100+ Finance Interview Questions With Answers [Bookmark Them!]

In any company, finance is one of the most vital components. Good financial management helps organizations to grow, take risks, strategize, manage investment activities and set long-term goals. For jobseekers seeking to enter this domain, a sound knowledge of the various concepts related to finance is extremely important. Thus, the job interviews for onboarding candidates for finance management are designed to assess their fundamental knowledge.

In this article, we will be covering the top finance interview questions and answers that will help you revise all the basic topics in one go and increase your chances of getting hired at the company of your choice. So whether you are a fresher or an early-stage professional, this well-researched list of the most expected finance interview questions will certainly pump up your confidence before the final day. 

What exactly is Finance?

"Finance without strategy is just numbers and strategy without finance is just dreaming" 

Before taking the plunge into the most asked finance interview questions, let's first answer a basic question, i.e. what is finance? In simple terms, finance deals with all aspects of money management in the finance industry including:

• Investment banking - It involves advising companies on mergers & acquisitions, debt financing, equity offerings, etc.

• Asset Wealth Management - This includes investment funds like mutual funds or hedge funds that help to invest in stocks, bonds, real estate, commodities, derivatives, currencies, etc.

• Banking – The term ‘banking’ refers to a wide range of activities that banks perform such as lending, borrowing, investing, trading, asset securitization, credit analysis, etc.

• Insurance – Insurers protect against risks associated with life events like death, disability, unemployment, illness, accidents, natural disasters, etc.

• Accounting – Accountants prepare accounts for businesses so they can make informed decisions about their finances. They also help them manage cash flow, taxes, investments, etc. There are three main categories of accountancy; namely, auditing, tax preparation, and bookkeeping.

Do you know what Auditors, Bookkeepers, and Tax preparers do in an organization? Audit firms/companies while preparing income tax returns. Bookkeepers record transactions related to business operations. Tax preparers prepare tax returns based on information provided by clients.

Most Common Finance Interview Questions

As with most other job interviews, financial interview questions cover both behavioral questions and technical finance interview questions. Following are some of the general type of questions that you may face apart from finance-related interview questions. 

General finance interview questions 

• Tell me about yourself

• Which quality makes you fit for the financial analyst job?

•  Why did you think of doing an MBA?

•  Where do you see 5 years from now?

•  What are the GDP, growth rate, and inflation rate of the country?

• Define Fair Market Value(FMV

•  Who is the head of Niti Ayog? 

•  Who is the RBI governor?

• Differentiate between primary market and secondary market.

• How will you handle negativity?

• What if you have a conflict with a senior or colleague?

• Difference between GDP and GNP

• The current rate of USD

• What is the current account deficit?

• What is your dream job?

• Rate yourself on a scale of 1 – 10

Basic finance interview questions and answers for freshers

The questions below cover the basic finance concepts that candidates must be aware of. 

1. What do you like about ‘Finance'?

Finance interests me for the following reasons:

1. It gives an insight into the workings of all the aspects of an enterprise
2. I am comfortable working with numbers and am good at Excel.
3. It will enable me to be a part of the major decision-making process of the enterprise such as distribution of profits, financing of capital requirements, effective working capital management, evaluation of performance, and identifying areas of concern and improvements, etc.

2. What does the inventory turnover ratio shows?

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period.

3. What is the return on equity?

Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company is managing the equity that shareholders have contributed to the company. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Return on Equity = Net Income – Pref. dividend (if, any) / Shareholder's Equity.

4. What is the net worth of a company?

Net worth is the amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health.

5. What is the operating cycle/Cash conversion cycle?

The operating cycle is also known as the cash conversion cycle. In the context of a manufacturer, the operating cycle has been described as the amount of time that it takes for a manufacturer's cash to be converted into products plus the time it takes for those products to be sold and turned back into cash.

6. What is the difference between EBIT and EBIDTA? Can EBIT be greater than EBIDTA?

EBIT represents the approximate amount of operating income generated by a business, while EBITDA roughly represents the cash flow generated by the operations of a business.

7. Distinguish between Budgeting and Forecasting.

Budgeting and financial forecasting are financial planning techniques that help a business enterprise to achieve its desired levels of profits. The difference between the two are as follows:

8. What are SENSEX and NIFTY?

SENSEX:

• Sensex, also called the BSE 30, is a stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE).

• 30 companies are selected on the basis of the free-float market capitalization.

• These are different companies from varied sectors representing a sample of large, liquid, and representative companies.

• The base year of Sensex is 1978-79 and the base value is 100.

• It is an indicator of market movement.

• If the Sensex goes up, it means that most of the stocks in India went up during the given period. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE has gone down.

NIFTY:

1. The NIFTY 50 index is the National Stock Exchange of India’s benchmark stock market index for the Indian equity market. Nifty is owned and managed by India Index Services and Products (IISL).

