Top 20 Corporate Finance Interview Questions and Answers
Corporate finance interview questions includes different kind of questions asked at the time of interview such as How do you interpret the financial statements of the company and what does it tell about ?, What should be the major area of focus of the company as per latest financial statements?, Explain the sources of short term finance., Will the company require more working capital loan as compared to current or is it required to cut down the current limit?, Explain cash flow statement of the company, and what are the areas that is consuming major case, etc.
Preparing for a Corporate Finance Interview? This list contains the top 20 corporate finance interview questions that are most frequently asked by employers. This list is divided into 2 parts
- Part 1 – Corporate Finance Interview Questions (Basic)
- Part 2 – Corporate Finance Interview Questions (Advanced)
Table of contents
- Top 20 Corporate Finance Interview Questions and Answers
- Part 1 – Corporate Finance Interview Questions (Basic)
- #1 – What are Financial Statements of a company and what do they tell about a company?
- #2 – Explain Cash Flow Statement in detail
- #3 – Explain three sources of short-term Finance used by a company
- #4 – Define Working Capital
- #5 – A company buys an asset; walk me through the impact on the 3 financial statements
- #6 – What is EPS and how is it calculated?
- #7 – Different types of EPS
- #8 – What is a difference between Futures Contract and Forwards Contract?
- #9 – What are the different types of Bonds?
- #10 – What is a securitized Bond?
- >Part 2 – Corporate Finance Interview Questions (Advanced)
- #11 – What is Deferred Tax Liability and why it might be created?
- #12 – What is Financial Modeling in Corporate Finance?
- #13 – What are the most common multiples used in valuation?
- #14 – Describe WACC and its components
- #16 – What are Stock Options?
- #17 – What is the DCF method?
- #18 – What is a Stock Split and Stock Dividend?
- #19 – What is the Rights Issue?
- #20 – What is a clean and dirty price of a bond?
- Corporate Finance Interview Questions Video
- Recommended Articles
- Part 1 – Corporate Finance Interview Questions (Basic)
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Corporate Finance Interview Questions Video
Part 1 – Corporate Finance Interview Questions (Basic)
This first part covers basic corporate finance interview questions and answers.
#1 – What are Financial Statements of a company and what do they tell about a company?
Ans. Financial Statements of a company are statements, in which the company keeps a formal record about the company’s position and performance over time. The objective of Financial StatementsObjective Of Financial StatementsThe main objective of the financial statement analysis for any company is to provide the necessary data required by the financial statement users for the informative decision-making, assessing the company's current and past performance, predicting business success or failure, etc.read more is to provide financial information about the reporting entity that is useful to exist and potential investors, creditors, and lenders in making decisions about whether to invest, give credit or not. There are mainly three types of financial statementsTypes Of Financial StatementsThere are three types of financial statements, i.e., Balance Sheet, Income Statement and Cash Flow Statements. These written records facilitate the analysis and comparison of an organization's financial position and performance.read more which a company prepares.
1. Income StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more – Income Statement tells us about the performance of the company over a specific account period. Financial performance is given in terms of revenue and expense generated through operating and non-operating activities.
2.Balance Sheet – Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more tells us about the position of the company at a specific point in time. Balance Sheet consists of Assets, Liabilities and Owner’s Equity. Basic equation of Balance Sheet:Equation Of Balance Sheet:Balance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilitiesread more Assets = Liabilities + Owner’s Equity.
3.Cash Flow Statement – Cash Flow StatementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more tells us the amount of cash inflow and outflow. Cash Flow Statement tells us how the cash present in the balance sheet changed from last year to the current year.
#2 – Explain Cash Flow Statement in detail
Ans. Cash Flow Statement is an important financial statement that tells us about the cash inflow and cash outflow from the company. Cash Flow can be prepared by the Direct method and Indirect method. Generally, the company uses the Direct method for preparing the Cash Flow Statement as seen in the annual report of the companyAnnual Report Of The CompanyAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more. The direct method starts with cash collected from customers adding interests and dividends and then deducting cash paid to suppliers, interest paid, income tax paid. The indirect method starts from net income and then we add back all the non-cash charges which are depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more and amortization expense, we also add working capital changes.
