes. This is the question most often used to open a technical interview. | Step | Statement | Line | Change | Reasoning | Excel formula | |---|---|---|---|---|---| | 1 | Income statement | Depreciation | +10 | Higher expense | input: `10` | | 2 | Income statement | Operating income (EBIT) | -10 | Expense reduces EBIT one for one | `=-10` | | 3 | Income statement | Income tax expense | -2.5 | Lower taxable income at 25% | `=-10*25%` | | 4 | Income statement | Net income | -7.5 | -10 less the tax saving of 2.5 | `=-10-(-2.5)` | | 5 | Cash flow statement | Net income | -7.5 | First line | `=-10*(1-25%)` | | 6 | Cash flow statement | Add back depreciation | +10 | Non-cash expense | `=10` | | 7 | Cash flow statement | Net change in cash | +2.5 | Equal to the tax saving | `=-7.5+10` | | 8 | Balance sheet | Cash | +2.5 | From the cash flow statement | `=2.5` | | 9 | Balance sheet | Property, plant and equipment (net) | -10 | Accumulated depreciation rises | `=-10` | | 10 | Balance sheet | Total assets | -7.5 | 2.5 less 10 | `=2.5-10` | | 11 | Balance sheet | Retained earnings | -7.5 | Net income flows to equity | `=-7.5` | | 12 | Check | Assets less (liabilities plus equity) | 0 | -7.5 less -7.5 | `=-7.5-(-7.5)` | The one-sentence summary: "Depreciation is a non-cash expense that saves tax, so net income falls by 7.5, cash rises by the 2.5 tax shield, and the balance sheet balances because assets and retained earnings both fall by 7.5." ### 2.3 Worked walk-through B: a debt-funded capital expenditure, one year later Assumptions: the company borrows USD 50 at 8% and buys equipment for USD 50 with a five-year life, straight-line, no residual value; tax 25%; the interest and depreciation are deductible; the debt is not repaid in the year. | Item | Computation | Result | Excel formula | |---|---|---|---| | Depreciation | 50 / 5 | 10.0 | `=SLN(50,0,5)` | | Interest | 50 x 8% | 4.0 | `=50*0.08` | | Pre-tax income change | -(10 + 4) | -14.0 | `=-(10+4)` | | Net income change | -14 x (1 - 25%) | -10.5 | `=-14*(1-25%)` | | Cash from operations | -10.5 + 10 | -0.5 | `=-10.5+10` | | Cash from investing | capital expenditure | -50.0 | input: `-50` | | Cash from financing | new debt | +50.0 | input: `50` | | Net change in cash | -0.5 - 50 + 50 | -0.5 | `=-0.5-50+50` | | Total assets | cash -0.5, equipment 50 - 10 = 40 | +39.5 | `=-0.5+(50-10)` | | Liabilities plus equity | debt +50, retained earnings -10.5 | +39.5 | `=50+(-10.5)` | Note the trap: on the day of the purchase nothing touches the income statement at all. Cash rises by 50 from the loan, falls by 50 for the equipment, and the balance sheet grows by 50 on both sides (equipment and debt). ### 2.4 Rules that answer most variants | Event | Income statement | Cash flow statement | Balance sheet | |---|---|---|---| | Non-cash expense (depreciation, impairment, write-down), deductible | Net income falls by expense x (1 - t) | Add back the expense, cash rises by expense x t | Asset falls by the expense, cash rises by the tax saving, retained earnings fall by expense x (1 - t) | | Accrued expense (incurred, not yet paid) | Net income falls by expense x (1 - t) | Add the increase in the liability, cash rises by expense x t | Liability rises by the expense, cash rises by the tax saving, retained earnings fall | | Prepaid expense paid in cash | No effect until used | Working capital outflow | Cash falls, prepaid asset rises | | Inventory bought on credit | No effect | Inventory increase offset by payables increase, no net cash change | Inventory and payables both rise | | Stock-based compensation (assumed deductible for simplicity) | Net income falls by expense x (1 - t) | Add back the full expense | Paid-in capital rises by the expense, retained earnings fall, cash rises by the tax saving | | Asset sold above book value | Gain raises pre-tax income | Deduct the gain in operations, show full proceeds in investing | Asset removed, cash rises by proceeds less tax | | Dividend paid | No effect | Financing outflow | Cash and retained earnings fall by the same amount | Tax treatment of some items (impairment of goodwill, stock-based compensation, some write-downs) differs between book and tax rules and between jurisdictions. In an interview, say "assuming it is deductible" or "assuming it is not deductible, so a deferred tax effect arises", and carry the assumption through consistently. ## 3. Enterprise value, equity value and the bridge ### 3.1 The idea Equity value (market capitalisation for a listed company) is what the common shareholders own. Enterprise value is the value of the operating business that all capital providers share: common equity, debt, preferred equity and the outside holders of consolidated subsidiaries (non-controlling interests). The bridge adds the claims of the other capital providers and subtracts non-operating assets that a buyer would not pay operating multiples for, such as cash and equity-accounted investments (associates). $$ EV = E + D + P + NCI - C - A $$ | Symbol | Meaning | Note | |---|---|---| | $EV$ | Enterprise value | Value of operations to all capital providers | | $E$ | Equity value | Diluted shares (treasury stock method) times share price | | $D$ | Debt | Book value is usual; market value if debt trades well below par | | $P$ | Preferred equity | Claim senior to common equity | | $NCI$ | Non-controlling interests | Added because consolidated EBITDA includes 100% of subsidiaries | | $C$ | Cash and equivalents | Some practitioners subtract only excess cash | | $A$ | Equity-accounted investments | Subtracted because their profit is not in EBITDA | The logic of Modigliani and Miller (1958) explains why enterprise value is the natural measure: in a world without taxes and frictions, the value of the operating assets does not depend on how they are financed, so enterprise value multiples are comparable across companies with different capital structures. Equity value multiples such as the price-to-earnings ratio are not, because earnings are after interest. Diluted shares use the treasury stock method (the approach IAS 33 and US GAAP apply for options and warrants in diluted earnings per share): in-the-money options are assumed to be exercised, and the exercise proceeds are assumed to buy back shares at the current price. $$ N_{diluted} = N_{basic} + n_{opt} - \frac{n_{opt} \times K}{S} \quad \text{for } S > K $$ ### 3.2 Worked example: the Northfield Outdoor Co. bridge (USD m, shares in m) *Example* inputs: share price 42.00, basic shares 120.0, options 6.0 with strike 30.00, debt 900, preferred equity 100, non-controlling interests 60, cash 350, associates 40; last-twelve-month EBITDA 680, EBIT 520, net income 310. | Line | Computation | Result | Excel formula | |---|---|---|---| | Option exercise proceeds | 6.0 x 30.00 | 180.00 | `=6*30` | | Shares repurchased | 180.00 / 42.00 | 4.2857 | `=180/42` | | Net new shares | 6.0 - 4.2857 | 1.7143 | `=6-180/42` | | Diluted shares | 120.0 + 1.7143 | 121.7143 | `=120+6-6*30/42` | | Equity value | 121.7143 x 42.00 | 5,112.00 | `=(120+6-6*30/42)*42` | | Enterprise value | 5,112 + 900 + 100 + 60 - 350 - 40 | 5,782.00 | `=5112+900+100+60-350-40` | | EV / EBITDA | 5,782 / 680 | 8.50x | `=5782/680` | | EV / EBIT | 5,782 / 520 | 11.12x | `=5782/520` | | Price / earnings | 5,112 / 310 | 16.49x | `=5112/310` | Leases: under IFRS 16 (effective for periods beginning on or after 1 January 2019) almost all leases are on the balance sheet as lease liabilities, and lease cost moves from operating expenses into depreciation and interest, so reported EBITDA rises. Under US GAAP (ASC 842) operating leases are on the balance sheet but the lease cost stays in operating expenses. Consistency is the rule: if you add lease liabilities to enterprise value, use EBITDA before lease cost. *Example*: with lease liabilities of 220 and annual lease cost of 45, enterprise value becomes 6,002 and EBITDA before lease cost 725, a multiple of 8.28x instead of 8.50x. Comparing an IFRS company on the first basis with a US GAAP company on the second is a classic error. ### 3.3 Questions to practise aloud - Why can a company with negative equity value not exist, while