Investment Banking Practice Questions
AND ANSWERS | 2026 UPDATE | 100%
CORRECT!!
QUESTION: "How do the 3 financial statements link together? Assume
the Indirect Method for the Cash Flow Statement." - ANSWERS-
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.
Next, reflect investing and financing activities, which may increase or
decrease cash flow, and sum up Cash Flow from Operations, Investing,
and Financing to get the net change in cash at the bottom.
,Link Cash on the Balance Sheet to the ending Cash number on the
CFS, and add Net Income to Retained Earnings within Equity on the
Balance Sheet.
Then, link each non-cash adjustment to the appropriate Asset or
Liability SUBTRACT links on the Assets side and ADD links on the L&E
side.
Link each CFI and CFF item to the matching item on the Balance
Sheet, using the same rule as above.
Check that Assets equals Liabilities + Equity at the end if this is not
true, you did something wrong and need to re-check your work.
QUESTION: "How much would you pay for a company that generates
$100 of cash flow every single year into eternity?" - ANSWERS-
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
$% = $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?" - ANSWERS-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?" - ANSWERS-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?" -
ANSWERS-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.
AND ANSWERS | 2026 UPDATE | 100%
CORRECT!!
QUESTION: "How do the 3 financial statements link together? Assume
the Indirect Method for the Cash Flow Statement." - ANSWERS-
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.
Next, reflect investing and financing activities, which may increase or
decrease cash flow, and sum up Cash Flow from Operations, Investing,
and Financing to get the net change in cash at the bottom.
,Link Cash on the Balance Sheet to the ending Cash number on the
CFS, and add Net Income to Retained Earnings within Equity on the
Balance Sheet.
Then, link each non-cash adjustment to the appropriate Asset or
Liability SUBTRACT links on the Assets side and ADD links on the L&E
side.
Link each CFI and CFF item to the matching item on the Balance
Sheet, using the same rule as above.
Check that Assets equals Liabilities + Equity at the end if this is not
true, you did something wrong and need to re-check your work.
QUESTION: "How much would you pay for a company that generates
$100 of cash flow every single year into eternity?" - ANSWERS-
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
$% = $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?" - ANSWERS-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?" - ANSWERS-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?" -
ANSWERS-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.