2. The base year is taken as 1995 and the base value is set to 1000.

3. Nifty is calculated on 50 stocks actively traded in the NSE

4. 50 top stocks are selected from 24 sectors.

9. What are EPS and diluted EPS?

EPS is the portion of a company's profit that is allocated to every individual share of the stock. It is a term that is of much importance to investors and people who trade in the stock market. The higher the earnings per share of a company, the better is its profitability. EPS - PAT/ TOTAL NO.O/S SHARES

Diluted EPS takes into account what would happen if dilutive securities were exercised. Dilutive securities are securities that are not common stock but can be converted to common stock if the holder exercises that option. If converted, dilutive securities effectively increase the weighted number of shares outstanding, and this, in turn, decreases EPS, because the calculation for EPS uses a weighted number of shares in the denominator.

10. What is derivative

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets.

Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.

Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have a greater risk for the counterparty than do standardized derivatives.

11. What is options trading?

Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option.

12. Difference between call and put options

• Call options - provide the holder the right (but not the obligation) to purchase an underlying asset at a specified price (the strike price), for a certain period of time. If the stock fails to meet the strike price before the expiration date, the option expires and becomes worthless. Investors buy calls when they think the share price of the underlying security will rise or sell a call if they think it will fall. Selling an option is also referred to as 'writing' an option.
• Put options - give the holder the right to sell an underlying asset at a specified price (the strike price). The seller (or writer) of the put option is obligated to buy the stock at the strike price. Put options can be exercised at any time before the option expires. Investors buy puts if they think the share price of the underlying.

13. Explain Future and Forward Contract?

A forward contract is a customized contractual agreement where two private parties agree to trade a particular asset with each other at an agreed specific price and time in the future. Forward contracts are traded privately over the counter, and not on an exchange.

A futures contract — often referred to as futures — is a standardized version of a forward contract that is publicly traded on a futures exchange. Like a forward contract, a futures contract includes an agreed-upon price and time in the future to buy or sell an asset — usually stocks, bonds, or commodities, like gold.

14. What are Swaps?

A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price, or commodity price. Conceptually, one may view a swap as either a portfolio of forwarding contracts or as a long position in one bond coupled with a short position in another bond. This article will discuss the two most common and most basic types of swaps: the plain vanilla interest rate and currency swaps.

15. Explain valuation and techniques

Valuation is the process of determining the current worth of an asset or a company; there are many techniques used to determine value. An analyst placing a value on a company looks at the company's management, the composition of its capital structure, the prospect of future earnings, and the market value of assets.

Techniques:

1. Discounted cash flow (DCF) analysis.
2. Comparable transactions method.
3. Market valuation.
4. Book value

16. What is financial risk management?

Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk. The risks can be operational risk, credit risk, market risk, foreign exchange risk, shape risk, volatility risk, liquidity risk, inflation risk, business risk, legal risk, reputational risk, sector risk, etc.

Similar to general risk management, financial risk management requires identifying its sources, measuring them, and strategy to address them.

17. What are SLR, CRR, REPO, and Reverse Repo Rate?

• Repo rate is also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. 
• Reverse Repo Rate is the short-term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which is always risky. 
• Cash Reserve Ratio - Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, banks don't hold these as cash with themselves, they deposit such cash (aka currency chests) with the Reserve Bank of India, which is considered equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.
• Statutory Liquidity Ratio - Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold, and approved securities. The ratio of liquid assets to demand and time liabilities is known as the Statutory Liquidity Ratio (SLR). 

18. Difference between broad money and narrow money

Narrow money is a category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. In the United States, narrow money is classified as M1 (M0 + demand accounts).

Broad money is the most inclusive method of calculating a given country's money supply. The money supply is the totality of assets that households and businesses can use to make payments or to hold as short-term investments, such as currency, funds in bank accounts and anything of value resembling money.

19. Explain dividend models

• Dividend Growth Model: Also known as the Gordon growth model, it is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.
• Dividend Discount Model: The Dividend Discount Model (DDM) is a procedure for valuing the price of a stock by using the predicted dividends and discounting them back to the present value. If the value obtained from the DDM is higher than what the shares are currently trading at, then the stock is undervalued.

20. What is a sin tax?

A sin tax is an excise tax specifically levied on certain goods deemed harmful to society, for example, alcohol and tobacco, candies, drugs, soft drinks, fast foods, coffee, sugar, gambling, and pornography. Two claimed purposes are usually used to argue for such taxes.

21. What is STT?

STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units.

22. What is deferred tax liability and assets?

Deferred tax asset is an accounting term that refers to a situation where a business has overpaid taxes or taxes paid in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief, and the over-payment is, therefore, an asset for the company.

Deferred tax liability is an account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may be realized during any given year, which makes the deferred status appropriate.

