Corporate Finance Interview Questions and Answers

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 3 parts

• Part 1 – Corporate Finance Interview Questions (Basic)
• Part 2 – Corporate Finance Interview Questions (Advanced)

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 Statements is to provide financial information about the reporting entity that is useful to existing and potential investors, creditors and lenders in making decisions about whether to invest, give credit or not. There are mainly three types of financial statements which a company prepares.
1. Income Statement – 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 Sheet 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: Assets = Liabilities – Owner’s Equity.
3.Cash Flow Statement – Cash Flow Statement 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 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 Direct method and Indirect method. Generally company uses Direct method for preparing the Cash Flow Statement as seen in the annual report of the company. Direct method starts with cash collected from customers adding interests and dividends and then deducting cash paid to suppliers, interest paid, income tax paid. Indirect method starts from net income and then we add back all the non-cash charges which is depreciation and amortization expense, we also add working capital changes.

Cash Flow Statement is categorised into three activities: Cash Flow from Operations, Cash Flow from Investing and Cash Flow from Financing.
Cash Flow from Operations consists of cash inflows and outflows which are generated from the company’s core business or product. Cash Flow from Investing 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 financing date. Some of the short-term sources of financing are: Trade Credit, Unsecured Bank Loans, Bank Over-drafts, Commercial Papers, Secured Short-term loans.

• Trade Credit is an agreement between 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 credit 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 which 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 bank.
• Unsecured Bank Loan is a type of credit which 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 Assets minus Current Liabilities. Working capital tells us about the amount of capital tied up to its business (daily activities) such as account receivables, 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. Purchase of Asset is a transaction done by the company which will impact all the three statements of the company. Let’s say that the asset is an 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 equipment 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 Earnings per Share of the company. This is calculated for the common stockholders of the company. As the name suggests, it is the per share earnings of the company. It acts as an indicator of profitability. Calculation:

EPS = (Net Income – Preferred Dividends) / weighted average number of shares oustanding 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 EPS: It is useful for the companies which have 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 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 securities 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 which are already specified by the exchange and is traded through exchanges. Future markets have clearing houses which 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 counter) 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 Futures

#9 – What are the different types of Bonds? 

Ans. A bond is a fixed income security which 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 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 which 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 which 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 straight-line method for charging depreciation in its income statement for shareholders but it uses 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 which is used to make a decision or a forecast about a project generally in 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 means forecasting companies financial statements like Balance Sheet, Cash Flows, and Income Statement. These forecasts are in turn used for company valuations and financial analysis.
• With respect to Investment Banking, you can talk about the Financial Models that you have prepared. You may refer to these Financial Modeling Templates.

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/Sales
• EV/EBITDA
• EV/EBIT
• PE Ratio
• PEG Ratio
• P/CF Ratio
• P/BV Ratio
• EV/Assets

#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 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 management of the company. Its components are Debt, Common Equity, and Preferred Equity.

The formula of WACC = (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 undervalued or overvalued. 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 Options 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 DCF method? 

Ans. DCF is Discounted Cash Flow 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:
Dividend Discount Model (DDM), Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE).

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 stock 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 Rights Issue? 

Ans. A rights offering is an issue which 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. This might be seen as a bad sign as the company might not be able to fulfil its future obligations through the cash generated by 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 bond not including the interest accrued. In other words, 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.

Recommended Article

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 –

• Accounting Interview Q&As
• Private Equity Interview Questions
• Top 20 Financial Modeling Interview Questions
• Investment Banking Questions and Answers
• Hedge Fund Interview Questions and Answers

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