Cash Flow Statement is categorized into three activities: Cash Flow from Operations, Cash Flow from Investing and Cash Flow from Financing.
Cash Flow from OperationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more consists of cash inflows and outflows which are generated from the company’s core business or product. Cash Flow from InvestingCash Flow From InvestingCash flow from investing activities refer to the money acquired or spent on the purchase or disposal of the fixed assets (both tangible and intangible) for the business purpose. For instance, the purchase of land and joint venture investment is cash outflow, while equipment sale is a cash inflow.read more consists of the cash inflows and outflows from a company in the form of investments like purchase or sale of PP&E (property, plant & equipment). Cash Flow from FinancingCash Flow From FinancingCash flow from financing activities refers to inflow and the outflow of cash from the financing activities like change in capital from securities like equity or preference shares, issuing debt, debentures or repayment of a debt, payment of dividend or interest on securities.read more consists of cash inflows and outflows generated from all the financing activities of the company like issuance of Bonds or early retirement of Debt.
Let us move to the next Corporate Finance interview question.
#3 – Explain three sources of short-term Finance used by a company
Ans. Short-term financingShort-term FinancingShort-term financing refers to financing a business for less than a year in order to generate cash for working and operating expenses, usually for a smaller amount. It include obtaining funds through online loans, credit lines, and invoice financing.read more is done by the company to fulfill its current cash needs. Short-term sources of finance are required to be repaid within 12 months from the financing date. Some of the short-term sources of financing are: Trade Credit, Unsecured Bank Loans, Bank Over-drafts, Commercial PapersCommercial PapersCommercial Paper is a money market instrument that is used to obtain short-term funding and is often issued by investment-grade banks and corporations in the form of a promissory note.read more, Secured Short-term loans.
- Trade Credit is an agreement between a buyer and a seller of goods. In this case, the buyer of the goods purchases the goods on a credit i.e. the buyer pays no cash to the seller at the time of buying the goods, only to pay at a later specified date. Trade creditTrade CreditThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.read more is based on mutual trust that the buyer of the goods will pay the amount of cash after a specified date
- Bank Overdraft is a type of short-term credit that is offered to an individual or a business entity having a current account which is subject to the bank’s regulation. In this case, an individual or a business entity can withdraw cash more than what is present in the account. Interest is charged on the amount of over-draft which is withdrawn as a credit from the bankCredit From The BankBank credit is usually referred to as a loan given for business requirements or personal needs to its customers, with or without a guarantee or collateral, with an expectation of earning periodic interest on the loan amount. The principal amount is refunded at the end of loan tenure, duly agreed upon, and mentioned in the loan covenant.read more.
- Unsecured Bank Loan is a type of credit that banks are ready to give and is payable within 12 months. The reason why it is called an unsecured bank loan is that no collateral is required by the individual or a business entity taking this loan.
#4 – Define Working Capital
Ans. Working Capital is basically Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more minus Current LiabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more. Working capital tells us about the amount of capital tied up to its business (daily activities) such as account receivablesAccount ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, payables, inventory in hand and many more. Working capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more can also tell us the amount of cash needed to pay off the company’s obligations which have to be paid off within 12 months.
#5 – A company buys an asset; walk me through the impact on the 3 financial statements
Ans. The purchase of Assets is a transaction done by the company which will impact all the three statements of the company. Let’s say that the asset is the equipment of $5million.
- In Balance Sheet, cash will go down by $5million; decreasing the asset side of the balance sheet and at the same time the asset will be recorded as equipment of $5million which will increase the asset side of the balance sheet by the same amount. Hence, the balance sheet of the company will be tallied.
- In Income Statement, there will be no impact on the first year of income statement but after the first year, the company will have to charge depreciation expense on the purchased equipmentDepreciation Expense On The Purchased EquipmentDepreciation on Equipment refers to the decremented value of an equipment's cost after deducting salvage value over the life of an equipment. It lowers its resale value.read more which the company will have to show it in the Income Statement of the company.