a negative enterprise value can (briefly) appear? - If a company raises USD 100 of debt and holds the cash, what happens to enterprise value and to equity value? (Answer: neither changes; debt rises by 100 and cash rises by 100.) - Which multiple would you use for a bank, and why is EV / EBITDA meaningless there? (Debt is an operating input for a bank, so price-to-book and price-to-earnings are used.) ## 4. Valuation methods with computed examples Four methods dominate banking work. Trading comparables and precedent transactions are relative methods: they price the company from what investors pay for similar companies. The discounted cash flow (DCF) is intrinsic: it values the forecast free cash flows. The leveraged buyout analysis gives a floor: the price a financial buyer could pay and still earn its target return. Empirical work supports using several methods together: Kaplan and Ruback (1995) found that DCF valuations of highly leveraged transactions performed at least as well as multiples-based methods, and that multiples added some explanatory power to the DCF; Liu, Nissim and Thomas (2002) found that forward earnings multiples perform best among the multiples they tested. The *Example* target throughout this section is a fictional listed outdoor-apparel maker with last-twelve-month EBITDA of USD 150m, net debt of USD 210m and 40m diluted shares, trading at USD 27.00 before any bid. ### 4.1 Trading comparables Select peers on business model, end market, size, growth and margins (see finance/comparable-companies-analysis for the full template). Compute the same multiple for each on the same basis (calendarised, same accounting for leases), then apply a range, usually the interquartile range, to the target. | Peer *(Example)* | EV / LTM EBITDA | |---|---| | Peer 1 | 7.4x | | Peer 2 | 8.1x | | Peer 3 | 8.9x | | Peer 4 | 9.6x | | Peer 5 | 10.8x | | Mean | 8.96x | | First quartile | 8.10x | | Median | 8.90x | | Third quartile | 9.60x | | Point | Implied EV (multiple x 150) | Equity value (EV - 210) | Per share (/ 40) | Excel formula | |---|---|---|---|---| | First quartile | 1,215.0 | 1,005.0 | 25.13 | `=(QUARTILE.INC(B2:B6,1)*150-210)/40` | | Median | 1,335.0 | 1,125.0 | 28.13 | `=(MEDIAN(B2:B6)*150-210)/40` | | Third quartile | 1,440.0 | 1,230.0 | 30.75 | `=(QUARTILE.INC(B2:B6,3)*150-210)/40` | The formulas assume the five peer multiples sit in cells B2:B6. Per-share values are rounded to two decimals half up, as Excel displays them (1,005 / 40 = 25.125 shown as 25.13). ### 4.2 Precedent transactions Precedents use the multiples paid in past acquisitions of similar companies. They usually sit above trading comparables because they include a control premium and, often, expected synergies. They are backward-looking, so adjust for market conditions at the time of each deal. | Point | Multiple *(Example)* | Implied EV | Equity value | Per share | |---|---|---|---|---| | First quartile | 10.10x | 1,515.0 | 1,305.0 | 32.63 | | Median | 10.60x | 1,590.0 | 1,380.0 | 34.50 | | Third quartile | 11.40x | 1,710.0 | 1,500.0 | 37.50 | The five *Example* precedent multiples are 9.2x, 10.1x, 10.6x, 11.4x and 12.3x; quartiles use `=QUARTILE.INC`. ### 4.3 Discounted cash flow Unlevered free cash flow (after tax on EBIT, plus depreciation and amortisation, less capital expenditure, less the increase in working capital) is discounted at the weighted average cost of capital (see mba/mba-capm-wacc-card), and a terminal value is added, usually by the Gordon growth formula (Gordon 1959) and cross-checked with an exit multiple. The full method is in mba/mba-dcf-valuation-card. $$ EV = \sum_{t=1}^{N} \frac{FCF_t}{(1+WACC)^t} + \frac{FCF_N (1+g)}{(WACC-g)(1+WACC)^N} $$ *Example*: forecast free cash flow of 82, 90, 97, 103 and 108 in years 1 to 5, WACC 9%, terminal growth 2.5%. | Item | Result | Excel formula | |---|---|---| | PV of forecast free cash flows | 369.04 | `=NPV(9%,82,90,97,103,108)` | | Terminal value at year 5 | 1,703.08 | `=108*(1+2.5%)/(9%-2.5%)` | | PV of terminal value | 1,106.88 | `=1703.08/(1+9%)^5` | | Enterprise value | 1,475.93 | `=369.04+1106.88` | | Terminal value share of EV | 75.0% | `=1106.88/1475.93` | | Implied exit multiple (year-5 EBITDA 182.50 at 4% growth) | 9.33x | `=1703.08/(150*1.04^5)` | | Equity value per share | 31.65 | `=(1475.93-210)/40` | Excel's `NPV` discounts the first value by one full period, which is what we want here because the first cash flow arrives at the end of year 1. The implied exit multiple of 9.33x sits inside the trading range, a useful sanity check. Sensitivity of value per share to WACC and terminal growth (USD): | WACC \ g | 2.0% | 2.5% | 3.0% | |---|---|---|---| | 8.0% | 35.47 | 38.48 | 42.09 | | 9.0% | 29.55 | 31.65 | 34.10 | | 10.0% | 25.11 | 26.64 | 28.40 | ### 4.4 Leveraged buyout floor A financial sponsor pays what its target return allows. Using the paper LBO logic in mba/mba-paper-lbo with *Example* assumptions (EBITDA growth 4% a year, exit at 8.0x year-5 EBITDA of 182.50, entry debt 5.0x EBITDA = 750, debt paid down by 300 to 450 by year 5), exit equity is 1,009.98. | Target IRR | Entry equity = exit equity / (1 + IRR)^5 | Maximum EV | Multiple | Per share | Excel formula | |---|---|---|---|---|---| | 25% | 330.95 | 1,080.95 | 7.21x | 21.77 | `=1009.98/(1+25%)^5` | | 20% | 405.89 | 1,155.89 | 7.71x | 23.65 | `=1009.98/(1+20%)^5` | | 15% | 502.14 | 1,252.14 | 8.35x | 26.05 | `=1009.98/(1+15%)^5` | ### 4.5 The football field The football field puts the ranges side by side. The *Example* ranges: comparables first to third quartile, precedents first to third quartile, DCF across WACC 8% to 10% and growth 2% to 3%, LBO across 25% to 15% target IRR. The unaffected share price is 27.00. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Football field of value per share by method, fictional example", "width": 420, "height": 180, "data": { "values": [ {"method": "Trading comparables", "low": 25.13, "high": 30.75}, {"method": "Precedent transactions", "low": 32.63, "high": 37.5}, {"method": "DCF (WACC 8-10%, g 2-3%)", "low": 25.11, "high": 42.09}, {"method": "LBO (IRR 25-15%)", "low": 21.77, "high": 26.05} ] }, "layer": [ { "mark": {"type": "bar", "height": 22}, "encoding": { "y": {"field": "method", "type": "nominal", "sort": null, "title": null}, "x": {"field": "low", "type": "quantitative", "title": "Value per share (USD)", "scale": {"domain": [15, 45]}}, "x2": {"field": "high"} } }, { "data": {"values": [{"price": 27.0}]}, "mark": {"type": "rule", "strokeDash": [4, 4]}, "encoding": {"x": {"field": "price", "type": "quantitative"}} } ] } ``` Reading it: precedents are highest (control premium), the LBO floor is lowest (a financial buyer with no synergies and a high return target), and the DCF is the widest because terminal assumptions dominate. A strategic buyer that expects synergies can justify a price near the precedent range; a sponsor cannot go far above about USD 26. ### 4.6 Which method when | Situation | Lead method | Why | |---|---|---| | Stable, listed peers exist | Trading comparables | Market evidence, quick to update | | Sale of the whole company | Precedents plus LBO floor | Control is being sold; sponsors set a floor | | Long-dated, predictable cash flows (infrastructure, utilities) | DCF | Cash flows are forecastable; multiples miss duration | | Early-stage, loss-making | Revenue multiples, scenario DCF | EBITDA is negative or meaningless | | Banks and insurers | Price-to-book, price-to-earnings, dividend discount | Debt is operating, enterprise value is not meaningful | ## 5. Accretion and dilution ### 5.1 The idea A deal is accretive if the buyer's pro forma earnings per share (EPS) is higher than its standalone EPS, and dilutive if lower. EPS is defined in IAS 33 (and ASC 260 under US GAAP). The quick test compares the cost of each acquisition currency with the target's earnings yield at the offer price: - Cost of stock = acquirer's earnings yield = 1 / acquirer P/E. - Cost of new debt = interest rate x (1 - tax rate). - Cost of cash on hand = forgone interest income x (1 - tax rate). - Target earnings yield = target net income / purchase price = 1 / target P/E at the