Investment Banking puzzles, solved step by step
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013A company issues Rs 100 crore of new shares and uses all of it to repay debt. What happens to enterprise value, equity value and EV/EBITDA?Bulge bracket IBElite boutique IB
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What happens to enterprise value?
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Enterprise value is unchanged, equity value rises by Rs 100 crore and EV/EBITDA stays the same. Equity value rises because Rs 100 crore of new shares now exist, and debt falls by the same Rs 100 crore. Enterprise value is equity plus net debt, so the two moves cancel. EBITDA sits above the interest line and is untouched, so the multiple cannot change either.
Why does enterprise value not move?
Think of a house worth Rs 1 crore with a Rs 40 lakh mortgage. If you pay down Rs 10 lakh of the loan with your savings, your stake rises to Rs 70 lakh and the loan falls to Rs 30 lakh, but the house is worth exactly what it was. Enterprise value measures the business, and swapping one kind of claim for another changes how that value is split, not how big it is. At first order, issuing shares to repay debt is exactly that swap.
Before the deal, equity of Rs 600 crore and debt of Rs 400 crore make an enterprise value of Rs 1,000 crore; afterwards equity of Rs 700 crore and debt of Rs 300 crore make the same Rs 1,000 crore, so EV/EBITDA stays at 10.0x while P/E falls to 18.7x. Then what does change?
Everything below the interest line. Take EBITDA of Rs 100 crore, D&A of Rs 20 crore, Rs 400 crore of debt at 10% and a 25% tax rate, with 60 crore shares at Rs 10. Interest falls from Rs 40 crore to Rs 30 crore, so net income rises from Rs 30 crore to Rs 37.5 crore, and with equity now worth Rs 700 crore, P/E falls from 20.0x to 18.7x. Equity multiples such as P/E move with capital structure; enterprise multiples such as EV/EBITDA do not, which is why bankers compare companies on enterprise multiples.
EPS also rises, from Rs 0.50 to Rs 0.54. The reason is a comparison of two costs: the new shares were sold at an earnings yieldNet income divided by equity value, the inverse of the P/E. It is what each rupee of equity earns. of 5%, and the debt they retired cost 7.5% after tax. Replacing a 7.5% cost with a 5% cost lifts earnings per share.
Rs crore Before After Enterprise value 1,000 1,000 EV / EBITDA 10.0x 10.0x Equity value 600 700 Debt 400 300 Net income 30.0 37.5 P/E 20.0x 18.7x EPS, Rs 0.50 0.54 Illustrative company: EBITDA Rs 100 crore, D&A Rs 20 crore, debt at 10%, tax at 25%, shares issued at the Rs 10 market price. What could make enterprise value move after all?
Three second-order effects, worth one sentence each. Fees on the share issue leak value out to advisers. Less debt means a smaller interest tax shield, which in Modigliani and Miller's analysis with taxes lowers value slightly. Against that, lower leverage reduces the risk and cost of financial distress. In an interview, give the first-order answer, unchanged, and then name the effects that could nudge it.
Where candidates lose it
The common slip is to say enterprise value rises because the company raised money. The cash went straight out to lenders, so nothing is left behind; and even if the cash had stayed on the balance sheet, net debt would still have fallen by 100 and enterprise value would still be flat.
The second slip is saying the share price must fall because of dilution. If the shares are sold at the market price, each holder's slice is smaller but the pie is bigger by exactly the cash paid in, so the price does not move at the moment of issue.
What the interviewer asks next
- What if the company keeps the Rs 100 crore as cash instead?
- What if it uses the Rs 100 crore to buy back shares instead of repaying debt?
- When would issuing shares to repay debt dilute EPS?
027Equity value is Rs 1,000 crore. The company has Rs 400 crore of debt, Rs 150 crore of cash, Rs 100 crore of preference shares, Rs 50 crore of minority interest and a stake in an associate worth Rs 80 crore. What is enterprise value?BarclaysLondon · 2026
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Which of these items are subtracted on the way from equity value to enterprise value?
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Enterprise value is Rs 1,320 crore. Start with equity value of Rs 1,000 crore. Add the claims that rank alongside or ahead of the ordinary shareholders on the consolidated business: debt of Rs 400 crore, preference shares of Rs 100 crore and minority interest of Rs 50 crore. Subtract what the company owns that is not part of that operating business: cash of Rs 150 crore and the Rs 80 crore associate stake. 1,000 plus 550 less 230 is 1,320.
