FINANCE QUESTIONS AND SAMPLE ANSWERS

2023

COMPILED BY RAJENDER SINGH

CHIEF MENTOR, RIIM, PUNE
 Preparing the Students for Placement Interviews.
(FINANCE STREAM)

Some of the sample questions generally asked during placement interviews are given
below. We have compiled Questions and answers in brief on all Finance subjects to meet
the Interview needs. Students are advised to study supplementary material on these
questions and prepare themselves to face any type of question.

1. what is the capital market? Types of exchanges and depositories in India?

2. What is NAV, EPS, EV & debt to equity ratio?
3. Tell us golden rules of accounting.
4. Difference between IFRS and US GAAP, All the ratios.
5. For tax role every deduction and the tax slab rates.
6. What is US taxation?
7. Journal entry questions of accrual basis should be prepared for finance.
8. Current interest rates, current economic trends, about SEBI regulations and day
market updates?
9. if I'll give 50k how you invest in stock market and mutual funds?
10. What are the 5 Cs of credit (Character, Capacity, Capital, Collateral, and Conditions.)
and how are they used?
11. What considerations would you make to decide whether to lend $10 million to a new
corporate borrower?
12. Is there a specific debt to capital ratio that banks target?
13. How would you handle a long-term client who wants a $10 million loan that, in your
assessment, is considered risky?
14. What is the current LIBOR and Treasury rate? What are the credit metrics that banks
look at when extending credit?
15. How do you calculate the terminal value in a Discounted Cash Flow evaluation
method?
16. How different is NPV from DCF?
17. What is your experience with Microsoft Excel as a financial analysis tool?
18. What skills set do you have that make you the perfect candidate for this position?
19. What qualities will you consider when lending to a fintech startup?
20. What is butterfly swaps, interest rate swaps, credit default swaps, ratio analysis,
21. Valuation models like DCF, regression analysis etc and important excel application in
valuation.
22. What is financial planning?
23. What is the GDP, growth rate, and inflation rate of the country?
24. Define Fair Market Value (FMV)
25. Who is the head of Niti Ayog?
26. Who is the RBI governor?
27. Differentiate between primary market and secondary market.
General finance interview questions

a. Tell me about yourself

b. Which quality makes you fit for the financial analyst job?
c. Why did you think of doing an MBA?
d. Where do you see 5 years from now?
e. How will you handle negativity?
f. What if you have a conflict with a senior or colleague?
g. Difference between GDP and GNP
h. The current rate of USD
i. What is the current account deficit?
j. What is your dream job?
k. Rate yourself on a scale of 1 – 10

Finance is a critical component of any business organization, and interviews for finance
positions can be extremely challenging. The finance interview process is designed to test a
candidate’s knowledge of financial concepts and their ability to apply those concepts in a
real-world setting. Candidates who are well-prepared for finance interview questions will be
able to demonstrate their understanding of financial concepts and show how they would
apply those concepts in a given situation. They will also be able to effectively communicate
their ideas and explain their thought process.

How to prepare for Finance interview questions?

To prepare for an actual interview, you’ll need to do a lot. You must have a solid awareness
of your target company and its product, as well as the ability to show that you are the ideal
applicant for the position. The interview consists of three parts: pre-interview, interview, and
post-interview. Let’s see the few techniques that are essential to know about preparing for the
interview.

1. People who share similar values even in a company’s culture are sought after
by employers. Prior to an interview, do some research about the firm to gain
insight into its long-term goals. Discussing these issues with your prospective
employer can also help you look to be a long-term investment. Conducting
comprehensive research on the firm may also help you align your CV with its
criteria.
2. Maintain your LinkedIn profile up to date at all times. Your LinkedIn page
may be checked by the interviewer to gain a sense of your history and
personality.
3. Read the job description thoroughly to understand the work skill sets and the
sort of applicant the company is looking for. The job description could also
reveal what kinds of questions the interviewer might ask. Make a list of the
skills, expertise, and professional and personal characteristics that the
company is looking for to show that you’re the best candidate for the job.
 4. Always have a few questions prepared for the interviewer. This can help you
avoid an uncomfortable pause when asked if you have any questions. It’s
advisable to keep queries about work or business culture to a minimum.
5. Arrive at the location a few minutes early. You will be able to relax and
unwind as a result of it. However, you need not arrive too early. Use that time
to plan interview questions instead.
6. During a job interview, listening is just as important as responding to
questions. If you’re not paying attention, they won’t be able to respond
effectively.
7. Prepare to engage in conversation with the interviewer. Instead of offering
robotic responses to questions, build a relationship with the interviewer
throughout the interview.
8. Answer all questions briefly and clearly, emphasizing your most significant
achievements. It’s perfectly OK to pause before answering a tough question to
gather your thoughts or to seek clarification if you’re unsure what the question
means.
9. Good examples show off your strengths and help an interviewer envision what
you may accomplish at their company. Examples are methods to show the
recruiter that you have the skills and experience to succeed in the position for
which you are applying.
10. Spend a few minutes after the interview thinking about how you performed
and where you might have done better. A thorough examination can aid in the
development of your interviewing abilities in preparation for future interviews.
Asking the interviewer for comments on the interview is not a good idea.
11. If you have not heard from the company within the time range specified, you
should approach the Human resources department to enquire about the
outcome of the interview. Regardless of how you contact HR, make sure to
also include your name, the post you applied for, the day of the interview, the
name of the interviewer, and any other pertinent information to assist HR
professionals to recall your meeting and update you on the progress of your
interview in real-time.