offer. If the weighted cost of the currencies used is below the target's earnings yield, the deal is accretive before synergies, fees and purchase price allocation effects (amortisation of acquired intangibles, which a full model includes and this quick test ignores). $$ EPS_{PF} = \frac{NI_A + NI_T + \text{synergies} \times (1-t) - \text{interest} \times (1-t)}{N_A + N_{new}} $$ ### 5.2 Worked example: all-stock and all-cash (USD m, shares in m) *Example* inputs. Acquirer: net income 500, 200 shares, share price 40.00. Target: net income 80, 50 shares, share price 24.00, offer premium 25%. Tax rate 25%. No synergies, fees or purchase price allocation effects. | Item | Computation | Result | Excel formula | |---|---|---|---| | Acquirer EPS | 500 / 200 | 2.5000 | `=500/200` | | Acquirer P/E | 40 / 2.50 | 16.00x | `=40/2.5` | | Offer per share | 24 x 1.25 | 30.00 | `=24*(1+25%)` | | Purchase price | 30 x 50 | 1,500 | `=30*50` | | Target P/E at offer | 1,500 / 80 | 18.75x | `=1500/80` | | Target earnings yield | 80 / 1,500 | 5.33% | `=80/1500` | All-stock: | Item | Computation | Result | Excel formula | |---|---|---|---| | New shares issued | 1,500 / 40 | 37.5 | `=1500/40` | | Pro forma net income | 500 + 80 | 580 | `=500+80` | | Pro forma shares | 200 + 37.5 | 237.5 | `=200+37.5` | | Pro forma EPS | 580 / 237.5 | 2.4421 | `=580/237.5` | | Accretion (dilution) | 2.4421 / 2.5000 - 1 | (2.32%) | `=(580/237.5)/2.5-1` | | Pre-tax synergies to break even | (2.50 x 237.5 - 580) / (1 - 25%) | 18.33 | `=(2.5*237.5-580)/(1-25%)` | Quick test: the acquirer's P/E (16.00x) is below the P/E it pays for the target (18.75x). Put as yields, each new share costs the acquirer 6.25% of earnings (1 / 16) but buys only 5.33% (1 / 18.75), so the deal is dilutive. An all-stock deal is accretive before synergies only when the acquirer's P/E is above the target's P/E at the offer. All-cash, funded with new debt at 6%: | Item | Computation | Result | Excel formula | |---|---|---|---| | After-tax cost of debt | 6% x (1 - 25%) | 4.50% | `=6%*(1-25%)` | | After-tax interest | 1,500 x 4.50% | 67.5 | `=1500*4.5%` | | Pro forma net income | 500 + 80 - 67.5 | 512.5 | `=500+80-67.5` | | Pro forma EPS (shares unchanged) | 512.5 / 200 | 2.5625 | `=512.5/200` | | Accretion (dilution) | 2.5625 / 2.5000 - 1 | 2.50% | `=(512.5/200)/2.5-1` | Quick test: the after-tax cost of debt (4.50%) is below the target's earnings yield (5.33%), so the deal is accretive. ### 5.3 What to say after the number Accretion is not value creation. The all-cash deal is accretive because debt is cheap after tax, but it raises leverage and the cost of equity (see mba/mba-capital-structure-card); the all-stock deal is dilutive but shares the risk with the target's shareholders. Value is created only if the present value of synergies exceeds the premium paid (here 25% of the target's 1,200 market value, or 300) plus deal costs. Myers and Majluf (1984) add a signalling angle: paying in stock can signal that the acquirer believes its own shares are overvalued. ## 6. Market awareness preparation Prepare a one-page view of the market that you refresh every week from primary sources: central bank statements, government statistics releases, company filings and deal announcements. Know the date of each figure. The aim is not to forecast but to show that you can connect a market movement to a client conversation. ### 6.1 Weekly market worksheet | Indicator | Level | Date and source | Change vs last month | So what for clients | |---|---|---|---|---| | Policy rate (your home market) | [x.xx%] | [YYYY-MM-DD, central bank page] | [+/- bp] | [Cost of acquisition debt, refinancing windows] | | 10-year government bond yield | [x.xx%] | [YYYY-MM-DD, source] | [+/- bp] | [Discount rates, valuation multiples] | | High-yield credit spread | [xxx bp] | [YYYY-MM-DD, source] | [+/- bp] | [Leveraged buyout financing conditions] | | Main equity index level | [x,xxx] | [YYYY-MM-DD, source] | [+/- %] | [Initial public offering and follow-on windows] | | Index forward P/E | [xx.x] | [YYYY-MM-DD, source] | [+/-] | [Stock