- Cash Flow Statement, assuming that only cash has been paid by the company to purchase the equipment. The Cash Flow from Investing will result in the cash outflow of $5million.
#6 – What is EPS and how is it calculated?
Ans. EPS is the Earnings per Share of the companyEarnings Per Share Of The CompanyEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more. This is calculated for the common stockholders of the companyStockholders Of The CompanyA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more. As the name suggests, it is the per-share earnings of the company. It acts as an indicator of profitabilityAs An Indicator Of ProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more. Calculation:
EPS = (Net Income – Preferred Dividends) / weighted average number of shares outstandingWeighted Average Number Of Shares OutstandingWeighted Average Shares Outstanding is a calculation used to estimate the variations in a Company’s outstanding shares during a given period. It is determined by multiplying the outstanding number of shares (consider issuance & buybacks) in a given reporting period with their individual time-weighted portions. read more during the year
#7 – Different types of EPS
Ans. There are basically three types of EPS which an analyst can use to calculate the company’s earnings: Basic EPS, Dilutive EPS, and Anti-Dilutive EPS.
- Basic EPSBasic EPSBasic EPS represents the income of the company for each common stock. In other words, it is the value appreciation of the common shares resulting from equal distribution of the company's profit as dividends among the common stockholders.read more: It is useful for companies that have a simple capital structure. In other words, it can be used to calculate earnings of the company which has no convertible securities outstanding like convertible bonds or convertible preference shares.
- Dilutive EPS: It has a dilutive characteristic attached to it. When a company has a complex capital structure, it is better to calculate Dilutive EPS instead of Basic EPS. In other words, when a company has convertible securities such as convertible bonds, convertible preference shares and/or stock options which after conversion, dilutes the earnings i.e. lower the earnings calculated for common shareholders of the company.
- Anti-Dilutive EPS: This is the kind of EPS in which the convertible securitiesConvertible SecuritiesConvertible securities are securities or investments (preferred stocks or convertible bonds) that can be easily converted into a different form, such as shares of an entity's common stock, and are typically issued by entities to raise money. In most cases, the entity has complete control over when the conversion occurs.read more after conversion, increases the earnings for the common shareholders of the company.
Let us move to the next Corporate Finance interview question.
#8 – What is a difference between Futures Contract and Forwards Contract?
Ans. A futures contract is a standardized contract which means that the buyer or seller of the contract can buy or sell in lot sizes that are already specified by the exchange and is traded through exchanges. Future markets have clearinghouses that manage the market and therefore, there is no counterparty risk.
Forwards Contract is a customizable contract which means that the buyer or seller can buy or sell any amount of contract they wish to. These contracts are OTC (over the counterCounterOver the counter (OTC) is the process of stock trading for the companies that don't hold a place on formal exchange listings. The broker-dealer network facilitates such decentralized trading of derivatives, equity and debt instruments.read more) contracts i.e. no exchange is required for trading. These contracts do not have a clearinghouse and therefore, the buyer or the seller of the contract is exposed to the counterparty riskExposed To The Counterparty RiskCounterparty risk refers to the risk of potential expected losses for one counterparty as a result of another counterparty defaulting on or before the maturity of the derivative contract.read more.
Also, do check this detailed article on Forwards vs FuturesForwards Vs FuturesForward contracts and future contracts are very similar. Still, the key distinction is that futures contracts are standardized contracts traded on a regulated exchange, whereas forward contracts are OTC contracts, which stand for "over the counter."read more
#9 – What are the different types of Bonds?
Ans. A bond is a fixed-income security that has a coupon payment attached to it which is paid by the bond issuer annually or as per the conditions set at the time of issuance. These are the types of bonds:
- Corporate BondCorporate BondCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value.read more, which is issued by the corporations.
- Supra-National Bond is issued by super-national entities like the IMF and World Bank.
- Sovereign National Bond is a bond issued by the government of the country.
#10 – What is a securitized Bond?