23. Explain cash equivalents?

Cash and cash equivalents refer to the line item on the balance sheet that reports the value of a company's assets that are cash or can be converted into cash immediately. These include bank accounts, marketable securities, commercial paper, Treasury bills and short-term government bonds with a maturity date of three months or less. Marketable securities and money market holdings are considered cash equivalents because they are liquid and not subject to material fluctuations in value.

24. Difference between Depreciation, Depletion and Amortization

Depletion refers to the allocation of the cost of natural resources over time. For example, an oil well has a finite life before all of the oil is pumped out. Therefore, the oil well's setup costs are spread out over the predicted life of the oil well.

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

Amortization is an accounting term that refers to the process of allocating the cost of an intangible asset over a period of time. It also refers to the repayment of loan principal over time.

25. What is accumulated depreciation?

Accumulated depreciation is the total depreciation for a fixed asset that has been charged to expense since that asset was acquired and made available for use.

26. What are free cash flows?

FCF is an assessment of the amount of cash a company generates after accounting for all capital expenditures, such as buildings or property, plants, and equipment. The excess cash is used to expand production, develop new products, make acquisitions, pay dividends and reduce debt.

FCF - EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).

27. Explain Purchase Price and Profitability 

Finance interview questions such as these try to assess the basic knowledge of the candidates. Following are the details.

Purchase price is the price one pays for something. This may be an asset, investment etc. It becomes the basis for calculating profit or loss incurred. 

Profitability is the measure of profit (when income is more than expense). It is calculated with the help of profitability ratios which are as follows: 

• Gross Profit
• Net profit
• Return on equity
• Return on assets

28. Difference between solvency and liquidity

This is one of the most common finance interview questions. Going by definition, solvency is firm’s potential to carry on business activities in the foreseeable future, so as to expand and grow. It is the measure of the company’s capability to fulfill its long-term financial obligations when they fall due for payment.

Liquidity is the firm’s ability to fulfill its obligations in the short run, normally one year. It is the near-term solvency of the firm, i.e. to pay its current liabilities.

29. Difference between an operating lease and a financial lease

A finance lease is often used to buy equipment for the major part of its useful life. The goods are financed ex GST and have a balloon at the end of the term. Here, at the end of the lease term, the lessee will obtain ownership of the equipment upon a successful 'offer to buy' the equipment. Traditionally this 'offer' is the balloon amount.

An operating lease agreement to finance equipment for less than its useful life and the lessee can return equipment to the lessor at the end of the lease period without any further obligation.

30. What is asset acquisition?

An asset acquisition strategy is the purchase of a company by buying its assets instead of its stock. An asset acquisition strategy may be used for a takeover or buyout if the target is bankrupt or is in a bad financial position.

31. Explain leverage ratio and solvency ratio

A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.

The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations

32. What is preference capital?

Preference capital is the portion of capital which is raised through the issue of the preference shares. Preference shares shares are paid out to shareholders before common stock dividends are issued. This means that if a company becomes bankrupt the preferred stockholders are entitled to be paid from company assets before common stockholders. Preference capital has characteristics of both equity and debentures. 

33. Difference between current ratio and a quick ratio

The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The current ratio is calculated by dividing current assets by current liabilities.

The quick ratio, on the other hand, is a liquidity indicator that filters the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities (you can think of the “quick” part as meaning assets that can be liquidated fast). The quick ratio also called the “acid-test ratio,” is calculated by adding cash & equivalents, marketable investments, and accounts receivables, and dividing that sum by current liabilities.

The main difference between the current ratio and the quick ratio is that the latter offers a more conservative view of the company’s ability to meets its short-term liabilities with its short-term assets because it does not include inventory and other current assets that are more difficult to liquidate (i.e., turn into cash). By excluding inventory (and other less liquid assets) the quick ratio focuses on the company’s more liquid assets.

34. What is working capital and what is networking capital?

Working capital is the amount of a company's current assets minus the amount of its current liabilities. The adequacy of a company's working capital depends on the industry in which it competes, its relationship with its customers and suppliers, and more.

• Components of cash flow Statement

The components are:

1. Cash flow resulting from operating activities.
2. Cash flow resulting from investing activities.
3. Cash flow resulting from financing activities.
4. It also may include disclosure of non-cash financing activities.

35. What is goodwill?

Goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent goodwill.

Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet.

36. How to calculate goodwill?

Calculating Goodwill Using Average Profits – Avg profits * no of years.

Goodwill using super profits (Actual profit – normal profit)

Goodwill by the capitalization of profits

37. What is contingent liability?

A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.

• What is NPA?

A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days.

Around 7.7 Lakh cr. of NPA in India in the year 2017.

• What are REITs?

REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all type’s regular income streams, diversification, and long-term capital appreciation. In turn, shareholders pay the income taxes on those dividends.

• What is the book value of a business?

