Top 25 interview questions of finance
Top 25 interview questions of finance
Q1) What is investment banking?
Investment banking manages portfolios of financial assets, commodity and currency, fixed income, corporate finance, corporate advisory services for mergers and acquisitions, debt and equity writing etc.
Q2) What Is Working Capital?
By definition, working capital is current assets minus current liabilities. The working capital figure shows a financial manager how much of an organization's cash is tied up in items such as accounts receivables and inventory. It also indicates how much cash is going to be required to pay off short term debt and obligations over the next year.
Q3) How do you calculate the WACC?
WACC (stands for Weighted Average Cost of Capital) is calculated by taking the percentage of debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the percentage of equity to capital, multiplied by the required return on equity. Learn more in CFI’s free guide to understanding WACC.
Q4) Explain To Me What A Cash Flow Statement Is And How It Works.
You'll want to start with net income and then proceed line by line through the major adjustments (depreciation, deferred taxes, and working capital changes) required to arrive at cash flow from operations. In your explanation you'll also want to mention the following: Capital expenditures, purchase of intangible assets, sale of real assets, and purchase/sale of investment securities to find cash flow generated from investing activies.
- Issuance/repurchase of debt, sale of equity, and payment of dividends to find cash flow from financing activities.
- Adding the cash flows from operating, investing and financing activities your able to come up with the total change in cash.
- By taking the cash balance at the beginning of the period and adjusting it for the total change in cash you arrive at the cash balance at the end of the period.
Q5) Is it possible for a company to show positive cash flows but be in grave trouble?
Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off inventory and delaying payables), and another example involves lack of revenues going forward in the pipeline.
Q6) What is overdraft protection?
Overdraft protection is a service that is provided by a bank to their customer. For instance, if you are holding two accounts, saving and credit account, in the same bank. Now if one of your accounts does not have enough cash to process the cheques, or to cover the purchases. The bank will transfer money from one account to another account, which does not have cash so to prevent check return or to clear your shopping or electricity bills.
Q7) A Company Purchases A Piece Of New Equipment. Explain The Impact Of The Purchase On The Income Statement, Balance Sheet, And Statement Of Cash Flows.
At the time of the purchase, there is a cash outflow (cash flow statement) and PP&E goes up (balance sheet). Over the life of the asset it is depreciated. This shows up a reduction in net income (income statement) and PP&E (balance sheet) decreases by the amount depreciated. At the same time retained earnings (balance sheet) also goes down. However, the depreciation is added back in the cash from operations section (cash flow statement) as it is a non-cash expense the reduced net income.
Q8) Why are increases in accounts receivable a cash reduction on the cash flow statement?
Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to net income to reflect the fact that the company never actually received those funds.
Q9) Which is cheaper, debt or equity?
Debt is cheaper because it is paid before equity and has collateral backing it. Debt ranks ahead of equity on liquidation of the business. There are pros and cons to financing with debt vs. equity that a business needs to consider. It is not automatically better to use debt financing simply because it’s cheaper. A good answer to the question may highlight the trade off if there is any follow-up required. Learn more about the cost of debts and cost of equity.
Q10) What is (APR) Annual Percentage Rate?
APR stands for Annual Percentage Rate, and it is a charge or interest that the bank imposes on their customers for using their services like loans, credit cards, mortgage loan etc. The interest rate or fees imposed is calculated annually.
Q11) What is ‘Fixed’ APR and ‘Variable’ APR?
APR’ (Annual Percentage Rate) can be ‘Fixed’ or ‘Variable’ type. In ‘Fixed APR’, the interest rate remains same throughout the term of the loan or mortgage, while in ‘Variable APR’ the interest rate will change without notice, based on the other factors like ‘prime rate’.
Q12) What Is Authorized Capital?
Authorized capital is the maximum capital that a company is authorized to raise.
Q13) What does negative working capital mean?
Negative working capital is common in some industries, such as grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers often give 30 days (or more) credit. This means that the company receives cash from customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable. In other situations, negative working capital may signal a company is facing financial trouble if it doesn’t have enough cash to pay its current liabilities.