Ans. A bond that is repaid by the issuing entity by the cash flows which come from the asset set as collateral for the bond issued is known as securitized Bond. We can understand by the example: A bank sells its house loans to a Special Purpose EntitySpecial Purpose EntityA special-purpose entity is created to fulfill particular objectives, including devising measures to appropriate financial and legal risk profiles. It has a predefined purpose and a limited scope in terms of activity and is sometimes used as a short term solution to a current or potential problem.read more and then that entity issues the bonds which are repaid by the cash flows generated by those house loans, in this case, it is the EMI payments made by the house owners.
>Part 2 – Corporate Finance Interview Questions (Advanced)
Let us now have a look at the advanced Corporate Finance Interview Questions.
#11 – What is Deferred Tax Liability and why it might be created?
Ans. Deferred Tax Liability is a form of tax expense that was not paid to the income tax authorities in the previous years but is expected to be paid in future years. This is because of the reason that the company pays less in taxes to the income tax authorities than what is reported as payable. For example, if a company uses a straight-line methodStraight-line MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. read more for charging depreciation in its income statement for shareholders but it uses a double-declining method in the statements which are reported to income tax authorities and therefore, the company reports a Deferred Tax Liability as the paid less than what was payable.
#12 – What is Financial Modeling in Corporate Finance?
- First of all, financial modeling is a quantitative analysis that is used to make a decision or a forecast about a project generally in the asset pricing model or corporate finance. Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project.
- In Corporate Finance, Financial modeling meansFinancial Modeling MeansFinancial modeling refers to the use of excel-based models to reflect a company's projected financial performance. Such models represent the financial situation by taking into account risks and future assumptions, which are critical for making significant decisions in the future, such as raising capital or valuing a business, and interpreting their impact.read more forecasting companies financial statements like Balance Sheet, Cash Flows, and Income Statement. These forecasts are in turn used for company valuations and financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more.
- With respect to Investment BankingInvestment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more, you can talk about the Financial Models that you have prepared. You may refer to these Financial Modeling TemplatesFinancial Modeling TemplatesYou can download many financial modeling templates, including the Alibaba IPO model, Box IPO model, Colgate financial model, free cash flow to firm model, sensitivity analysis model, comparable company analysis model, PE and PE band chart.read more.
Let us move to the next Corporate Finance interview question.
#13 – What are the most common multiples used in valuation?
There are few common multiples which are frequently used in valuation –
- EV/SalesEV/SalesEV to Sales Ratio is the valuation metric which is used to understand company’s total valuation compared to its sales. It is calculated by dividing enterprise value by annual sales of the company i.e. (Current Market Cap + Debt + Minority Interest + preferred shares – cash)/Revenueread more
- EV/EBITDAEV/EBITDAEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more
- EV/EBITEV/EBITThe EV to EBIT ratio is an important valuation metric that determines whether a company's stock is expensive or cheap in comparison to the broader market or a competitor.read more
- PE RatioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more
- PEG RatioPEG RatioThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read more
- Price to Cash FlowPrice To Cash FlowPrice to Cash Flow Ratio is a value indicator that measures a company's stock price in relation to the cash flow amount it generates. This is determined as the ratio of Price Per Share to Operating Cash Flow Per Share. read more
- P/BV RatioP/BV RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more
- EV/AssetsEV/AssetsThe EV to Assets Ratio is an important valuation metric that is used to compare the value of a company to its total assets. It is calculated by dividing the enterprise value by the company's total assets.read more
#14 – Describe WACC and its components
Ans. WACCWACCThe weighted average cost of capital (WACC) is the average rate of return a company is expected to pay to all shareholders, including debt holders, equity shareholders, and preferred equity shareholders. WACC Formula = [Cost of Equity * % of Equity] + [Cost of Debt * % of Debt * (1-Tax Rate)]read more is the Weighted Average Cost of Capital which the company is expected to pay on the capital it has borrowed from different sources. WACC is sometimes referred to as the Firm’s Cost of Capital. The cost to the company for borrowing the capital is dictated by the external sources in the market and not by the management of the company. Its components are Debt, Common Equity, and Preferred Equity.