The difference between the company's total assets (what all the company owns - land, building, cash, equipment etc) and liabilities (all the debts) is the book value of a company.

• What is financial modeling?

It is the goal of the analyst to accurately forecast the price or future earnings performance of a company. Numerous valuations and forecast theories exist, and financial analysts are able to test these theories by recreating business events in an interactive calculator referred to as a financial model. A financial model tries to capture all the variables in a particular event.

• What is the difference between private equity and venture capital?

Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in start-ups with high growth potential.

• Which is cheaper debt or equity?

A company should always optimize its capital structure. If it has taxable income it can benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is able to make its interest payments it may make sense to issue debt if it lowers the WACC.

• What are accretion and dilution?

Accretion is asset growth through addition or expansion. Accretion can occur through a company’s internal development or by way of mergers and acquisitions. Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Adding to the number of shares outstanding reduces the value of holdings of existing shareholders.

• How RTGS is different from NEFT?

NEFT is an electronic fund transfer system that operates on a Deferred Net Settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place taking into account all transactions received till the particular cut-off time.

These transactions are netted (payable and receivables) in NEFT whereas in RTGS the transactions are settled individually on real-time basis. In NEFT any transaction initiated after a designated settlement time would have to wait till the next designated settlement time.

Contrary to this, in the RTGS transactions are processed continuously throughout the RTGS business hours.

Investment banking questions

•   What is the difference between commercial and investment banking?

The commercial bank accepts deposits from customers and makes consumer and commercial loans using these deposits.

Investment bank: acts as an intermediary between companies and investors. Does not accept deposits, but rather sells investments, advises on M&A, etc…loans and debt/equity issues originated by the bank are not typically held by the bank but rather sold to third parties on the buy-side through their sales and trading arms.

• Meaning and formula of WACC

WACC: Weighted  average  cost of capital 

Where,

ME: Market Value of Equity E – Equity

D: Debt

Re – Cost of equity Rd – Cost of Debt T – Tax rate

A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source than another, we calculate a weighted average to find out how expensive it is for a company to raise the funds needed to buy buildings, equipment, and inventory.

It's important for a company to know its weighted average cost of capital as a way to gauge the expense of funding future projects. The lower a company's WACC, the cheaper it is for a company to fund new projects.

• Implications of (1 – T) in the WACC formula

There are tax deductions available on interest paid, which is often to companies’ benefit. Because of this, the net cost of companies’ debt is the amount of interest they are paying, minus the amount they have saved in taxes as a result of their tax-deductible interest payments. This is why the after-tax cost of debt is considered.

• What are the cost of debt and the cost of equity?

The cost of Debt is the Total Cost(interest) that a company is required to pay on the borrowed money. Cost of debt refers to the effective rate a company pays on its current debt.

Cost of equity refers to a shareholder's required rate of return on an equity investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.

• What is the dividend growth model?

The dividend growth model is used to calculate the cost of equity, but it requires that a company pays dividends. The calculation is based on future dividends. The theory behind the equation is the company's obligation to pay dividends is the cost of paying shareholders and therefore the cost of equity.

• Explain CAPM

Where,

Rf = Risk Free rate B = Beta

Rm = Market risk

The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected returns for assets given the risk of those assets, and calculating costs of capital.

The CAPM model says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas).

• Meaning of BETA and can it be negative?

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

A security's beta is calculated by dividing the covariance of the security's returns and the benchmark's returns by the variance of the benchmark's returns over a specified period.

A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Conversely, if an ETF's beta is 0.65, it is theoretically 35% less volatile than the market.

A beta less than 0, which would indicate an inverse relation to the market - is possible but highly unlikely. However, some investors believe that gold and gold stocks should have negative betas because they tended to do better when the stock market declines.

• What is the required rate of return?

The required rate of return (RRR) is the minimum annual percentage earned by an investment that will induce individuals or companies to put money into particular security or project. The RRR is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money, and corporations use the RRR to decide if they should pursue a new project or business expansion.

• What is the risk-free return?

Risk-free return is the theoretical rate of return attributed to an investment with zero risks. The risk-free rate represents the interest on an investor's money that he or she would expect from an absolutely risk-free investment over a specified period of time.

• What are correlation, covariance, and variance and relate them?

Covariance measures how two variables move together. It measures whether the two move in the same direction (a positive covariance) or in opposite directions (a negative covariance).

Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management. Correlation is computed into what is known as the correlation coefficient, which has a value that must fall between -1 and 1.

Variance measures the variability (volatility) from an average or mean and volatility is a measure of risk, the variance statistic can help determine the risk an investor might take on when purchasing a specific security. A variance value of zero indicates that all values within a set of numbers are identical; all variances that are non-zero will be positive numbers.

A large variance indicates that numbers in the set are far from the mean and each other, while a small variance indicates the opposite.

• What is a hedge fund?

Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). One aspect that has set the hedge fund industry apart is the fact that hedge funds face less regulation than mutual funds and other investment vehicles.

• What is hedging?

Most people have, whether they know it or not, engaged in hedging. For example, when you take out insurance to minimize the risk that an injury will erase your income or you buy life insurance to support your family in the case of your death, this is a hedge.

• How will you calculate enterprise value?

Enterprise Value, or EV for short, is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus debt, minority interest, and preferred shares, minus total cash and cash equivalents.

EV = market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments.

• Can a company have negative enterprise value?

Yes, it surely can. If the company is on the brink of bankruptcy, it will have negative enterprise value. Added to this, if the company has large cash reserves, enterprise value will swing to the negative side.

• What is minority interest?

Minority Interest also referred to as non-controlling interest (NCI), is the share of ownership in a subsidiary’s equity that is not owned or controlled by the parent corporation. The parent company has a controlling interest of 50 to less than 100 percent in the subsidiary and reports financial results of the subsidiary consolidated with its own financial statements

For example, suppose that Company A acquires a controlling interest of 75 percent in Company B. In this case the minority interest in Company B will be 25%. On its financial statements, Company A cannot claim the entire value of Company B without accounting for the 25 percent that belongs to the minority shareholders of Company B. Thus, company A must incorporate the impact of company B’s minority interest on its balance sheet and income statements.

• IPO and Book-building process.

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. (HDFC Standard Life Insurance) (Biggest IPO – COAL INDIA – 15200cr)

Book building is the process by which an underwriter attempts to determine at what price to offer an initial public offering (IPO) based on demand from institutional investors. An underwriter builds a book by accepting orders from fund managers, indicating the number of shares they desire and the price they are willing to pay.

• Requirement for bringing IPO

The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets:

1. The company has a track record of distributable profits in terms of Section 205 of the Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years;
2. The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each);
3. In case the company has changed its name within the last one year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name;
4. The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e., offer through offer document + firm allotment + promoters’ contribution through the offer document), does not exceed five (5) times its pre-issue net worth as per the audited balance sheet of the last financial year.)

• Sources of raising funds issue of shares.

Sources of raising funds are:

1. Issue of Debentures.
2. Loans from Financial Institutions. Loans from Commercial Banks.
3. Public Deposits. Reinvestment of Profits

• How to evaluate a stock?

The Price-to-Book Ratio (P/B)

Price-to-Earnings Ratio (P/E)

Dividend Yield

• How do you arrive at cash flows?

Here is the process:

1. Start with net income.
2. Add back non-cash expenses (Such as depreciation and amortization)
3. Adjust for gains and losses on sales on assets.
4. Add back losses Subtract out gains
5. Account for changes in all non-cash current assets.
6. Account for changes in all current assets and liabilities except notes payable and dividends payable.

• Explain NPV and IRR. How do you calculate the same?

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.

NPV = Cash inflows / (1+r)^n – Cash outflows

Internal rate of return (IRR) is a metric used in capital budgeting to measure the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. the higher a project's internal rate of return, the more desirable it is to undertake the project. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis.

• Can the IRR be negative?

Negative IRR indicates that the sum total of the post-investment cash flows is less than the initial investment; i.e., the non-discounted cash flows add up to a value that is less than the investment. Yes, both in theory and practice negative IRR exists, and it means that an investment loses money at the rate of the negative IRR. In such cases, the net present value (NPV) will always be negative unless the cost of capital is also negative, which may not be practically possible.

However, a negative NPV doesn’t always mean a negative IRR. Negative NPV simply means that the cost of capital or discount rate is more than the project IRR.

IRR is often defined as the theoretical discount rate at which the NPV of a cash flow stream becomes zero.

• 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

• What is typically higher – the cost of debt or the cost of equity?

The cost of equity is higher than the cost of debt because the cost associated with borrowing debt (interest expense) is tax-deductible, creating a tax shield. Additionally, the cost of equity is typically higher because, unlike lenders, equity investors are not guaranteed fixed payments, and are last in line at liquidation.

• What is loan syndication?

Loan syndication is the process of involving several different lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that may be too much for a single lender to provide or outside the scope of a lender's risk exposure levels. Thus, multiple lenders work together to provide the borrower with the capital needed.

Loan syndication is used in corporate borrowing. Companies seek corporate loans for a wide variety of reasons. Loan syndication is commonly needed when companies are borrowing for mergers, acquisitions, buyouts, and other capital projects. These types of capital projects often require large loans, thus loan syndication is mainly used in extremely large loan situations.

• What is securitization?

Securitization is the process of taking an illiquid asset or group of assets, and through financial engineering, transforming it (or them) into security.

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs).

• What major factors affect the yield of a corporate bond?