as acquisition currency] | | Key currency pair | [x.xxxx] | [YYYY-MM-DD, source] | [+/- %] | [Cross-border deals] | | *Example:* Sector EV / EBITDA median (your target group) | 9.4x | YYYY-MM-DD, own comps file | +0.3x | Sellers more willing to run sale processes | ### 6.2 Deal to discuss (prepare two) | Field | Deal 1 | Deal 2 | |---|---|---| | Parties and announcement date | [Acquirer, target, YYYY-MM-DD] | [ ] | | Price, premium and multiple | [EV, premium to unaffected price, EV / EBITDA] | [ ] | | Consideration | [Cash, stock, mix; financing] | [ ] | | Strategic rationale | [Two sentences in your words] | [ ] | | Your view | [Was the price justified? What would you watch?] | [ ] | | Risks | [Regulatory, integration, financing] | [ ] | | Source | [Press release, merger proxy or offer document] | [ ] | ### 6.3 Stock pitch in two minutes Structure: the company and the recommendation in one sentence; two or three reasons with a number each; the valuation (a multiple or a DCF value versus the price); the main risk and what would change your mind. Use finance/stock-pitch for the written version. ## 7. Practice questions Accounting: 1. Inventory worth USD 20 is written down (assume deductible). Walk through the three statements. 2. A company records USD 15 of expenses that it has not yet paid (an accrued expense). Walk through the statements. 3. A company grants USD 12 of stock-based compensation (assume deductible). What happens to cash and why? 4. Why do we add back depreciation on the cash flow statement but not on the balance sheet? 5. A customer prepays USD 30 for a service to be delivered next year. Which statements change today? Enterprise value: 6. A company has 100m basic shares at USD 20.00 and 10m options with a strike of USD 15.00. Compute diluted shares with the treasury stock method. 7. Why do we subtract equity-accounted investments but add non-controlling interests? 8. A company issues USD 200m of new shares and uses the cash to repay debt. What happens to enterprise value? Valuation: 9. Rank the four methods by the value they usually produce, and explain the ranking. 10. In the DCF in section 4.3, what is value per share at WACC 10% and growth 3%? Why does growth matter more at a lower WACC? 11. Give two reasons a company might trade at a lower multiple than its peers despite higher growth. Mergers: 12. Using the inputs in section 5.2, the acquirer buys a target at a P/E of 12.0x (target net income still 80) in an all-stock deal. Is it accretive, and by how much? 13. Using the inputs in section 5.2, the all-cash deal is funded with debt at 9% instead of 6%. Accretive or dilutive? 14. Using the inputs in section 5.2, the deal is paid half in stock and half in new debt at 6%. Compute pro forma EPS. 15. Why can a dilutive deal still be a good deal for shareholders? ## 8. Preparation plan and tracker | Relative timing | Focus | Output | Done | |---|---|---|---| | T-10 weeks | Accounting links and walk-throughs | Section 2 answered aloud, timed | [ ] | | T-8 weeks | Enterprise value and multiples | Bridge for two real companies from filings | [ ] | | T-7 weeks | Comparables and precedents | One comps sheet using finance/comparable-companies-analysis | [ ] | | T-6 weeks | DCF | One DCF using mba/mba-dcf-valuation-card | [ ] | | T-5 weeks | LBO | Three paper LBOs from mba/mba-paper-lbo | [ ] | | T-4 weeks | Accretion and dilution | Section 5 rebuilt from blank | [ ] | | T-3 weeks onwards | Market awareness | Weekly worksheet, two deals, one stock pitch | [ ] | | T-2 weeks | Mixed practice | All 15 questions, misses logged in mba/mba-error-log | [ ] | | T-1 week | Mock interviews | Three mocks with second-year students or bankers | [ ] | Mock interview log: | Date | Interviewer | Questions asked | Score (1 to 5) | What to fix | |---|---|---|---|---| | *Example:* YYYY-MM-DD | Second-year student | Depreciation walk-through, accretion all-stock | 3 | Forgot the tax shield on cash; said "accretive" without the yield comparison | | [YYYY-MM-DD] | [Name] | [Questions] | [ ] | [ ] | ## 9. Common mistakes 1. Forgetting the tax effect in walk-throughs, so cash does not move when a deductible non-cash expense changes. 