Why are some items added and others subtracted?
Picture buying a shop. You pay the owner for her shares, but you also take on the bank loan, you owe the silent partner his share of the profits, and you inherit the cash in the till and the shop's small stake in the bakery next door. The price of the shop itself is what you paid, plus the loan and the partner's claim, minus the cash and the bakery stake, which you could sell on day one without touching the shop. Enterprise value is the value of the consolidated operating business, so you add every claim on that business and subtract every asset whose earnings sit outside it.
Equity value of Rs 1,000 crore steps up by debt, preference shares and minority interest to Rs 1,550 crore and down by cash and the associate stake to an enterprise value of Rs 1,320 crore, because the additions are claims on consolidated EBITDA and the subtractions are assets whose income sits outside it. What is the test for each line?
Ask where the item's earnings appear. Minority interestThe share of a consolidated subsidiary owned by outside shareholders. Its profit is inside consolidated EBITDA but belongs to someone else. is added because consolidation puts 100% of the subsidiary's EBITDA into the group figure even though outsiders own part of it; leave it out and EV is too small for the EBITDA it is set against. Preference shares are added because their dividend is a claim ahead of the ordinary equity. The associateA company in which the group holds a significant but not controlling stake, usually 20% to 50%, shown as one line of share of profit below operating profit. is subtracted for the mirror reason: its profits arrive as a single line below EBITDA, so its value must come out of the numerator to keep the multiple consistent. The rule is consistency between numerator and denominator: EV must describe exactly the business whose EBITDA you divide it by.
Item Rs crore Why Equity value 1,000 the ordinary shares, the starting point Debt +400 a claim on consolidated EBITDA Preference shares +100 a claim ranking ahead of the ordinary equity Minority interest +50 outsiders' share of a subsidiary whose EBITDA is fully consolidated Cash -150 not needed to run the business; netted against debt Associate stake -80 its profit arrives below EBITDA, so its value comes out Enterprise value 1,320 1,000 + 550 - 230 An illustrative bridge; every figure is from the question, not from any real company. The relationship1,000 equity value, the ordinary shares 400 + 100 + 50 debt, preference shares and minority interest: claims on the consolidated business 150 + 80 cash and the associate stake: value whose income is not in consolidated EBITDA What it says in wordsAdd the claims on consolidated EBITDA and subtract the assets whose income sits outside it.What would you say the question leaves out?
Three things an interviewer may push on. Net debt here is Rs 250 crore, but a company needs some cash to run, so only the excess is truly surplus; most desks ignore that in an interview and net all of it, which is the assumption to state. Debt-like items such as unfunded pension deficits, lease liabilities and earn-outs also belong on the add side, and an interviewer who adds a convertible bond is checking whether you treat it as debt or as equity at the current share price. Give the Rs 1,320 crore, then name one debt-like item you would ask about, because the bridge in a live deal is longer than the one in the question. The multiple this feeds, EV/EBITDA, is only as clean as the bridge beneath it.
Where candidates lose it
The usual slip is the associate: candidates add it because it is an asset, or ignore it. It is subtracted, because its earnings sit below EBITDA and its value would otherwise inflate the multiple. The other common slip is subtracting minority interest because it belongs to outsiders; it is added, because the EBITDA it earns is counted in full.
Say the test out loud before you add a single number: claims on consolidated EBITDA are added, assets whose income sits outside it are subtracted. Then the arithmetic is five steps and the answer, Rs 1,320 crore, is the easy part.
What the interviewer asks next
- If the company also carries Rs 60 crore of lease liabilities, does enterprise value change?
- In a sum-of-the-parts valuation, where does minority interest appear, and with what sign?
- The associate contributes Rs 10 crore of share of profit. If you kept the stake inside EV, what would you have to do to EBITDA?
Asked at Barclays, Investment Banking, London, 2026 (Wall Street Oasis):
25 minutes of technical questions, covering basics: EV-to-Equity, Valuation, Multiples, Working Capital
044A company finds Rs 10 crore of cash lying on the street. What happens to its enterprise value and its equity value?UBSAnonymous interview candidate in · 2024
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What happens to enterprise value?
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Enterprise value stays the same and equity value rises by Rs 10 crore. Shareholders own the extra cash, so their equity is worth Rs 10 crore more. Enterprise value is equity plus debt minus cash: equity is up 10 and cash is up 10, so EV does not move. EV measures the operating business, and picking money up off the street does not change what that business earns. Ignoring tax on the windfall keeps the numbers clean.