1.What is Finance?

Finance is a wide phrase that encompasses banking, debt, credit, capital markets, money, and
investments, among other things. Finance, in its most basic form, refers to money
management and the act of obtaining necessary finances. Money, banking, credit,
investments, assets, and liabilities are all part of financial systems, and finance is responsible
for overseeing, creating, and studying them. There are essentially three types of finance,
personal finance, corporate finance, and governing body finance. In simple terms, finance
deals with all aspects of money management in the finance industry including:

A. Investment banking - It involves advising companies on mergers & acquisitions, debt

financing, equity offerings, etc.
B. 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.

C. 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.

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

E. 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.

What do you like about ‘Finance'?

Finance interests me for the following reasons:

 It gives an insight into the workings of all the aspects of an enterprise

 I am comfortable working with numbers and am good at Excel.

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 do you understand by working capital?

Working capital, also referred to as net working capital (NWC), is the difference between a
company’s current assets and current liabilities, such as cash, accounts receivable/unpaid
invoices from customers, and raw materials and completed goods inventories. The assets and
liabilities on a company’s balance sheet are used to calculate working capital.

Cash, receivable accounts, inventories, and other assets that are anticipated to be liquidated or
converted into cash in less than a year are described as current assets. Accounts payable,
salaries, income taxes, and the current component of long-term debt due within a year are
all examples of current obligations.
3.What is a cash flow statement? Explain.

A cash flow statement is a crucial instrument for managing finances and tracking an
organisation’s cash flow. This statement is one of three important reports used to assess a
company’s performance. It is commonly used to make cash forecasts in order to facilitate
short-term planning. The cash flow statement displays the source of funds and aids in the
tracking of incoming and outgoing funds. Operating operations, investment activities, and
financial activities all contribute to a company’s cash flow. The statement also shows cash
inflows, business-related costs, and investment at a certain moment in time. The cash flow
statement provides useful information for managers to make educated decisions about how to
regulate corporate operations.

4.Can a company show positive net income and yet go bankrupt?

Yes, it is possible for a corporation to have a positive cash flow and still go bankrupt. The
first type of bankruptcy is insolvency, which occurs when your spending cash surpasses your
incoming cash. This frequently occurs when a company overextends itself to complete a
project, only to find that the client does not pay as promptly as planned. The second sort of
bankruptcy is “true” bankruptcy, which occurs when a company’s obligations outnumber its
assets. Even if a corporation has good cash flow, it may not be able to continue as a “ongoing
business” without the assistance of investors or the bankruptcy court under this form of
bankruptcy. By decreasing working capital (by increasing accounts receivable and decreasing
accounts payable) and financial strategies, a corporation might display positive net income
despite nearing insolvency.

5. What is hedging? Explain.

Hedging is a risk management approach that involves acquiring an opposing position in a

comparable asset to balance investment losses. Hedging often results in a loss in prospective
earnings due to the reduction in risk it provides. Hedging necessitates the payment of a
premium in exchange for the protection it offers. Derivatives, such as Futures and option
contracts, are commonly used in hedging tactics. When you get insurance, for example, you
are hedging yourself against unanticipated calamities.

Hedging is a valuable concept that every investor ought to be aware of when it comes to
investing. Hedging means to acquire portfolio protection in the stock market, which is
frequently equally as essential as portfolio appreciation.

Hedging is frequently addressed in a more general sense than it is described. Even if you’re a
novice investor, understanding what hedging is and how it works might be advantageous.

6. What is preference capital?

The part of capital raised via the issuance of preference shares is known as preference capital.
This is a hybrid kind of finance that has some properties of equity and other
characteristics of debentures. Preference shares, also known as preferred stock, are stocks of
a corporation’s stock that pay dividends to stockholders before common stock payments are
paid out. Preferred investors have a right to be compensated from the firm’s assets before
ordinary shareholders if the company goes bankrupt.