2. Walking through the balance sheet first and losing the thread; always go income statement, cash flow statement, balance sheet. 3. Ending without checking that the balance sheet balances, or "fixing" it with a plug. 4. Mixing numerator and denominator: an enterprise value multiple over net income, or a price-to-earnings ratio over EBITDA. 5. Using basic instead of diluted shares, or counting out-of-the-money options in the treasury stock method. 6. Treating leases inconsistently between enterprise value and EBITDA, especially across IFRS and US GAAP peers. 7. Presenting a DCF without stating how much of the value sits in the terminal value (75% in section 4.3). 8. Saying "accretive, so good deal" without discussing value, premium and synergies. 9. Forgetting that new debt costs interest after tax, not before tax, in accretion and dilution. 10. Quoting market figures without a date or source, or quoting figures you cannot defend. 11. Memorising scripts so rigidly that a changed assumption in a follow-up breaks the answer. 12. Assuming interest is always fully tax deductible. Many jurisdictions cap the deduction. As general examples, as of October 2026: Article 4 of Council Directive (EU) 2016/1164 (the Anti-Tax Avoidance Directive) caps deductible exceeding borrowing costs at 30% of the taxpayer's tax-adjusted EBITDA, with options for member states such as a de minimis amount, so national rules differ (http://data.europa.eu/eli/dir/2016/1164/oj); and in the United States, section 163(j) of the Internal Revenue Code generally limits business interest expense to business interest income plus 30% of adjusted taxable income, which the IRS says again adds back depreciation and amortisation for tax years beginning after 31 December 2024 (IRS FS-2026-14, checked 28 October 2026, https://www.irs.gov/newsroom/questions-and-answers-about-the-limitation-on-the-deduction-for-business-interest-expense). Check the current rules before you rely on them; in an interview, simply state your assumption. ## 10. My notes and next steps | Topic | What I still get wrong | Next action | By | |---|---|---|---| | *Example:* Accretion and dilution | Mixing up which yield to compare | Redo section 5 from blank, then questions 12 to 14 | YYYY-MM-DD | | [Topic] | [ ] | [ ] | [YYYY-MM-DD] | Questions to ask interviewers about their group: [ ] ## Sources and further reading Primary works and standards: - Modigliani, F. and Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. *American Economic Review*, 48(3), 261-297. - Gordon, M. J. (1959). Dividends, earnings, and stock prices. *Review of Economics and Statistics*, 41(2), 99-105. - Myers, S. C. and Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. *Journal of Financial Economics*, 13(2), 187-221. - Kaplan, S. N. and Ruback, R. S. (1995). The valuation of cash flow forecasts: an empirical analysis. *Journal of Finance*, 50(4), 1059-1093. - Liu, J., Nissim, D. and Thomas, J. (2002). Equity valuation using multiples. *Journal of Accounting Research*, 40(1), 135-172. - IFRS Foundation. IAS 33 Earnings per Share; IFRS 16 Leases; IFRS 18 Presentation and Disclosure in Financial Statements (effective for annual periods beginning on or after 1 January 2027), https://www.ifrs.org (checked October 2026). - Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, Article 4, http://data.europa.eu/eli/dir/2016/1164/oj. - Internal Revenue Service (2026). Questions and answers about the limitation on the deduction for business interest expense (FS-2026-14), checked 2026-10-28, https://www.irs.gov/newsroom/questions-and-answers-about-the-limitation-on-the-deduction-for-business-interest-expense. Textbooks (further reading, by name only): Rosenbaum and Pearl, *Investment Banking: Valuation, LBOs, M&A, and IPOs*; Koller, Goedhart and Wessels, *Valuation: Measuring and Managing the Value of Companies*; Berk and DeMarzo, *Corporate Finance*; Damodaran, *Investment Valuation*. Open resource: OpenStax, *Principles of Accounting, Volume 1: Financial Accounting* (CC BY-NC-SA 4.0), https://openstax.org. ## Answer key 1. Income statement: write-down 20, tax -5, net income -15. Cash flow: net income -15, add back 20, cash +5. Balance sheet: inventory -20, cash +5, assets -15; retained earnings -15. Balanced. 