What is enterprise value actually measuring?
Think of buying a shop whose till holds Rs 10,000. You would pay for the business plus the cash in the till, and the cash is worth exactly its face value to you, no more and no less. Enterprise value prices the operating business on its own, so cash, which is worth its face value to whoever holds it, is taken out of the bridge. Equity value is what shareholders own, and they own both the business and the cash.
Finding Rs 10 crore lifts equity value from Rs 500 crore to Rs 510 crore and cash from Rs 50 crore to Rs 60 crore, and because cash is subtracted in the bridge, enterprise value stays at Rs 750 crore. How does the bridge move?
Take a company with equity worth Rs 500 crore, debt of Rs 300 crore and cash of Rs 50 crore, so enterprise value is Rs 750 crore. Find Rs 10 crore: cash becomes Rs 60 crore and equity Rs 510 crore, and EV is 510 plus 300 minus 60, still Rs 750 crore. Nothing in the operating business changed, so multiples of EBITDAEarnings before interest, tax, depreciation and amortisation: a rough measure of the cash profit the operating business produces. or revenue do not change either.
The relationshipE equity value, what the shareholders own D debt C cash, subtracted because it is not part of the operating business What it says in wordsEquity and cash rise by the same amount, so their effects on enterprise value cancel.What assumptions should you say out loud?
Two. First, tax: the windfall is probably taxable income, so at a 25% rate equity and cash each rise by Rs 7.5 crore rather than Rs 10 crore. Whatever amount sticks, cash and equity move together and enterprise value stays put. Second, the cash sits idle. If the company used it to repay debt, EV would still not change, but the split between lenders and shareholders would. Naming both shows the interviewer you know which line each event touches.
Where candidates lose it
The common wrong answer is that enterprise value rises by Rs 10 crore because the company is worth more. The owners are richer, but the operating business is not, and EV only measures the business.
The opposite slip is saying EV falls because cash is subtracted. That forgets equity rises by the same amount. Walk the bridge line by line and the two moves cancel.
What the interviewer asks next
- The company uses the Rs 10 crore to repay debt. What happens to EV and equity value?
- The company issues Rs 100 crore of new shares for cash. What happens to EV?
- Why might a buyer pay less than face value for cash trapped in a foreign subsidiary?
Asked at UBS, Investment Banking, Anonymous interview candidate in, 2024 (Wall Street Oasis):
explain the assumptions behind it - if pick up 10 bucks, what happens to EV
060A share trades at Rs 50 and there are 100 crore basic shares. Three option tranches are outstanding: 10 crore at a strike of Rs 20, 5 crore at Rs 40 and 8 crore at Rs 60. What is the diluted share count under the treasury stock method?JefferiesSan Francisco · 2026
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Before you work it: what is the diluted share count?
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107 crore diluted shares. Only options with a strike below the Rs 50 share price are exercised. The Rs 20 tranche brings in Rs 200 crore, which buys back 4 crore shares, so it adds 6 crore net. The Rs 40 tranche also brings in Rs 200 crore, buying back 4 crore, so it adds 1 crore net. The Rs 60 tranche is out of the money and adds nothing.
Why do only some options count?
An option to buy a share at Rs 60 when it trades at Rs 50 is like a voucher to buy a shirt for more than its shelf price: nobody uses it. Only in-the-money options, those with a strike below the current share price, would be exercised, so only they add shares. Here the Rs 20 and Rs 40 tranches are in the money and the Rs 60 tranche is not. The 8 crore Rs 60 options are ignored today, but they come back into play if the price rises past Rs 60 or a bidder offers more than that.
At a Rs 50 share price the Rs 20 tranche adds 6 crore shares net and the Rs 40 tranche adds 1 crore, after the exercise cash buys back 4 crore shares each, while the Rs 60 tranche adds nothing, so 100 crore basic shares become 107 crore diluted. Why does each tranche add fewer shares than its option count?
When holders exercise, they pay the strike price to the company. The treasury stock methodA way to count dilution that assumes the company uses the cash from option exercises to buy back its own shares at the current price. assumes the company uses that cash to buy back shares at today's price. Each in-the-money tranche adds its option count minus the shares its exercise cash can buy back. The Rs 20 tranche pays 10 crore x Rs 20 = Rs 200 crore, which buys 4 crore shares at Rs 50, so 6 crore net. The Rs 40 tranche pays 5 crore x Rs 40 = Rs 200 crore, again 4 crore bought back, so 1 crore net.
