Top 25 Interview Question of Corporate Finance
Top 25 Interview Question of Corporate Finance
Q1) Define Corporate Finance?
Corporate finance describes the financial decisions of corporations. Its main objective is to maximize corporate value while reducing financial risk. The financial manager has responsibility for corporate finance decisions.
Q2) Define Finance?
Finance is a term used to describe both the money resources available to governments, firms, or individuals, and the management of these fu
Q3) What is a Capital Budgeting?
Capital Budgeting is the process in which a company formulates its strategies of investment in various capital or long term projects and how much investment is appropriate from the point of view of increasing shareholder’s wealth.
The Process Involves:
- Gathering Investment Ideas
- Analyzing Success Probabilities
- Calculating Costs
- Deciding which Projects to Invest in
- Allocating Funds
- Reviewing and Monitoring the Project at Periodic Intervals
Q4) What is NPV?
NPV stands for Net Present Value. It is the sum of all discounted cash inflows & outflows related to a capital investment project for a company. It helps in deciding whether or not it is profitable for a company to invest in the project.
- Decision Rule: If NPV > 0 then the project is worth investing in while if NPV < 0 then the project is not worth investing in.
Q5) What Are The Responsibilities Of Financial Manager?
financial manager is responsible for financing the firm and acts as an intermediary between the financial system's institutions and markets, on the one hand, and the enterprise, on the other.
Q6) What is IRR?
IRR stands for Internal Rate of Return. It is the rate of return where the NPV = 0, which implies that the present value of cash inflows = present value of cash outflows when discounted at the IRR
- Decision Rule: If there are two projects to choose from, the project with a higher IRR should be selected because essentially IRR is a return & higher the return, better the investment is.
Q7) Which Are The Interrelated Areas Finance Consists Of?
- Money and capital markets, which deals with securities markets and financial institutions
- Investments, which focuses on the decisions made by both individual and institutional investors as they choose securities for their investment portfolios
- Financial management, or "business finance," which involves decisions within firms.
Q8) Explain three sources of short-term Finance used by a company
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 Papers, 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 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 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 bank.
- 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.
Q9)What Is Profit Maximization?
Another objective of Financial Managers is Profit Maximization which entreats Financial Managers to put in place measures and policies that will increase the financial position of the firm. Shareholders need to receive periodic amounts to solidify their interest in the organization. A firm that does not make and declare profits continuously will not attract investors to put their money in it.
Q10) What Are The Two Basic Problems Financial Manager Faces Nowadays?
- How much money should the firm invest, and what specific assets should the firm invest in. This is the firm's investment, or capital budgeting decision.
- How should the cash required for an investment be raised. This is the financing decision.
Q11) What is a difference between Futures Contract and Forwards Contract?
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 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
Q12) What Is Bank Overdraft?
Businesses and individuals who have Current accounts with banks, subject to the bank's regulations, may be allowed to from time to time withdraw amounts in excess of the balance standing in such accounts. The believe that the account may be credited with some funds later after which the bank would recover the overdraft and some service charges. Overdrafts are more likely to be made available to businesses that need short-term funds for a seasonal trade or for a specific contract.
Q13) Define Balance Sheet?
Balance Sheet is a position statement as it refers to a particular date. It is also referred to as Statement of Sources and Application of Funds. It informs about the various sources used by the organization which are technically known as liabilities to raise the funds which are referred as assets.
Q14) What are the different types of Bonds?
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.
Q14)Define The Cash System Of Accounting?
Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.
Q15) What is a securitized Bond?
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.
Q16) Define Capital Expenditure?
Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.
E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.
Q17) What are the flaws of the Payback Period?. How can these be avoided?
- It uses Undiscounted CFs.
- Ignores the life after the point when the investment is recovered so if beyond that there is a big cash outflow then the method doesn’t account for it.
- At times we use discounted CF to avoid the first flaw but the second flaw is not possible to remove from this method.
Q18) Define Share Capital?
Share Capital is that portion of a company's equity that has been obtained by issuing share to a shareholder. The amount of share capital increases as new shares are sold to public in exchange for cash.
Q19) Described Deferred Revenue Expenditure?
Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an accounting year but the benefit of which may be extended to a number of years. And these are charged to profit and loss account. E.g. Development expenditure, Advertisement etc.
Q20) Define Proprietary Firms Easy Formation?
Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities. Also there is no set limit of minimum or maximum number of persons to start the business as it can be started by a single person.
Q21) When can IRR be Unreliable?
IRR can be unreliable when the CFs are unconventional, which means there is more than one sign change in the CF stream or the outflows are too small for the inflows that there can never be a 0 NPV.
Q22) What is Deferred Tax Liability and why it might be created?
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 method 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.
Q23) What are Stock Options?
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.
Q24) Define Proprietary Firms Quick Decision Making?
Being the only owner of the business the sole trader takes all the decisions himself. He evaluates all the opportunities available and finds the solution to problems which makes decision making quick.
Q25) Define Proprietary Firms Personal Attention To Customer Needs?
Due to the small geographical area it becomes easy for the sole proprietor deal with all its customers personally and knows their needs. Thus it makes easy for him to pay special attention to consumer needs.