7. What do you understand by fair value?

The current price or worth of an object is known as fair value. More specifically, it is the
amount for which the object might be sold that is both fair to the buyer and to the seller. Fair
value does not refer to items being sold in dissolution; rather, it relates to items being sold in
regular, fair circumstances. When assets are sold or a firm is bought, fair value becomes
increasingly crucial. Using fair value, a fair and reasonable sales price for specific things or
an entire firm may be calculated. When a firm is acquired, the fair value is used to assess the
asset worth and arrive at a suitable sales price.

8. What is RAROC?

The risk-adjusted return on capital (RAROC) is a risk-adjusted return on investment

measurement. RAROC is one of the most accurate techniques for determining a bank’s
profitability. Expected returns may be computed using a more informed method that includes
the determined economic capital and risk exposure. Banks employ RAROC, among other
tools, to control risks, particularly those arising from their lending operations, for successful
risk management. This is frequently computed in the following way:

RAROC = (Revenues – Costs – Expected Losses) / Economic Capital

Economic capital is a measure of risk in terms of capital. More specifically, it's the amount
of capital that a company (usually in financial services) needs to ensure that it stays solvent
given its risk profile.

Economic capital is calculated internally by the company, sometimes using proprietary

models. The resulting number is also the amount of capital that the firm should have to
support any risks that it takes.

9. What is the secondary market?

In the primary market, securities issued by a corporation for the first time are sold to the
public. The stock is traded in the secondary market once the IPO is completed and the stock
is listed. The key distinction between the two is that even in the primary market, investors
buy securities directly from the firm through initial public offerings (IPOs), but in the
secondary market, buyers buy securities from other investors who are eager to sell them.

Some of the primary instruments accessible in a secondary market include equity shares,
bonds, preference shares, treasury bills, debentures, and so on.

10. What is cost accountancy? What are its objectives?

Cost accounting is a type of managerial accounting that tries to capture a company’s entire
cost of production by measuring both variable and fixed expenses, such as a leasing fee. The
goal of cost accounting is to develop the procedures for recording, classifying, and allocating
expenditures on commodities, labour, and overhead. This is required in order to appropriately
determine the cost of items and services.

11.What is a put option?

A put option is a contract that gives the option buyer the right, but not the responsibility, to
sell or short a set quantity of an underlying securities at a predetermined price within a
predetermined time frame. The striking price is the predetermined price at which the buyer of
a put option can sell the underlying securities. Shares, commodities, bonds, commodities,
forex, futures, and indices are all traded as underlying assets for put options. A call option,
on the other hand, grants the holder the right to buy the underlying securities at a stated
price, either on or before the option contract’s expiration date.

12. What are adjustment entries? How can you pass them?1

Adjustment entries are entries that are passed at the end of the accounting period to adjust the
marginal and other accounts so that the correct net profit or net loss is shown in the profit and
loss account, and the balance sheet can also portray the true and fair view of the business’s
financial condition.

Before preparing final statements, these adjustment entries must be passed. Otherwise, the
financial report would be deceptive, and the balance sheet will not reflect the genuine
financial status of the company.

13. What is Deferred Tax Liability?

A deferred tax liability is a line item on a company’s balance statement that represents taxes
that are due but not payable until later. Scheduled to a difference in time between when the
tax was accrued and when it is due to be paid, the liability is delayed.

14. What is goodwill? How it is calculated?

Goodwill is an intangible asset connected with the acquisition of a business by another.

Goodwill is defined as the fraction of the purchase price that is more than the total of the
net fair value of all assets acquired and liabilities taken in the transaction. Goodwill exists
for a variety of reasons, including the value of a company’s brand name, a strong client base,
good customer relations, good staff relations, and proprietary technologies.

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.

A. How to calculate goodwill?

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

Goodwill using super profits (Actual profit – normal profit)
Goodwill by the capitalization of profits.
B. Under what circumstances does goodwill increase?

When a company buys another business for more than the fair value of its tangible and
intangible assets, goodwill is created

15. How can we calculate WACC (weighted average cost of capital)?

The weighted average cost of capital (WACC) is a figure that represents the average cost of
capital for a company. Long-term obligations and debts, such as preferred and ordinary
stocks and bonds, that corporations pay to shareholders and capital investors, are examples of
capital expenses. Rather than calculating capital expenses, the WACC takes a weighted
average of each source of capital for which a firm is responsible.

WACC = [(E/V) x Re] + [(D/V) x Rd x (1 – Tc)]

E = equity market value

Re = equity cost

D = debt market value

V = sum of the equity and debt market values

Rd = debt cost

Tc = Current tax rate – corporations

16. What is investment banking?

Investment banking is a branch of banking that specialises in assisting individuals and

businesses in raising funds and providing financial advice. They function as a link between
security issuers and investors, as well as assisting new businesses in becoming public. They
either acquire all available shares at a price determined by their experts and resell them to the
general public, or they sell shares on behalf of the issuer and receive a commission on each
share sold.