The economic factors that influence corporate bond yields are interest rates, inflation, and economic growth. All of these factors affect corporate bond yields and exert influence on each other. The pricing of corporate bond yields is a multivariable, dynamic process in which there are always competing pressures.

For example, economic growth is bullish for corporations as it leads to increased revenues and profits for companies, making it easier for them to borrow money and service debt, which leads to reduced risk of default and lower yields. However, extended periods of economic growth led to inflation risk and upward pressure on wages. Economic growth leads to increased competition for labor and diminished excess capacity.

Finance Interview Questions on Financial Modeling/Capital Budgeting

This is an important category of finance-related interview questions. Here are some questions that you must run through. 

• What is financial modeling?

 Financial modeling is a quantitative analysis that 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 the future holds for a particular industry or for a particular project.

In simple terms, financial modeling means forecasting companies’ financial statements like Balance Sheets, Cash Flows, and Income statements. These forecasts are in turn used for company valuations and financial analysis. Financial modeling is useful because it helps companies and individuals make better decisions.

Financial modeling is not confined to only a company’s financial affairs. It can be used in any area of any department and even in individual cases.

• Explain valuation.

Valuation is the process of determining the current worth of an asset or a company; there are many techniques used to determine value. An analyst placing a value on a company looks at the company's management, the composition of its capital structure, the prospect of future earnings, and the market value of assets.

• Techniques of capital budgeting?

Following are the techniques of capital budgeting:

1. Payback Period.
2. Discounted Payback Period.
3. Net Present Value.
4. Accounting Rate of Return.
5. Internal Rate of Return.

• What is the payback period and discounted payback period?

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

The discounted payback period is a capital budgeting procedure used to determine the profitability of a project. A discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure, by discounting future cash flows and recognizing the time value of money.

The net present value aspect of the discounted payback period does not exist in a payback period in which the gross inflow of future cash flows is not discounted.

For whom free cash flows are prepared. Free cash flows for equity (FCFE) Free cash flows for Firm (FCFF)

• How to calculate FCFE (Free Cash Flow to Equity)?

1. Net Income
2. Subtract Net Capital Expenditure
3. Subtract Net Change in working capital
4. Subtract Debt repayment

• How to calculate FCFF (Free Cash Flow to Firm)?

1. Net Income
2. Subtract Net Capital Expenditure
3. Subtract New Change in working capital

•   How to calculate Free cash flows?

EBIT (1-tax rate) + (depreciation) + (amortization) - (Net change in working capital) - (capital expenditure).

• What are the principles for cash flow estimation?

The principles are:

1. Consistency Principle
2. Incremental Principle
3. Separation Principle
4. Post Tax Principle

• What is DCF and why do we calculate DCF?

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.

• When would you not use a DCF in a Valuation?

We do not use a DCF if the company has unstable or unpredictable cash flows (tech or bio-tech startup) or when debt and working capital serve a fundamentally different role. For example, banks and financial institutions do not re-invest debt and working capital is a huge part of their Balance Sheets - so you wouldn't use a DCF for such companies.

• How to calculate DCF?

We take cash flows for each year and discount them with either cost of equity or WACC.

• How do you calculate the discount rate?

There are a number of methods that can be used to determine discount rates. A good approach – and the one we’ll use in this tutorial – is to use the weighted average cost of capital (WACC) – a blend of the cost of equity and after-tax cost of debt

• What is the terminal value and how do you calculate the same?

Terminal value (TV) represents all future cash flows in an asset valuation model. This allows models to reflect returns that will occur so far in the future that they are nearly impossible to forecast. The Gordon growth model, discounted cash flow and residual earnings all use terminal values that can be calculated with perpetuity growth, while an alternative exit valuation approach employs relative valuation methods.

• What is a risk-free rate? 

In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate.

• How to calculate beta?

The formula for calculating beta is the covariance of the return of an asset with the return of the Market, divided by the variance of the return of the benchmark over a certain period.

• What is levered and unlevered beta?

Unlevered beta compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the financial effects from leverage. This number provides a measure of how much systematic risk a firm's equity has when compared to the market.

• What are systematic risk and unsystematic risk?

Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be an unsystematic risk

Systematic risk, also known as 'market risk' or 'un-diversifiable risk', is the uncertainty inherent to the entire market or entire market segment.

• How would you value an apple tree?

The same way you would value a company: by looking at what comparable apple trees are worth (relative valuation) and the value of the apple tree’s cash flows (intrinsic valuation).

• What is the difference between NPV AND XNPV?

NPV assumes that the cash flows come in equal time intervals.

XNPV assumes that the cash flows don’t come in equal time intervals.

• What is LBO?

Leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the acquiring company's assets. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

• What is management buyout?

A transaction where a company’s management team purchases the assets and operations of the business they manage. A management buyout (MBO) is appealing to professional managers because of the greater potential rewards from being owners of the business rather than employees.

