1. What is 29^2? What is the square root of 9,801?
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29^2 = 841 (30^2 - 60 + 1). Square root of 9,801 = 99.
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Morgan Stanley Investment Banking Interview Questions
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2. Given EV component values - how does using cash to pay dividends impact EV?
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No impact on EV: cash falls and equity value falls by the same amount (EV = equity + debt - cash).
3. What is the ending value of a DCF if you used levered FCF instead of unlevered FCF?
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Equity value (discounting levered FCF at the cost of equity). If you incorrectly discounted LFCF at WACC you'd get a meaningless mix, not enterprise value.
4. If your credit card interest rate increases (or decreases), would you spend more or less?
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Increase -> spend less (borrowing costs more, consumers pay down balances). Decrease -> spend more (cheaper credit). This is the transmission of monetary policy to consumption.
5. What happens to the cost of debt as a company's credit rating improves?
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It falls: higher ratings signal lower default risk, so lenders demand narrower credit spreads over Treasuries (and more investors can buy it, e.g., investment-grade mandates), lowering the yield on new debt and WACC.
6. Levered vs. unlevered IRR.
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Unlevered IRR measures the asset's return with no debt (all-equity cash flows and sale proceeds). Levered IRR measures the equity return after debt financing (interest, principal, loan proceeds). With positive leverage (asset return > cost of debt), levered IRR exceeds unlevered IRR but with more risk; with negative leverage, levered IRR is lower.
7. Walk through a NAV model.
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Value each property by capitalizing forward NOI at an appropriate market cap rate (or DCF), add development pipeline/land at cost or estimated value, cash and other assets; subtract debt, preferred equity and other liabilities -> Net Asset Value; divide by shares for NAV per share and compare to the share price (premium/discount to NAV). Sensitize cap rates.
8. $10 D&A increase.
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D&A up $10 (tax rate 40% example): Income Statement: operating income down $10, net income down $6. Cash Flow Statement: net income down $6, add back $10 D&A (non-cash) - cash from operations up $4. Balance Sheet: cash up $4, PP&E down $10 - assets down $6; retained earnings down $6 - balances. Key insight: D&A is non-cash but tax-deductible, so it INCREASES cash by D&A x tax rate.
9. Starbucks market sizing - how would you evaluate a Starbucks store's revenue and profitability?
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Revenue = transactions per day x average ticket x days open. Assume ~500-700 transactions/day (morning peak, drive-thru and mobile orders ~30%+) x ~$7 average ticket x 360 days = ~$1.3-1.8M (company-operated U.S. store AUVs are roughly ~$1.8-2M). Costs: cost of sales/product ~30%, store labor ~30-35%, occupancy ~10%, other store opex ~10% -> store operating margin ~15-20% before corporate G&A. Adjust for location (drive-thru, urban vs. suburban), seasonality and store format.
10. If you're projecting a deal to be dilutive, how can you adjust the considerations to make it accretive? If a deal is neither dilutive nor accretive, what can you do to your projections to make it look accretive?
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Consideration: use more debt/cash (if after-tax costs are below the target's earnings yield) and less stock, lower the premium, add earnouts or seller notes, raise stock at a higher share price. Projections: realistic synergies and faster phase-in, updated target growth/margin assumptions, lower financing costs, tax planning - but assumptions must remain defensible; manipulating projections just to show accretion is inappropriate and will be challenged in diligence and by the board.
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