17. What are derivatives?

Derivatives are sophisticated financial contracts that are based on the value of an underlying
asset, a collection of assets, or a benchmark. Stocks, bonds, commodities, currencies, interest
rates, market indexes, and even cryptocurrencies are examples of underlying assets. Investors
enter into derivative contracts that spell out how they and another party will react to future
changes in the underlying asset’s value. Derivatives can be bought and sold over-the-counter
(OTC), which means through a broker-dealer network, or on exchanges.
18. What does an inventory turnover ratio show?

The time it takes for an item to be acquired by a corporation to be sold is referred to as

inventory turnover. A full inventory turnover indicates the firm sold all of the merchandise it
bought, minus any items lost due to damage or shrinking.

Inventory turnover is common in successful businesses; however, it varies by sector and

product type.

19.What is ROE or return on equity?

The Return on Equity (ROE) ratio effectively assesses the rate of return on a company’s
common stock held by its shareholders. The company’s ability to generate returns for
investors it acquired from its shareholders is measured by its return on equity. Investors
choose companies with larger returns on investment. This can, however, be used as a
standard for picking stocks within the same sector. Profit and income levels differ
dramatically among industries. Even within the same industry, ROE levels might differ if a
business decides to pay dividends rather than hold profits as idle capital.

20. What is SENSEX and NIFTY?

Sensex and Nifty are stock market indexes, whereas BSE and NSE are stock exchanges. A
stock market index is a real-time summary of the market’s moves. A stock market index is
built by combining stocks of similar types. The Bombay Stock Exchange’s stock market
index, known as the Sensex, stands for ‘Stock Exchange Sensitive Index.’ The Nifty is the
National Stock Exchange’s index and stands for ‘National Stock Exchange Fifty.’

21. What are EPS and diluted EPS?

Only common shares are included in earnings per share (EPS), whereas diluted EPS
includes convertible securities, stock options, and secondary offerings. EPS is a metric that
quantifies a company’s earnings per share. Basic EPS, unlike diluted EPS, does not take into
account the dilutive impact of convertible securities on EPS. In fundamental analysis, diluted
EPS is a statistic that is used to assess a company’s EPS quality after all convertible securities
have indeed been exercised. All existing convertible preferred shares, debt securities, stock
options, and warrants are considered convertible securities.

EPS = PAT/ TOTAL NO. OF OUT STANDING SHARES

22. What are swaps?

Both investors and traders utilise derivatives contracts as one of the greatest diversification
and trading instruments. It may be separated into two types according on its structure:
contingent claims, often known as options, and forward asserts, such as exchange-traded
futures, swaps, or forward contracts. Swap derivatives are efficiently utilised to exchange
obligations from these groups. These are contracts in which two parties agree to exchange a
series of cash flows over a set period of time.
23. What is financial risk management?

Financial risk management is the process of identifying and addressing financial hazards that
your company may face now or in the future. It’s not about avoiding risks since few
organisations can afford to be completely risk-free. It’s more about putting a clear line. The
goal is to figure out what risks you’re willing to face, which dangers you’d rather avoid, and
how you’ll design a risk-averse approach.

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.
The plan of action is the most important aspect of any financial risk management strategy.
These are the methods, rules, and practises that your company will follow to guarantee that it
does not take on even more danger than it can handle. To put it another way, the strategy will
make it clear to employees.

24. What is deferred tax liability and assets?

A deferred tax asset (DTA) is a balance sheet item that shows a discrepancy between internal
accounting and taxes owing. Because it is not a physical entity like equipment or buildings, a
deferred tax asset is classified as an intangible asset. Only on the balance sheet does it exist.

A deferred tax obligation (DTL) is a tax payment that is recorded on a company’s balance
sheet but is not due until a later tax filing.

25. Explain cash equivalents.

Legal currency, banknotes, coins, cheques received but not deposited, and checking and
savings accounts are all examples of cash. Any short-term investment security having a
maturity time of 90 days or less is considered a cash equivalent. Bank certificates of deposit,
banker’s acceptances, Treasury bills, commercial paper, and other money market instruments
are examples of these products.

Due to their nature, cash and its equivalents vary from other current assets such as marketable
securities and accounts receivable. However, depending on a company’s accounting strategy,
certain marketable securities may be classified as cash equivalents.

26. What is liquidity?

Liquidity refers to how soon you can receive your money. To put it another way, liquidity is
the ability to obtain your money whenever you need it. Liquidity could be your backup
savings account or cash on hand that you can use in the event of an emergency or financial
catastrophe. Liquidity is also crucial since it helps you to take advantage of chances. If you
have cash on hand and ready access to funds, it will be simpler for you to pass up a good
chance. Liquid assets are cash, savings accounts, and checkable accounts that can be
readily turned into cash when needed.