Tranche In the money? Exercise cash, Rs crore Bought back, crore Net new shares, crore 10 crore at Rs 20 Yes 200 4 6 5 crore at Rs 40 Yes 200 4 1 8 crore at Rs 60 No 0 Diluted count, with 100 basic 107 Two in-the-money tranches add 7 crore shares net after buybacks, taking the basic 100 crore to 107 crore; the out-of-the-money Rs 60 tranche adds nothing at a Rs 50 share price. The relationshipn options in the tranche, crore K the strike price of the tranche P the current share price, Rs 50 What it says in wordsEach in-the-money tranche adds its option count times the part of the price the strike does not cover.Notice what the formula says. The deeper in the money an option is, the closer it comes to a full new share: the Rs 20 tranche dilutes at 60% of its count, the Rs 40 tranche at only 20%. Diluted equity value at Rs 50 is 107 crore x Rs 50 = Rs 5,350 crore, Rs 350 crore above the basic Rs 5,000 crore, and that diluted figure is the one that goes into an enterprise value bridge.
Where candidates lose it
The common miss is adding all 23 crore options, or both in-the-money tranches in full, to get 123 or 115 crore. Both ignore that exercise brings cash in, and that the method assumes the cash buys shares back.
The other miss is forgetting to re-test the Rs 60 tranche in a takeover. At an offer price above Rs 60 it moves into the money, so the share count depends on the price you are testing.
What the interviewer asks next
- A bidder offers Rs 70 a share. What is the diluted share count now?
- How would you treat a convertible bond in the same count?
- The share count depends on the price, and the price depends on the share count. How do bankers handle that loop in a model?
Asked at Jefferies, Technology, Media and Telecom (TMT), San Francisco, 2026 (Wall Street Oasis):
It was a lot of stock option and technology specific questions.
075A tech company is worth 10x EBITDA and carries net debt of 7x EBITDA. If its enterprise value falls 10%, what happens to its equity value?Moelis & CompanyNew York · 2026
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Before you work it: how far does the equity fall?
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The equity falls by about 33%, a third. Equity value is enterprise value less net debt: 10 minus 7, so 3 turns of EBITDA. A 10% fall takes enterprise value to 9 turns, and the lenders are still owed 7, so equity is 2 turns. From 3 to 2 is a one third fall. At 7 turns of debt on a 10 turn valuation the equity is a thin slice, and every move in the business's value is magnified 3.33 times on it.
Why does the equity fall more than the business?
Picture a flat bought for Rs 1 crore with a Rs 70 lakh loan. If the flat's price falls 10% to Rs 90 lakh, the bank is still owed Rs 70 lakh, so the owner's stake falls from Rs 30 lakh to Rs 20 lakh, a third. Net debt is fixed in rupees, so the whole of any fall in enterprise value comes out of the equity, and the thinner the equity slice, the larger the percentage hit. Here the equity is 3 turns of EBITDA under 7 turns of debt, so a 1 turn fall in value is a third of it.
With net debt fixed at 7 turns of EBITDA, a fall in enterprise value from 10 turns to 9 takes the equity from 3 turns to 2, a 33% fall, and the multiplier of 3.33 works the same way upwards, where a 10% rise in EV would lift the equity 33%. What is the general rule, and what does 7x tell you about sensitivity?
The percentage move in equity is the percentage move in EV times EV over equity. At 10x EV and 7x debt that multiplier is 10 over 3, 3.33, so each 1% in enterprise value is 3.33% on the equity, up or down. That is what an interviewer means by sensitivity: 7 turns of leverage on a 10 turn valuation makes the equity a geared bet on the business. If EBITDA or the multiple slips 30%, the equity is worth nothing and the lenders start taking losses, which is why debt at that level prices as if it carried some of the equity risk.
The relationshipE equity value, EV less net debt, 3 turns of EBITDA EV enterprise value, 10 turns of EBITDA Delta EV / EV the 10% fall in enterprise value What it says in wordsThe equity moves by the EV move scaled up by how many times EV covers the equity.Move in EV EV, x EBITDA Net debt, x EBITDA Equity, x EBITDA Move in equity +10% 11.0 7.0 4.0 +33% +0% 10.0 7.0 3.0 +0% -10% 9.0 7.0 2.0 -33% -20% 8.0 7.0 1.0 -67% -30% 7.0 7.0 0.0 -100% With net debt fixed at 7 turns, each 10% step in enterprise value is a one third step in the equity, and a 30% fall in enterprise value leaves the equity worth nothing. Why does a banker ask a tech company this?