2. Income statement: expense 15, tax -3.75, net income -11.25. Cash flow: net income -11.25, increase in accrued liabilities +15, cash +3.75. Balance sheet: cash +3.75; liabilities +15 and retained earnings -11.25, so liabilities plus equity +3.75. Balanced. 3. Net income -9.0 (12 x 0.75); add back 12; cash +3.0, the tax saving. Equity: paid-in capital +12, retained earnings -9, net +3, matching cash +3. Cash rises only because of the assumed tax deduction. 4. Depreciation is already on the balance sheet: it reduces net property, plant and equipment (through accumulated depreciation) and, via net income, retained earnings. The cash flow statement adds it back because it starts from net income, which deducted a non-cash expense. 5. Cash +30 and deferred revenue (a liability) +30. No income statement effect until the service is delivered. Cash flow from operations rises by 30 through the change in deferred revenue (tax treatment of prepayments varies by jurisdiction; ignore it here). 6. Proceeds 10 x 15 = 150; buyback 150 / 20 = 7.5; net new shares 2.5; diluted shares 102.5m. Excel: `=100+10-10*15/20`. 7. EBITDA excludes the profit of associates (shown below operating profit), so their value is removed from enterprise value. Consolidated EBITDA includes 100% of subsidiaries that the parent only partly owns, so the outside owners' share must be added to keep numerator and denominator consistent. 8. Nothing, to a first approximation: equity value rises by 200 and debt falls by 200. In practice lower leverage may change the cost of capital and so the value of operations. 9. Usually precedents (control premium and synergies) above DCF (wide, driven by terminal assumptions) above trading comparables (minority stake prices) above the LBO floor (a sponsor's return target and leverage limit). The DCF can sit anywhere depending on assumptions. 10. USD 28.40 (from the sensitivity table). The terminal value multiplier 1 / (WACC - g) is more sensitive to g when WACC - g is small. 11. Examples: higher risk (customer concentration, cyclicality, leverage), lower return on invested capital so growth creates less value, lower quality of earnings, governance concerns, low liquidity of the shares. 12. Price 12.0 x 80 = 960; new shares 960 / 40 = 24.0; pro forma EPS 580 / 224 = 2.5893; accretion 3.57%. The target's earnings yield (8.33%) exceeds the acquirer's (6.25%). 13. After-tax cost 9% x 0.75 = 6.75%; interest 101.25; EPS (580 - 101.25) / 200 = 2.3937; dilution (4.25%). The after-tax cost of debt now exceeds the target's 5.33% earnings yield. 14. Interest on 750 of debt at 4.50% after tax = 33.75; new shares 18.75; EPS (580 - 33.75) / 218.75 = 2.4971; dilution (0.11%), almost neutral. 15. EPS ignores value: if the present value of synergies exceeds the premium and costs, shareholders gain even if near-term EPS falls, for example when the target grows faster or the acquirer's P/E is low. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First pass through sections 2 to 5 | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Added own football field for a listed company in target sector | ## Standard and licence note Based on standard corporate finance and valuation theory in the primary works listed above, the IFRS Foundation's published summaries of IAS 33, IFRS 16 and IFRS 18 (checked October 2026) and common practice in investment banking interviews. The text, examples, numbers and questions are original; no textbook, guide or published interview question is copied or paraphrased, and Northfield Outdoor Co. and every peer and deal are fictional. The template is independent and not affiliated with or endorsed by any bank, business school or publisher. Check current accounting and tax rules before you rely on them. Template licence: MIT.