Checking accounts allow quick access to your funds on an ongoing basis and some
checking accounts are interest bearing, while saving accounts have withdrawal limits, are
interest bearing and typically used for achieving some financial purpose

27. What do you understand by leverage ratio and solvency ratio?

A leverage ratio is one of numerous financial metrics used to evaluate a company’s capacity
to satisfy its financial commitments. A leverage ratio may also be used to estimate how
changes in output will influence operating income by measuring a company’s mix of
operating costs.

The ratio calculates the proportion of debt and equity that a company uses for funding the
operations of the business. It is also called as Debt to equity ratio.

Solvency ratios are an important part of financial analysis since they assist in determining if a
firm has enough cash flow to meet its debt commitments. Leverage ratios are another name
for solvency ratios. It is thought that if a company’s solvency ratio is low, it is more likely to
be unable to meet its financial obligations and to default on debt payments.

28. What is an NPA?

Financial institutions classify loans and advances as non-performing assets (NPAs) if the
principle is past due and no interest payments have been paid for a certain length of time.
Loans become non-performing assets (NPAs) when they are past due for 90 days or more,
while other lenders have a narrower window in which they consider a loan or advance past
due.
Current NPA: The government has taken various reforms following which asset quality
of public sector banks has improved significantly with gross NPA ratio declining from the
peak of 14.6 per cent in March 2018 to 5.53 per cent in December 2022.

29. 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.
The formula for Gordon growth model: P = D1/r-g (P = stock price, g = constant growth
rate, r = rate of return, D1 = value of next year's dividend) read more, the stock's intrinsic
value equals the sum of the present value of the future dividend.

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.
Dividend Discount Model = Intrinsic Value = Sum of Present Value of Dividends + Present
Value of Stock Sale Price. This dividend discount model or DDM model price is the stock's
intrinsic value. If the stock pays no dividends, then the expected future cash flow will be the
sale price of the stock.

30. What do you understand about loan syndication?

A syndicated loan is provided by a group of lenders who pool their resources to lend to a big
borrower. A firm, a single project, or the government can all be borrowers. Each lender in the
syndicate provides a portion of the loan amount and shares in the risk of the loan. The
manager is one of the lenders who manages the loan on account of the other lenders within
the syndicate. The syndicate might be made up of several distinct types of loans, each with its
own set of repayment terms negotiated between the lenders and the borrower.

31. What is capital budgeting? List the techniques of capital budgeting.

The process through which a company evaluates possible big projects or investments is
known as capital budgeting. Capital budgeting is required before a project is authorised or
denied, such as the construction of a new facility or a large investment in an outside business.
A corporation could evaluate a prospective project’s lifetime cash inflows and outflows as
part of capital planning to see if the anticipated returns generated match an acceptable
goal benchmark. Investment assessment is another name for capital budgeting. The
following are the capital budgeting methods used in the industry

 Payback period method

 Accounting rate of return method
 Discounted cash flow method
 Net present Value (NPV) Method
 Internal Rate of Return (IRR)
 Profitability Index (PI)

32. What is a payback period?

The time it takes to recoup the cost of an investment is referred to as the payback period.
Simply explained, it is the time it takes for an investment to break even. People and
businesses spend their money primarily to be paid back, which is why the payback time is so
critical. In other words, the faster an investment pays off, the more appealing it gets.
Calculating the payback period is simple and may be accomplished simply dividing the initial
investment by the average cash flows.

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.
33. What is a balance sheet?

A balance sheet is a financial statement that shows the assets, liabilities, and shareholder
equity of a corporation at a certain point in time. Balance sheets serve as the foundation for
calculating investor returns and assessing a company’s financial structure. In a nutshell, a
balance sheet is a financial statement that shows what a firm owns and owes, as well as how
much money shareholders have invested. To conduct basic analysis or calculate financial
ratios, balance sheets can be combined with other essential financial accounts.

34. What is a bond? What are the types of bonds?

When governments and enterprises need to raise funds, they issue bonds. You’re giving the
issuer a loan when you buy a bond, and they pledge to pay you back the face value of the
loan on a particular date, as well as periodic interest payments, generally twice a year.
Interest rates and bond rates/ price are inversely related: as rates rise, bond prices fall, and
vice versa. Bonds have maturity period after which the principal must be paid in full or the
bond will default. Treasury, savings, agency, municipal, and corporate bonds are the five
basic types of bonds. Each bond has its unique set of sellers, purposes, buyers, and risk-to-
reward ratios.

35. Can you explain the difference between equity and debt financing?

Equity financing involves raising funds by selling ownership in the company, whereas debt
financing involves borrowing money that must be repaid with interest. Equity financing is
typically riskier for investors but offers potential for higher returns, while debt financing is
generally less risky but carries the obligation of repayment.

36. What is your experience with financial modeling?

Financial modeling involves building a mathematical representation of a company’s financial

performance, typically for forecasting or valuation purposes.