In answer to this interview question, it’s important to consider the company’s normal working capital cycle.
Q14) What Is Networth?
Networth is the total assets minus total liabilities of a company.
Q15) What Is A Deferred Tax Liability And Why Might One Be Created?
Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period.
Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS.
Q16) What is goodwill?
Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired business. Let’s walk through the following example: Acquirer buys Target for $500m in cash. Target has 1 asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.
- Acquirer records cash decline of $500 to finance acquisition
- Acquirer’s PP&E increases by $100m
- Acquirer’s debt increases by $50m
- Acquirer records goodwill of $450m
Q17) Walk me through a cash flow statement.
- Start with net income, go line by line through major adjustments (depreciation, changes in working capital and deferred taxes) to arrive at cash flows from operating activities.
- Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment securities to arrive at cash flow from investing activities.
- Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from financing activities.
- Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you to total change of cash.
- Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance.
Q18) What are the different types of banking software applications are available in the Industry?
There are many types of banking software applications and few are listed below
- a) Internet banking system: Internet banking allows the customers and financial institution to conduct final transaction using banks or financial institute website.
- b) ATM banking (Automated Teller Machine): It is an electronic banking outlet, which allows customers to complete basic transaction.
- c) Core banking system: Core banking is a service provided by a networked bank branches. With this, customer can withdraw money from any branch.
- d) Loan management system: The database collects all the information and keeps the track about the customers who borrows the money.
- e) Credit management system: Credit management system is a system for handling credit accounts, assessing risks and determining how much credit to offer to the customer.
- f) Investment management system: It is a process of managing money, including investments, banking, budgeting and taxes.
- g) Stock market management system: The stock market management is a system that manages financial portfolio like securities and bonds.
- h) Financial management system: Financial management system is used to govern and keep a record of its income, expense and assets and to keep the accountability of its profit.
Q19) What is negative Amortization?
When repayment of the loan is less than the loans accumulated interest, then negative Amortization occurs. It will increase the loan amount instead of decreasing it. It is also known as ‘deferred interest’.
Q20) What Is Bull Market?
A financial market of a group of securities in which prices are rising or are expected to rise.
Q21) Explain ‘financial modeling’.
Financial modeling is a quantitative analysis commonly used for either asset pricing or general corporate finance. It is the process wherein a company’s expenses and earnings are taken into consideration (commonly into spreadsheets) to anticipate the impact of today’s decisions in the future.
The financial model also turns out to be a very impactful tool for the following tasks:
- Estimate the valuation of any business
- Compare competition
- Strategic planning
- Testing different scenarios
- Budget planning and allocation
- Measure the impacts of any changes in economic policies
Since financial modeling is one of the most primary key skills, you can also share your experience about using different financial models including the discounted cash flow (DCF) model, initial public offering (IPO) model, leveraged buyout (LBO) model, consolidation model, etc.
Q22) What is ‘working capital, and which are the different types of working capital’?
The working capital formula is best defined as current assets minus current liabilities.
The primary function of working capital is to analyze the total amount of money that you have readily available to meet the demand of all the current expenses.
Since financial analysts play a major role in being an information mediator in capital markets, getting a true understanding of working capital needs is very essential. Also, an analyst must stay on toes to forecast the actual working capital requirements, especially in the case when the company is constantly growing or expanding.
Also, you can highlight a few prior incidents when your existing company felt the need for additional working capital, and you can even back your answer with the ways you used to boost the working capital.
Another example of proving your abilities is to suggest the times when you and your team used the working capital data to operate current and future needs smoothly.
Q23) What is NPV? Where is it used?
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.
Q24) Different Types Of Insurance
Types of insurance:
1. Auto insurance.
2. home insurance.
3. health insurance.
8. other types insurance.
9. insurance financing vehicles.
10. closed community self insuran
Q25)What Is Trial Balance?
It is statement of balances of all the accounts in the ledger prepared to prove the arithmetical accuracy of the books of accounts.