Because 7 turns is a lot of debt for a business valued on growth rather than assets. If the valuation multiple compresses, as growth multiples do when rates rise or growth slows, the enterprise value can fall 10% with no change in EBITDA at all, and the equity takes a third of that on the chin. Say the assumption you leaned on: net debt stays fixed, which holds over a short window but not if the company is burning or generating cash. The question tests whether you can see leverage as a magnifier before you build a single model.
Where candidates lose it
The common loss is answering 10%, as if equity and enterprise value moved together. The debt sits between them and does not move, so the equity absorbs the whole fall.
The second loss is giving 33% and stopping. The interviewer asked what 7x tells you about sensitivity, so name the multiplier, 10 over 3, and say that it works both ways.
What the interviewer asks next
- EBITDA falls 10% and the multiple stays at 10x. What happens to the equity, and is it the same answer?
- At what fall in enterprise value is the equity worth nothing?
- How does this magnifier relate to the beta of a levered company?
Asked at Moelis & Company, Generalist, New York, 2026 (Wall Street Oasis):
A tech company has leverage rate of 7X. What does it tell you about the about the impact on sensitivity?
091A company has a Rs 500 crore convertible bond with a conversion price of Rs 100, and its shares trade at Rs 120. In the enterprise value bridge, do you count the bond as debt or as shares? What changes if the share price falls to Rs 80?Bulge bracket IBElite boutique IB
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At a share price of Rs 120, how should the bond enter the bridge?
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At Rs 120, count it as 5 crore extra shares and not as debt; at Rs 80, count it as Rs 500 crore of debt and no new shares. Rs 500 crore at a Rs 100 conversion price is 5 crore shares. At Rs 120 those shares are worth Rs 600 crore, so the holder will convert. At Rs 80 they are worth Rs 400 crore, so the holder takes the Rs 500 crore back. Treat the bond as whichever it is most likely to become, never as both.
Why does the share price decide whether a bond is debt?
Suppose a friend lends you Rs 5 lakh and you agree they can take either the money back or a share of your shop. If the shop is booming, they will take the share; if it is struggling, they will take the cash. You plan around what they will choose. A convertible gives the holder a choice between repayment and shares, and the valuation should assume the choice a rational holder makes at today's price. The comparison is simple: conversion value, shares received times share price, against face value.
At Rs 120, converting gives 5 crore shares worth Rs 600 crore, more than the Rs 500 crore face value. The holder converts, so add 5 crore shares to the diluted count and remove the bond from debt. With, say, 50 crore existing shares, diluted equity value becomes 55 crore x 120 = Rs 6,600 crore. At Rs 80, converting gives shares worth only Rs 400 crore, so the bond stays as Rs 500 crore of debt and the share count stays at 50 crore.
At Rs 120 the 5 crore conversion shares are worth Rs 600 crore against Rs 500 crore of repayment, so the bond counts as shares, while at Rs 80 they are worth Rs 400 crore and it counts as Rs 500 crore of debt; counting it both ways double counts it. What goes wrong if you count it the other way?
Counting it as debt at Rs 120 puts Rs 500 crore into the bridge when the holder will in fact take Rs 600 crore of value in shares, understating the claim by Rs 100 crore. The serious error is counting it twice, as debt and as diluted shares, which overstates enterprise value by the full Rs 500 crore. That happens when the share count comes from one source that already includes the conversion and the debt figure from a balance sheet that still shows the bond.
The relationshipface the bond's face value, Rs 500 crore conversion price Rs 100 per share share price today's price, Rs 120 What it says in wordsIf the shares a holder would receive are worth more than the repayment, assume conversion.Say the limitation. Near the conversion price the choice is close and the bond carries option value either way, so some banks value it at fair value rather than flipping between debt and shares. Settlement terms also matter: some convertibles repay the face value in cash and deliver only the excess in shares, which needs a different share count.
Where candidates lose it
The common mistake is treating the convertible as debt because it is called a bond, whatever the share price. At Rs 120 the holder is not waiting to be repaid; they are holding shares in all but name.
The quieter loss is double counting when pulling numbers from different sources. Say out loud that the bond is in one place only, and which.
What the interviewer asks next
- At what share price does the treatment switch?
- How would you treat a convertible that settles the face value in cash and only the excess in shares?
- How does a convertible change the accretion or dilution of a deal paid for in stock?