An MBO is different from a management buy-in (MBI), in which an external management team acquires a company and replaces the existing management team. It also differs from a leveraged management buyout (LMBO), where the buyers use the company assets as collateral to obtain debt financing.

Questions on corporate restructuring mergers and acquisitions

•   What do you actually do in Restructuring?

Restructuring bankers advised distressed companies – businesses going bankrupt, in the midst of bankruptcy, or getting out of bankruptcy – and help them change their capital structure to get out of bankruptcy, avoid it in the first place, or assist with a sale of the company depending on the scenario.

• Why would a company go bankrupt in the first place?

Some reasons are:

1. A company cannot meet its debt obligations/interest payments.
2. Creditors can accelerate debt payments and force the company into bankruptcy.
3. An acquisition has gone poorly or a company has just written down the value of its assets steeply and needs extra capital to stay afloat (see: investment banking industry).
4. There is a liquidity crunch and the company cannot afford to pay its vendors or suppliers.

• What options are available to a distressed company that can't meet debt obligations?

The options are available to a distressed company that can't meet debt obligations are:

1. Refinance and obtain fresh debt/equity.
2. Sell the company (either as a whole or in pieces in an asset sale).
3. Restructure its financial obligations to lower interest payments/debt repayments, or issue debt with PIK interest to reduce the cash interest expense.
4. File for bankruptcy and use that opportunity to obtain additional financing, restructure its obligations, and be freed of onerous contracts.

• What is the end goal of a given financial restructuring?

Restructuring does not change the amount of debt outstanding in and of itself – instead, it changes the terms of the debt, such as interest payments, monthly/quarterly principal repayment requirements, and the covenants.

• Distinguish between merger and acquisition?

A merger occurs when two separate entities combine forces to create a new, joint organization. An acquisition refers to the takeover of one entity by another. A new company does not emerge from an acquisition; rather, the smaller company is often consumed and ceases to exist, and its assets become part of the larger company. Acquisitions – sometimes called takeovers – generally carry a more negative connotation than mergers.

• What are the reasons for mergers and acquisitions?

1. The reasons for mergers and acquisitions are:
2. Synergy
3. Diversification
4. Growth
5. Eliminating competition

•   What is horizontal merger and vertical merger?

A horizontal merger is when two companies that belong to the same industry merge – for example if Airtel and Reliance merge! They belong to the same industry = telecommunications.

A vertical merger is a merger between two companies that operate at separate stages of the production process for a specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merger operations. Most often, the logic behind the merger is to increase synergies created by merging firms that would be more efficient in operating as one.

• What is a reverse merger?

A reverse merger (also known as a reverse takeover or reverse IPO) is a way for private companies to go public, typically through a simpler, shorter, and less expensive process. A conventional initial public offering (IPO) is more complicated and expensive, as private companies hire an investment bank to underwrite and issue the soon-to-be public company shares.

When acquiring a company that is weaker or smaller than the one being gobbled up, this is termed a reverse merger. Typically, reverse mergers take place through a parent company merging into a subsidiary, or a profit-making firm merging into a loss-making one.

• What is a congeneric merger?

A congeneric merger is a type of merger where two companies are in the same or related industries but do not offer the same products. In a congeneric merger, the companies may share similar distribution channels, providing synergies for the merger.

• What is a conglomerate merger?

A conglomerate merger is a merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

• Regulators involved in the process of mergers and amalgamation?

The regulators involved are:

1. Competition Commission of India
2. Reserve Bank of India
3. Depositories
4. Stock exchanges
5. Registrar of Companies
6. Regional Director
7. Official liquidator
8. NCLT – replaced High Courts

• Benefits and drawbacks of a merger

Advantages of mergers

1. Economies of scale – bigger firms more efficient
2. More profit enables more research and development.
3. Struggling firms can benefit from new management.

Disadvantages of mergers

1. Increased market share can lead to monopoly power and higher prices for consumers
2. A larger firm may experience diseconomies of scale – e.g. harder to communicate and coordinate.

• What are the methods for amalgamation under AS-14?

 An amalgamation in the nature of merger, or

 An amalgamation in the nature of the purchase.

• What is an amalgamation in the nature of a merger?

All assets and liabilities of the transferor company become, after amalgamation, the assets, and liabilities of the transferee company.

Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.

The consideration is discharged by the transferee company wholly by the issue of equity shares only, except that cash may be paid in respect of any fractional shares.

The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

No adjustment is intended to be made to the book value of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

• What is the swap ratio?

The ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. To calculate the swap ratio, companies analyze financial ratios such as book value, earnings per share, profits after tax, and dividends paid, as well as other factors, such as the reasons for the merger or acquisition.

• What is divestiture?

A divestiture is the partial or full disposal of a business unit through sale, exchange, closure, or bankruptcy. A divestiture most commonly results from a management decision to cease operating a business unit because it is not part of a core competency

Basic accounting interview questions with answers

This is one of the most popular categories of finance interview questions. Following types of questions are asked in accounting interviews.

