INVESTMENT BANKING PRACTICE QUESTIONS AND
ANSWERS | 2026 UPDATE | 100% CORRECT!!
QUESTION: "How much would you pay for a company that generates $100 of
cash flow every single year into eternity?" Answer - ANSWER: It depends on
your Discount Rate, or "targeted yield."
If your Discount Rate is 10%, meaning you could earn 10% per year in
companies with similar risk/potential return profiles, you would pay $100 /
10% = $1,000.
But if your Discount Rate is 20%, you would pay $% = $500.
QUESTION: "A company generates $200 of cash flow today, and its cash flow is
expected to grow at 4% per year for the long term.
You could earn 10% per year by investing in other, similar companies. How
much would you pay for this company?" Answer - ANSWER: Company Value =
Cash Flow / (Discount Rate - Cash Flow Growth Rate), where Cash Flow Growth
Rate < Discount Rate.
So, this one becomes: $200 / (10% - 4%) = $3,333.
QUESTION: "What might cause a company's Present Value (PV) to increase or
decrease?" Answer - ANSWER: A company's PV might increase if its expected
future cash flows increase, its expected future cash flows start to grow at a
, faster rate, or the Discount Rate decreases (e.g., because the expected returns
of similar companies decrease).
The PV might decrease if the opposite happens.
QUESTION: "What does the internal rate of return (IRR) mean?" Answer -
ANSWER: The IRR is the Discount Rate at which the Net Present Value of an
investment, i.e., Present Value of Cash Flows - Upfront Price, equals 0.
You can also think of it as the "effective compounded interest rate on an
investment" - so, if you invest $1,000 today, end up with $2,000 in 5 years, and
contribute and earn nothing in between, the IRR is the interest rate you'd have
to earn on that $1,000, compounded each year, to reach $2,000 in 5 years.
QUESTION: "How do the 3 financial statements link together? Assume the
Indirect Method for the Cash Flow Statement." Answer - ANSWER: To link the
statements, make Net Income at the bottom of the Income Statement the top
line of the Cash Flow Statement.
Then, adjust this Net Income number for any non-cash items such as
Depreciation & Amortization.
Next, reflect changes to operational Balance Sheet items such as Accounts
Receivable, which may increase or decrease the company's cash flow
depending on how they've changed.
That gets you to Cash Flow from Operations.
ANSWERS | 2026 UPDATE | 100% CORRECT!!
QUESTION: "How much would you pay for a company that generates $100 of
cash flow every single year into eternity?" Answer - ANSWER: It depends on
your Discount Rate, or "targeted yield."
If your Discount Rate is 10%, meaning you could earn 10% per year in
companies with similar risk/potential return profiles, you would pay $100 /
10% = $1,000.
But if your Discount Rate is 20%, you would pay $% = $500.
QUESTION: "A company generates $200 of cash flow today, and its cash flow is
expected to grow at 4% per year for the long term.
You could earn 10% per year by investing in other, similar companies. How
much would you pay for this company?" Answer - ANSWER: Company Value =
Cash Flow / (Discount Rate - Cash Flow Growth Rate), where Cash Flow Growth
Rate < Discount Rate.
So, this one becomes: $200 / (10% - 4%) = $3,333.
QUESTION: "What might cause a company's Present Value (PV) to increase or
decrease?" Answer - ANSWER: A company's PV might increase if its expected
future cash flows increase, its expected future cash flows start to grow at a
, faster rate, or the Discount Rate decreases (e.g., because the expected returns
of similar companies decrease).
The PV might decrease if the opposite happens.
QUESTION: "What does the internal rate of return (IRR) mean?" Answer -
ANSWER: The IRR is the Discount Rate at which the Net Present Value of an
investment, i.e., Present Value of Cash Flows - Upfront Price, equals 0.
You can also think of it as the "effective compounded interest rate on an
investment" - so, if you invest $1,000 today, end up with $2,000 in 5 years, and
contribute and earn nothing in between, the IRR is the interest rate you'd have
to earn on that $1,000, compounded each year, to reach $2,000 in 5 years.
QUESTION: "How do the 3 financial statements link together? Assume the
Indirect Method for the Cash Flow Statement." Answer - ANSWER: To link the
statements, make Net Income at the bottom of the Income Statement the top
line of the Cash Flow Statement.
Then, adjust this Net Income number for any non-cash items such as
Depreciation & Amortization.
Next, reflect changes to operational Balance Sheet items such as Accounts
Receivable, which may increase or decrease the company's cash flow
depending on how they've changed.
That gets you to Cash Flow from Operations.
