Corporate Finance Interview Questions (with Answers)

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

Corporate Finance Interview Questions

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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 StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.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

Cash Flow Statements

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 company. 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 depreciation 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 Financing 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 financing 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.

#4 – Define Working Capital

Net Working Capital - colgate

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 refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more, payables, inventory in hand and many more. Working capital 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.

#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

Colgate Case Study - Earnings Per Share

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.

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 risk.

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 Bond, 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 Entity 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?

What is Financial Modeling

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 –

#14 – Describe WACC and its components

Ans. WACC 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 WACC Formula is a way of evaluating a firm's cost of capital in which each category is weighted proportionately. It is the average rate that a company is expected to pay to its stakeholders in order to finance its assets. In simple terms, it is the minimum return that the firm should earn on its existing asset base in order for investors and lenders to be interested, so as to avoid them from investing elsewhere.read more = (Wd*Kd) + (We*Ke) + (Wps*Kps).

#15 – Describe P/E Ratio 

PE Ratio - Google Apple

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 DCF 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:
DDM, FCFF, 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 split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly.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 Dividend 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 Issues 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.

Corporate Finance Interview Questions Video

 

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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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