Two Sense Blog: Technical Questions

By Lauren Ralph, Public Health and Economics, Alumni from the Class of ’19

Ah, the technical questions – easily the most feared and misunderstood portion of a finance interview. When I was preparing for them, I felt like there was an overwhelming amount of material online, but no guidance on how to execute the content. Today, I want to cut through the noise and mystery and give you some clear guidance on how to prep, what you’ll be asked, and how to deal with the curveballs that will inevitably come your way.

Before we dive in..

I think it’s important to approach this with the right perspective. That means answering the question: “Why do finance professionals feel the need to torture me with these questions?” If you understand why these questions are asked, you’ll be in a much better position to tackle them. Here’s the thing – many people think they want to go into finance but have never done their homework on the industry or day-to-day tasks. The only purpose of the technical questions is to ensure you’ve taken the time to educate yourself. You don’t need to be a hero on the technical questions and memorize every possible tricky accounting rule, but it’s a big red flag if you say you want to work in finance, and then you don’t know what a balance sheet is.

What do I need to study?

If you google “finance interview technical questions” you’ll find heaps of material most of it is pretty high quality. You’ll be well served by crowdsourcing the possible technical content areas. In fact, your interviewer will probably choose their technical questions via the same google search. To get you started, I’ve included links to five of my favorite sites with material on technical questions at the end of this post. With that said, these are the topics you would definitely be remiss to exclude from your preparation:

  • Valuation: You need to be able to explain the different ways to value a company and which will give you higher vs. lower valuations. Be comfortable with the jargon for these techniques (comps, transaction comps, DCF, LBO), as well as which are intrinsic methods.
  • Discounted Cash Flow or DCF model: though this is included in the valuation types above, I’m going to call it out specifically because it is a fan favorite for interview questions. You should be able to walk through this comfortably, as well as explain how altering the inputs would alter your result. Simply memorizing the steps won’t cut it here. You might know the words “weighted average cost of capital” but do you know how the valuation changes if you have a higher WACC, or the risk free premium increases?
  • LBO: secondary to the DCF in importance, but still worth a call out. You should be able to conceptually explain an LBO, how sponsors generate their returns (IRR vs. MOIC), and why a company might decide to do an LBO or “go private.” Walking through an LBO is not as important as walking through a DCF but could be asked.
  • Accounting: I would be shocked if you weren’t asked how the three financial statements connect to each other. Cover some of the often-overlooked components of the balance sheet (goodwill, deferred tax assets/liabilities, treasury stock). Know which of the financial statements reflect a single point in time and which show changes over a period of time.

How in-depth should I study the questions?

Unfortunately, it’s impossible to memorize all the possible technical questions – the interviewer can test the content areas mentioned above through an infinite number of scenarios or methods. The only way to be truly prepared is to understand how the concepts flow together. You need to get comfortable with how one part of the financial statements touches the other, how changing assumptions on one input to a financial model drives valuation up / down, and how the different valuation methods compare to one another. With that being said, learn to keep your answers concise. Going above and beyond what the interviewer asked opens you up to further questioning and to make a mistake on a concept that wasn’t even being tested.

General rule of thumb – if your answer takes over 90 seconds to explain or if your friends who aren’t studying finance couldn’t follow along, you’ve gone beyond what is being expected of you for the interview.

What should my study plan look like?

Finance technicals are just like any other material you would learn for a class at Hopkins except even more straightforward – almost every question and answer is published for you online! But you need to dedicate the time to get prepared and there’s no getting around it. You won’t learn these overnight and you won’t learn them in a weekend either. Here’s what I recommend:

  • Make a schedule you can stick to: I gave myself one month to get up to speed. I dedicated each Sunday to a deep dive into one of the topics above and spent several hours reading about the topic, writing out a flow chart, making flashcards, etc. Then, on Tuesdays and Thursdays, I would re-visit the deep dive from Sunday along with all the other topics and do a more cursory review of material and questions. Whatever you normally do for classes at Hopkins can be applied here, but you have to be extra diligent about it. There will be no professor to set up a timeline for you, so kick your self-discipline into high gear.
  • Pretend it’s a presentation: While you may be able to sketch out a great walk drown to FCF on paper, it’s an entirely different game to verbally explain the concept. Record yourself answering the questions or, better yet, run through them with another friend who is interviewing.
  • Build stamina: Remember studying for the SAT? You practiced separate concepts frequently, but every once in a while, you had to sit down for a full run-through of the entire exam. I highly recommend you mimic the interview process by either i) having someone perform an entire mock interview with you or ii) recording yourself responding to 30 minutes worth of technicals. Super days are absolutely exhausting and you want to be comfortable grinding through ten questions in a row.

What about those off-the-wall questions and brain teasers?

At some point in the interview process, you will be asked a question you don’t know the answer to. The question may even be designed to not have a correct response. Uncertainty is never a fun feeling, but you can use this as an opportunity to demonstrate your ability to react under pressure. Here’s what you do:

  • Take a deep breath: You do not need to answer right away. Gather your thoughts and see if anything comes to mind. It will be important in these next moments to appear collected and confident.
  • Simplify: Take every opportunity to round numbers if doing mental math. Ask additional questions to create some parameters around an extremely broad brain teaser. Getting close to the right answer is better than fumbling around with decimals in your head.
  • Explain your thought process: Offer the interviewer insight into your process. In the event that you get the answer wrong, they’ll know where you tripped up. It’s like showing your work to get partial credit!
  • Never say “I don’t know:” Under no circumstances can you throw in the towel. This is the quickest way to damage your interview. If you’re hopelessly stuck, it is always better to say, “I haven’t come across this topic before, but I think I would start approaching it by…” The interviewer is looking for effort and an ability to think through new topics on the spot.

How your resume plays a role

One final thing to note – you will very likely be asked about any financial or economic experience on your resume, often in the form of an additional technical question. You need to be ready to own any experience you have included. For example, if your resume says that your previous internship involved valuing companies, it is even more important that you be extremely comfortable answering valuation questions.

Resources

Technical questions may be the most intimidating part of the interview, but if you study for them in the same manner as you would a course at Hopkins, you should be in great shape. Ultimately, the technical questions are a way of demonstrating you care enough about the job to do the less fun aspects of preparing for the interview. Just check the box so you can move onto the more fun questions about markets and your passion for finance! As promised, see below for links to some of my favorite websites for technical questions:

  • wallstreetprep.com/knowledge/top-10-investment-banking-interview-questions/