Example: In my previous roles, I have built complex financial models using Excel and
other tools to analyse financial statements, forecast cash flows, and evaluate investment
opportunities.

37. Can you explain the concept of net present value (NPV)?

NPV is a measure of the value of an investment by calculating the present value of its
expected cash flows, discounted by the required rate of return. If the NPV is positive, it
indicates that the investment is expected to generate a return greater than the required rate of
return, while a negative NPV suggests the investment is not worthwhile.
38. How would you analyse a company’s financial statements?

Analysing financial statements involves reviewing a company’s income statement, balance

sheet, and cash flow statement to evaluate its financial performance and identify trends or
areas for improvement. Some key ratios to consider include the debt-to-equity ratio, return on
equity, and current ratio.

39. Can you explain the difference between a forward contract and a futures contract?

Both forward and futures contracts are agreements to buy or sell a specific asset at a
predetermined price at a future date. However, futures contracts are standardized and
traded on organized exchanges, while forward contracts are customized and traded over
the counter. Futures contracts are also marked-to-market daily, meaning the parties must
settle any gains or losses each day, while forward contracts settle at the end of the contract
term.

40. How do you calculate the price-to-earnings (P/E) ratio?

The P/E ratio is calculated by dividing the current stock price by the company’s earnings per
share (EPS) over the past 12 months. It is a measure of the stock’s valuation relative to its
earnings, with a higher P/E ratio indicating that investors are willing to pay more for each
dollar of earnings.

41. Can you explain the concept of cost of capital?

Cost of capital is the required rate of return that a company must earn in order to attract
investors and maintain its capital structure. It includes both the cost of debt (interest rate) and
the cost of equity (required rate of return), weighted by the relative proportion of each in the
company’s capital structure.

42. What are debentures?

A debenture is an unsecured bond or other financial instrument with no collateral. Because

debentures lack security, they must rely on the issuer’s trustworthiness and reputation for
support. Debentures are regularly issued by enterprises and governments to raise cash or
funds.

43. What are three types of short-term financing that our company could use to fulfil its
cash needs?

If your business finds itself in a difficult financial situation, it will need a finance professional
who knows how to resolve the problem quickly. By asking this question, an interviewer may
be trying to evaluate your ability to identify and solve issues related to paying current
liabilities.
Example: "To meet immediate cash needs, I would suggest using trade credit, bank loans or
a bank overdraft. After solving the immediate cash flow problem, I would prioritize an in-
depth review of all financial statements to prevent this type of situation in the future."
44. What impact would the purchase of an asset have on our balance sheet, income
statement and cash flow statement?

This question tests your financial expertise regarding purchases. Provide a succinct answer
that's easy for any professional to understand, regardless of their financial expertise.

Example: "The purchase would increase your assets on the balance sheet. On the year-end
income statement, this asset will have depreciation. On the cash flow statement, the purchase
can count as an investment activity."

45. How is a cash flow statement organized, and what does this information tell you?

Finance professionals should know how a cash flow statement is organized and what this
document can tell them. By asking this question, the interviewer could be trying to gauge
your experience level within the finance industry, and your answer should reflect your
expertise in cash-flow statements and how they are interpreted.

Example: "A cash flow statement notes the cash from operating activities, investing
activities and financing activities as well as supplemental information like interest or income
taxes paid. The cash flow statement accounts for major changes in the company's cash and
cash equivalents as reported on balance sheets at the beginning and end of an accounting
period."
46. What is the DCF method and why might we use this?

The DCF method helps companies plan for the future. In your response, you can demonstrate
how you'll prepare the business for long-term success.

Example: "The DCF method estimates investment value based on future cash flows. This
helps a business estimate what its future earnings will be based on current cash flow. You
would use this approach to plan mindfully for the future."
47. What are the different ways that you can value a company and which is most
appropriate for our line of business?

Your ability to assign value to a business will tell the hiring manager how you can evaluate
both the hiring company and its competitors. It can also demonstrate your knowledge of the
company you are interviewing with and its industry.

Example: "You can evaluate a company using assets, historical earnings, discount cash flow
or future maintainable earnings, among other methods. I would use historical earnings for a
business with the longevity of yours to assess long-term trends."
48. Why would a company fund its operations by issuing equity rather than debt?

Equity financing and debt financing are distinct options that a business may consider. The
hiring manager might ask this question to assess how you handle funding activities.
Example: "A company might issue equity rather than debt to fund its operations because
equity financing isn't as risky as using debt. Though you may lose some control to the
investors, you will gain valuable stability and the opportunity to take a longer view of future
planning."
49. 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.
50. 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.
51. 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. EBIT
cannot be greater than EBITDA.

52. 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:

Budgeting Forecasting

Forecasting predicts how the business will

Budgeting frames an outline that determines
perform, determining whether a business will
the direction in which the business should go.
achieve its budget targets or not.