• What is the difference between accounts payable and accounts receivable?  

Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.

• What are accruals?

Accruals are adjustments for 1) revenues that have been earned but are not yet recorded in the accounts, and 2) expenses that have been incurred but are not yet recorded in the accounts. The accruals need to be added via adjusting entries so that the financial statements report these amounts.

• What are prepaid expenses?

Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired.

The amount of prepaid expenses that have not yet expired are reported on a company's balance sheet as an asset. As the amount expires, the asset is reduced and an expense is recorded for the amount of the reduction. Hence, the balance sheet reports the unexpired costs and the income statement reports the expired costs.

•  What are the principles of accounting?

Cost Principles - The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired.

Matching Principle - The matching principle directs a company to report an expense on its income statement in the same period as the related revenues.

Full disclosure principle - For a business, the full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions concerning the company.

•  What are the accounting concepts?

1. Business Entity Concept

2. Dual Aspect Concept

3. Going Concern Concept

4. Accounting Period Concept

5. Cost Concept

6. Money Measurement Concept

7. Matching Concept

•  What is deferred revenue?

This is a tricky finance interview question. Actually deferred revenue is not yet revenue. It is an amount that was received by a company in advance of earning it. The amount unearned (and therefore deferred) as of the date of the financial statements should be reported as a liability. The title of the liability account might be Unearned Revenues or Deferred Revenues.

• Conventions of accounting

1. Conservatism

2. Full disclosure

3. Consistency

4. Materiality

• What is the impairment of an asset? How is it treated in accounting?

Impairment of an asset is the fall in the market value of an asset below its book value. The book value is arrived at after charging annual depreciation which is based on the normal wear and tear of the asset while impairment may arise due to factors beyond normal wear and tear such as damage or obsolescence due to technological updating of the product in the market where the asset loses market value. Impairment is written off in the Profit and Loss Account in the year of impairment.

Lucrative job profiles after pursuing an MBA in finance

Ready to nail your job interview with the above finance interview questions? How about some more motivation for you to prepare well? Now that you are thorough with the most important finance questions, let's drill down India's highest-paying positions and job profiles for MBA graduates in finance.

Investment Banker

One of the most sought-after job profiles for MBA graduates is that of an Investment Banker. This is, even more, a popular choice for those who do their MBA in finance due to the associated lucrative returns.

• The primary job roles of an investment banker, who is a part of any monetary establishment, include raising capital for companies, governments, or different institutions.

• Other various obligations incorporate overseeing mergers and acquisitions, risk assessment of a specific undertaking, and helping with evaluating monetary instruments.

• It's highly recommended to take a specialization in finance MBA if you are interested in becoming an Investment Banker.

Job offers in finance reached a have reached a whopping mark of INR 50 LPA with normal compensation of INR 26 LPA.

Management Consultant

The job of a Management Consultant is a kind of influential position that offers a chance to work with top executives from different avenues.

• Overall, Management Consultants assist associations with taking care of business problems, giving answers for changing business needs, and fostering game plans to execute proposed arrangements.
• The work domain is quite variable, sometimes it is confined to the development of strategy, optimization of processes, advancement, and in other cases, change of board and final execution of a project.

Some of the leading Indian colleges to pursue a course in Strategy are ISB Hyderabad, IIM Ahmedabad, IIM Bangalore, and IIM Calcutta to name a few. The average remuneration in this field ranges from INR 26LPA to 35 LPA.

International Banking

This career choice may be one of the best choices after your MBA.

• You are required to have extensive knowledge of international banking to handle and control a broad range of major international companies, transactions, FX, credit cards, mortgages, general banking, M&A, and real estate.
• Most of the banks these days have entry-level remuneration of 1.3 to 2 LPA, so you’ll get to earn as much as 10 LPA.

Trading and Derivatives

It is one of the most popular careers after an MBA, both for finance professionals and those who have participated in the stock market.

• However, the young professionals going for it have to master the basics, as there is a big difference between learning the basics of trading and becoming an expert in trading. However, once you have mastered the basics you will be able to make good money.
  
  
• Trading is active and demanding work and needs strong analytical skills, experience, and good reading skills. If you’re passionate about trading and developing your knowledge and skill to it, then this is a great career for you.
  
  
• The starting pay scale varies with each trading house, which usually ranges from 7 to 10 LPA.

Other profitable job avenues in finance include Cash Managers, Credit Managers & Specialists, Financial Analysts, Corporate Controllers, Finance Officers & Treasurers, Insurance & Risk Managers, etc.

Job interview process can be stressful. But a good preparation can take you a closer to your dream job. Practicing the above finance interview questions and answers will surely help you be fully prepared for your future interviews. 

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