The formula of WACCFormula Of WACCThe weighted average cost of capital (WACC) is the average rate of return a company is expected to pay to all shareholders, including debt holders, equity shareholders, and preferred equity shareholders. WACC Formula = [Cost of Equity * % of Equity] + [Cost of Debt * % of Debt * (1-Tax Rate)]read more = (Wd*Kd) + (We*Ke) + (Wps*Kps).
#15 – Describe P/E Ratio
Ans. P/E Ratio also referred to as Price to Earnings Ratio is one of the Valuation Ratios which is used by analysts to see if the stock of the company is overvalued or undervalued. The formula is as follows P/E = current market price of the company’s stock divided by Earnings per Share of the company.
#16 – What are Stock Options?
Ans. Stock OptionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more are the options to convert into common shares at a predetermined price. These options are given to the employees of the company in order to attract them and make them stay longer. The options are generally provided by the company to its upper management to align management’s interests with that of its shareholders. Stock Options generally have a venting period i.e. a waiting period before the employee can actually exercise his or her option to convert into common shares. A Qualified option is a tax-free option which means that they are not subject to taxability after the conversion. An Unqualified option is a taxable option which is taxed immediately after conversion and then again when the employee sells the stock.
#17 – What is the DCF method?
Ans. DCF is the DCFDCFDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance.read more method. This method is used by analysts to value a company by discounting its future cash flow and bringing it down to its current value. Discounted Cash Flow uses different techniques to value a company. These techniques or methods are:
DDMDDMThe Dividend Discount Model (DDM) is a method of calculating the stock price based on the likely dividends that will be paid and discounting them at the expected yearly rate. In other words, it is used to value stocks based on the future dividends' net present value.read more, FCFFFCFFFCFF (Free cash flow to firm), or unleveled cash flow, is the cash remaining after depreciation, taxes, and other investment costs are paid from the revenue. It represents the amount of cash flow available to all the funding holders – debt holders, stockholders, preferred stockholders or bondholders.read more, and Free Cash Flow to EquityFree Cash Flow To EquityFCFE (Free Cash Flow to Equity) determines the remaining cash with the company's investors or equity shareholders after extending funds for debt repayment, interest payment and reinvestment. It is an indicator of the company's equity capital managementread more.
Let us move to the next Corporate Finance interview question.
#18 – What is a Stock Split and Stock Dividend?
Ans. A stock split is when a company splits its stock into 2 or more pieces. For example a 2 for 1 split. A company splits its stockCompany Splits Its StockStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more for various reasons. One of the reasons is to make the stock available for the investors who invest in the stock of the companies which are inexpensive. The probability of growth for those stocks also increases. Stock DividendStock DividendA stock dividend refers to bonus shares paid to shareholders instead of cash. Companies resort to such dividends when there is a cash crunch. Shareholders are allotted a certain percentage of shareholding.read more is when the company distributes additional shares in lieu of cash as dividends.
#19 – What is the Rights Issue?
Ans. A rights offering is an issue that is offered to the existing shareholders of the company only and at a predetermined price. A company issues this offer when it needs to raise money. Rights IssuesRights IssuesThe term "right issue of shares" refers to the offering of shares to all existing Equity or Preference shareholders of the Company in proportion to their current shareholding in the Company.read more might be seen as a bad sign as the company might not be able to fulfill its future obligations through the cash generated by the operating activities of the company. One needs to dig deeper as to why the company needs to raise the capital.
#20 – What is a clean and dirty price of a bond?
Ans. Clean price is a price of a coupon bondCoupon BondCoupon bonds pay fixed interest at a predetermined frequency from the bond’s issue date to the bond’s maturity or transfer date. The holder of a coupon bond receives a periodic payment of the stipulated fixed interest rate.read more not including the interest accrued. In other words, the clean price is the present value of the discounted future cash flows of a bond excluding the interest payments. Dirty price of a bond includes accrued interest in the calculation of bond. Dirty price of the bond is the present value of the discounted future cash flows of a bond which include the interest payments made by the issuing entity.
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This is a guide to Top 20 Corporate Finance Interview Questions with answers. Here we covered both – basic as well as advanced corporate finance interview questions. You may also have a look at the following articles to prepare well for your Corporate Finance Interview –
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