Forecasting is more regular than budgeting. It

Budgeting doesn't take place very often.
is often updated once a month or every quarter.

Budgets take into account the vision of the Forecasts take into account the business plans
business. mostly in the short term.

Budgets can be used to take steps towards Accurate forecasting reduces uncertainty and
changing the strategy so that the business can helps to take immediate actions and make
achieve the budget goals that have been set. critical changes.

Budgeting doesn’t take into account the actual Forecasting takes actual market conditions into
market conditions, which is why not every account. Every business should forecast
business needs to have a budget. because it is closer to reality, and it can serve
 as a roadmap for your business.

Budgets include many aspects of the business Forecasts are not as detailed as budgets and
and are mostly very detailed. can be considered as general overviews.

53. 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:

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).
 The base year is taken as 1995 and the base value is set to 1000.
 Nifty is calculated on 50 stocks actively traded in the NSE
 50 top stocks are selected from 24 sectors .

54. 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.
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.

55. 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:
 Discounted cash flow (DCF) analysis.
 Comparable transactions method.
 Market valuation.
 Book value

56. 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.
Currently it is 6.5% - India

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.
Currently it is 3.35% - India

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.
Currently it is 4.5% - India

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).
Currently it is 18 – India
Bank Rate - Bank rate is a rate at which the Reserve Bank of India (RBI) provides the loan
to commercial banks without keeping any security. There is no agreement on repurchase
that will be drawn up or agreed upon with no collateral as well. The RBI allows short-term
loans with the presence of collateral.
Currently it is 6.75% – India
57. 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).

The smallest and most liquid measure, M0, is strictly currency in circulation plus commercial
bank reserve balances at Federal Reserve Banks; M0 is often referred to as the "monetary
base

M1 is a narrow measure of the money supply that includes currency, demand deposits, and
other liquid deposits, including savings deposits.

 M1 does not include financial assets, such as bonds.

 The M1 is no longer used as a guide for monetary policy in the U.S. due to the lack
of correlation between it and other economic variables.
 The M1 money supply was a much more constrictive measurement of the money
supply compared to the M2 or M3 calculation.
 The M1 money supply is reported on a monthly basis by the Federal Reserve Bank of
St. Louis.

M2 includes savings deposits, money market securities, and other time deposits
which are less liquid and not as suitable as exchange mediums.

M3 money supply is an even broader measure of the money supply that includes all
components of M1 and M2

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.

58. What is a sin tax?

A sin tax is an excise tax on specific goods and services due to their ability, or perception, to
be harmful or costly to society. The tax comes at the time of purchase. Some items that often
have a sin tax include tobacco products, alcohol, and gambling.
Sin taxes seek to deter people from engaging in socially harmful activities and behaviours.
They also provide a source of revenue for governments.

59. What is STT (Securities transaction tax)?

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. STT
was introduced in the Budget of 2004 and implemented in Oct 2004. The objective behind the
levy is to mitigate tax evasion as the same is taxed at source. Stocks, futures, option, mutual
funds and exchange traded funds come under the ambit of STT.

60. 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.

61. 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.
62. 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.

63. What are free cash flows (FCF)?

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).

64. Explain Purchase Price and Profitability

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
65. 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 fulfil its long-term financial obligations
when they fall due for payment.
Liquidity is the firm’s ability to fulfil 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.

66. 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.

67What.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.

68. 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.

69. 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.
70. What are REITs?

REIT, or Real Estate Investment Trust, is a company that owns or finances income-
producing real estate. Modelled 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.

71. What is the book value of a business?

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

72. 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.

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.

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.

73. What, in your opinion, makes a good financial model?

It’s important to have strong financial modeling p principles. Wherever possible, model
assumptions (inputs) should be in one place and distinctly coloured (bank models typically
use blue font for model inputs). Good Excel models also make it easy for users to understand
how inputs are translated into outputs. Good models also include error checks to ensure the
model is working correctly (e.g., the balance sheet balances, the cash flow calculations are
correct, etc.). They contain enough detail, but not too much, and they have a dashboard that
clearly displays the key outputs with charts and graphs.

74. How do you model revenues for a company?

This is one of the most common FP&A interviews questions. There are three common ways
to forecast revenues: bottom-up, top-down, and year-over-year.

A bottom-up approach to financial modeling involves starting with individual

products/services, estimating average prices/fees per product or service and then growth
rates.
A top-down approach involves starting with the overall market size, estimating a company’s
market share, and then translating that into revenue.

A year-over-year approach involves taking last year’s revenue and increasing it or

decreasing it by a certain percentage.

75. How do you build a financial model?

There are 10 major steps involved in building a financial model:

1 Historical results and assumptions

Building a financial model begins with collecting information from financial statements for
the past three years or more and calculating items such as revenue growth rate, gross margins,
accounts payable (AP) days, inventory days and accounts receivable (AR) days. These
metrics are then used in combination with the financial analyst’s insights to lay out the
assumptions for the forecast period as hard-codes.

2 Construct the income statement

With the forecast assumptions in place, you can build the income statement, starting from
revenue, Cost of Goods sold (COGS), all the way down to EBITDA.

3 Construct the balance sheet

The balance sheet is the next thing to build. Using the assumptions such as AR days, AP days,
and inventory days, balance sheet items like accounts receivable and inventory can be
forecast into the future.

4 Build the supporting schedules

Before completing the income statement and balance sheet, you need to create a schedule for
capital assets such as Property, Plant and Machinery (PP&E) as well as for debt and interest.

5 Complete the Income statement (I/S) and Balance Sheet (B/S).

On the income statement, link depreciation to the PP&E schedule and interest to the debt
schedule. You can then finish up the income statement by calculating the earnings before
taxes, taxes, and net income. On the balance sheet, link the closing PP&E balance and closing
debt balance from the supporting schedules. Shareholder’s equity is computed by adding net
income and capital raised, and subtracting dividends or shares repurchased from last year’s
closing balance.

6 Construct the cash flow statement

Upon completing the income statement and balance sheet, you can build the cash flow
statement using the reconciliation method, operating cash flow is calculated by taking net
income, adding depreciation, and adjusting for changes in non-cash working capital.
Investing cash flow is a function of capital expenditures in the PP&E schedule, and financing
cash flows consists of all cash inflows and outflows due to changes in debt and equity.

7 Perform the DCF analysis

Discounted cash flow analysis is a method of business valuation. It is done by calculating the
free cash flows and discounting them back to today at the firm’s cost of capital (or required
rate of return). You can then compute the net present value of the firm.

8 Sensitivity analysis and scenarios

Once the DCF analysis is completed, you can incorporate sensitivity analysis and scenarios to
assess the impact on the value of the company that results from changing different variables.
These are good ways to assess the risk of an investment.

9 Build charts and graphs

Presenting results of financial analysis using visual components such as charts and graphs
helps executives and management better interpret financial results and identify trends
quickly.

10 Stress test and audit

It is important to stress test extreme scenarios to see if the financial model behaves as
expected. Financial analysts should also audit the model using tools in Excel.

76. Pick a type of financial model and walk me through the process.

Pick a model which allows you to demonstrate some advanced financial modeling
knowledge, but don’t be too ambitious so that you end up picking one which you are not
familiar with. Make sure you know all the key steps to building the model thoroughly.
It is also a good idea to build a couple of models ahead of the interview, so that they’ll be
handy to show and demonstrate the process to the interviewer when this type of question is
asked.
Below are some useful resources on different types of financial models:
Three statement model.
DCF Model
Leverage Buyout model.

77.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.

78. 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.
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.

79. 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.

80. 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.

81. 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.

82.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.

83. Explain CAPM (Capital asset pricing model)

Formula:

ERi=Rf+βi (ERm−Rf)
where: ERi=expected return of investment
Rf=risk-free rate
βi=beta of the investment
(ERm−Rf) =market risk premium
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.

84. What is 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.

85. 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.
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.

86. 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.

87. 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.

88. 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.

89. 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:

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;

The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of
12 months each);

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;

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.)

90. How to evaluate a stock?

The following ratios can be used to evaluate a stock:

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

Price-to-Earnings Ratio (P/E)
Dividend Yield.

91. How do you arrive at cash flows?

Here is the process:

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

92. What is IRR and can the IRR be negative.

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.

93. 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).

94. 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 labour and diminished excess capacity.

95. How to calculate FCFE (Free Cash Flow to Equity)?

Net Income
Subtract Net Capital Expenditure
Subtract Net Change in working capital
Subtract Debt repayment

96. What are the principles for cash flow estimation?

The principles are:
Consistency Principle
Incremental Principle
Separation Principle
Post Tax Principle

97. 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. Example is Treasury bonds/ Government Bonds.

98. 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.

99. What is Leveraged buyout (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.

100. 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.

101. What do you actually do in Restructuring?

Restructuring of capital structure is done for 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:

a) A company cannot meet its debt obligations/interest payments.
b) Creditors can accelerate debt payments and force the company into bankruptcy.
c) 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).
d) 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:
a. Refinance and obtain fresh debt/equity.
b. Sell the company (either as a whole or in pieces in an asset sale).
c. Restructure its financial obligations to lower interest payments/debt repayments, or
issue debt with PIK interest to reduce the cash interest expense.
d. 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.

102. 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.

A. What are the reasons for mergers and acquisitions?

The reasons for mergers and acquisitions are:

i. Synergy
ii. Diversification
iii. Growth
 iv. