- Introduction
- Top Corporate Finance Interview Questions
- What is the time value of money?
- What is compounding?
- What is discounting?
- What is a merger? Give some example
- What are the most common multiples used in valuation?
- Describe WACC and its components
- What are Stock Options?
- What is a Stock Split and Stock Dividend?
- What is the Rights Issue?
- What is a clean and dirty price of a bond?
- If we could use only one statement to review the overall health of a company, which statement would we use, and why?
- What does a high P/E ratio indicate for a company’s future?
- What is the Internal Rate of Return (IRR?)
- Under what circumstances generally companies consider issuing debt instead of equity?
- What does negative working capital mean?
- What is trade credit?
- Describe Cash Flow from Investing
- Under which conditions does Internal Rate of Return (IRR) will be unreliable?
- Which method calculates that rate of discount which makes net present value = 0?
- Why do you want to work in corporate finance?
- What do you understand by the payback period?
- What is the Price Earnings Ratio?
- What is acquisition? Give some examples
- Why do mergers and acquisitions generally happen?
- What is Initial Public Offering?
- What is EPS? What is the formula used for the calculation of EPS?
- Why balance sheet balances?
- Why are increases in accounts receivable a cash reduction on the cash flow statement?
- What are the three important sections in the cash flow statement?
- How many financial statements are there? Name them
- What is capital structure?
- Mention any six assumptions of the Modigliani-Miller theorem?
- Give five examples of intangible assets of a company?
- How will you gauge the liquidity condition of a company?
- What are the advantages of raising debt over equity?
- What are the advantages of raising equity over debt?
- What is Beta in investment management?
- How do you calculate the cost of equity?
- What are the major goals of financial management?
- What are qualities do you think important to becoming an investment banker?
- What are the differences between the commercial bank and investment banks
- What is an Option in derivatives? What are the types of options contract?
Introduction
Corporate finance is the branch of finance concerned with the sources of funding and capital structure of corporations, the actions taken by managers to increase the firm’s value to shareholders, and the tools and analysis used to allocate financial resources. This article on corporate finance interview questions will help you understand different questions that the interviewer.
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Top Corporate Finance Interview Questions
What is the time value of money?
The concept of the time value of money reflects that money in the present is worth more than the same sum of money to be received in the future. There are two important principles in the time value of money. I.e. compounding and discounting.
What is compounding?
Compounding refers to the conversion of the present value of money into the future value of money.
What is discounting?
Discounting refers to the conversion of the future value of money into the present value of money.
What is a merger? Give some example
A merger is a mutually binding contract in which two companies come together to form one company.
- ·Zee Entertainment – Sony India Merger
- ·Indus Tower – Bharti Infratel Merger
- ·Vodafone Idea Merger
What are the most common multiples used in valuation?
Some of the most commonly used multiples are mentioned below:
- ·EV/Sales: Used to understand the company’s total valuation compared to its sale and is calculated by dividing enterprise value.
- ·EV/EBITDA: Used to determine the fair market value of a company.
- ·EV/EBIT: Used to determine if a stock is priced too high or too low to similar stocks and the market as a whole
- ·PE Ratio: Used for valuing a company that measures its current share price relative to its earnings per share (EPS)
- ·EV/Assets: Used for measuring the value of a company in comparison to its total assets
- ·P/BV Ratio: Used to establish the relationship between the total value of an organization’s outstanding shares and the book value of its equity.
Describe WACC and its components
The weighted average cost of capital indicates a company’s average cost of capital from all sources, including debt, equity and preference capital. The WACC can be calculated using the equation shown below:
(Wd*Kd) + (We*Ke) + (Wp*Kp)
· Wd Weight of debt
· Kd Cost of debt
· We Weight of equity
· Ke Cost of equity
· Wp Weight of preference capital
· Kp Cost of preference capital
What are Stock Options?
As the name suggests, Stock Options are the options (but not the obligations) to convert into common shares at a predetermined price. These options are given to the employees of the company to appeal to them and make them stay longer with the company. The options are normally offered by the company to its upper management to align management’s interests with that of its shareholders.
What is a Stock Split and Stock Dividend?
A stock split is a corporate action in which a company issues extra shares to shareholders, increasing the total by the specified ratio based on the shares. A stock split happens when a company splits each existing share into multiple new shares, making the stock more affordable.
A stock dividend is a dividend payment to shareholders that is made in shares rather than as cash.
What is the Rights Issue?
A rights issue is an offering of rights to the existing shareholders of a company that offers them an opportunity to buy additional shares openly from the company at a discounted price rather than buying them in the secondary market. The number of additional shares that can be bought is subject to the existing holdings of the shareholders.
What is a clean and dirty price of a bond?
- ·The clean price is the price of a coupon bond not including any accrued interest.
- · The dirty price is the cost of a bond that includes accrued interest based on the coupon rate.
If we could use only one statement to review the overall health of a company, which statement would we use, and why?
A cash flow statement is a document that gives insights into the overall health of the company. As you know cash is king in a business and the cash flow statement shows how this king (cash) is treated within the business. A cash flow statement is used to gauge the cash position of the business i.e. the inflow and cash outflow
What does a high P/E ratio indicate for a company’s future?
A high P/E ratio indicates that a stock is expensive and its price may fall in the future
What is the Internal Rate of Return (IRR?)
Internal Rate of Return is a popular capital budgeting technique. It is the rate at which the present value of cash inflow is equal to the present value of cash outflow.
Under what circumstances generally companies consider issuing debt instead of equity?
When a company is not willing to give an ownership stake to the investors
What does negative working capital mean?
Working capital can be negative when the current liabilities are larger than current assets. The negative working capital situation may arise where
What is trade credit?
Trade credit is a category of commercial financing in which a customer is permitted to purchase goods or services and pay the supplier at a later scheduled date. Trade credit eases the purchase of supplies without immediate payment.
Describe Cash Flow from Investing
Cash Flow from Investing Activities is part of a company’s cash flow statement. It shows how much money has been used in making investments during a specific period.
Under which conditions does Internal Rate of Return (IRR) will be unreliable?
The Internal Rate of Return rule may be untrustworthy when a project’s stream of expected cash flows comprises negative cash flows. Negative cash flows can happen when an investment necessitates the construction of several amenities that are built at different times in the future
Which method calculates that rate of discount which makes net present value = 0?
Having an NPV equal to zero indicates that the sum of the expected cash flow of the project is zero. This indicates the project won’t produce any positive cash flow once accounted for the initial investment. The NPV less than 0 generally indicates risk in a project.
Why do you want to work in corporate finance?
I would like to work in corporate finance for multiple reasons, especially the fact that corporate finance touches every corner of the business. Having an understanding of corporate finance will help me acquire 360-degree experiences in the business world.
What do you understand by the payback period?
The payback period reflects how quickly the business can recover the initial investment. In other words, it reflects how much time an investment takes to reach the break-even point. It would help if you recovered the investment costs of a project as soon as possible to make a profit.
What is the Price Earnings Ratio?
The P/E Ratio shows the connection between a company’s stock price and earnings per share. It is a common ratio that gives investors a good sense of the value of the company. The P/E ratio displays the outlooks of the market and is the price you must pay per unit of current earnings.
What is acquisition? Give some examples
An acquisition is a corporate action in which one company acquires most or all of another company’s shares to gain control of that company.
For example, in 2000, Pfizer acquired Warner-Lambert for $90 billion
Google acquired Android for an estimated $50 million back in 2005
Why do mergers and acquisitions generally happen?
The merger and acquis ion generally happen for synergy benefits. Synergy benefits refer to the performance of a combined entity that would be better than the individual entities.
What is Initial Public Offering?
When a company wants to raise funds in the primary market, it has to go through the process called an Initial public offering. This is the process through which a company can go public by sale of its stocks to the general public.
What is EPS? What is the formula used for the calculation of EPS?
EPS is a portion of a company’s profit that is distributed to each share of stocks. The EPS can be calculated using the equation shown below:
EPS = (net income – preferred dividends) divided by average outstanding common shares
Why balance sheet balances?
A balance sheet balances since the balance sheet are prepared in strict adherence to the principle of double-entry. This accounting system records all transactions in at least two different accounts, and so also acts as a check to make sure the entries are dependable.
Why are increases in accounts receivable a cash reduction on the cash flow statement?
This is one of the common corporate finance interview questions :
The cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to replicate the fact that the company never indeed received those funds.
What are the three important sections in the cash flow statement?
There are three important sections in the cash flow statement namely
- ·Operating activities
- ·Investing activities
- ·Financing activities
How many financial statements are there? Name them
There are four main financial statements that companies publish
- ·Balance sheets
- ·Income statements
- ·Cash flow statement
- ·Statements of shareholders’ equity
What is capital structure?
The capital structure is how a firm finances its overall operations and growth by using various sources of funds. For example, debt, equity, retained earnings etc.
Mention any six assumptions of the Modigliani-Miller theorem?
This is one of the common corporate finance interview questions
- Perfect capital markets
- Investors are rational
- There are no transaction costs
- Securities are infinitely divisible
- There are no floatation costs
- There are no taxes
Give five examples of intangible assets of a company?
- Goodwill
- Brand recognition
- Copyrights
- Patents
- Trademarks
- Trade names
How will you gauge the liquidity condition of a company?
The liquidity of any business can be traced by using three important ratios.
- Calculate the current ratio of the company (Current Assets/Current Liabilities)
- Calculate the quick ratio (Current Assets-Inventory/Current Liabilities)
- Find the Net Working Capital of the company (Current Assets – Current Liabilities)
What are the advantages of raising debt over equity?
- Ownership Stays with the company
- Lower Interest Rates
- Interest paid on debt is tax-deductible
- Easier Planning
- Accessible to businesses of any size
- Improves business credit score
What are the advantages of raising equity over debt?
This is one of the common corporate finance interview questions
- The company has no obligation to redeem the equity shares since these have no maturity date.
- The equity capital is a cushion for the lenders, as, with more and more equity bases, the company can simply raise additional funds on favourable terms. Thus, it increases the creditworthiness of the company.
- The company is not bound to pay dividends, in case there is a cash deficit. The company can skip the equity dividends without any legal impacts.
What is Beta in investment management?
Beta (β) is a measure of the volatility, or systematic risk, of a security in comparison to the market as a whole. A beta of 1 designates that the security’s price tends to move with the market. A beta greater than 1 designates that the security’s price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market
How do you calculate the cost of equity?
This is one of the common corporate finance interview questions :
There are numerous competing models for estimating the cost of equity, though, the capital asset pricing model (CAPM) is mainly used in the corporate world.
What are the major goals of financial management?
· Profit maximisation
· wealth maximization
· Improving market share
What are qualities do you think important to becoming an investment banker?
A few important skills required to become an investment banker are:
· Excellent analytical skills
· Attention to detail
· Ability to multitask
· Willingness to adapt to the changes in market
· Willingness to learn
· Ability to comprehend the problem statement
· Empathy towards customers
· Good communication and interpersonal skills
What are the differences between the commercial bank and investment banks
This is one of the common corporate finance interview questions :
Investment Bank
It acts as an intermediary between investors and corporates. It does not accept deposits, but sells Investments, advises on mergers and acquisitions, and holds loans debt and equity which originated from the Bank.
Commercial Bank
It accepts deposits from customers and offers commercial loans using this money. Most of the loans made by commercial banks are held as assets on the Bank’s balance sheet.
What is an Option in derivatives? What are the types of options contract?
An option is a contract between parties wherein the option holder has the right but not the obligation to buy or sell an underlying asset on or before the maturity date. There are two categories of options.
· Call option –Option to buy (but not the obligation to buy)
· Put option – Option to sell ( but not the obligation to sell)
Hope these corporate finance interview questions and answers related to corporate finance jobs were useful. Thanks for reading.
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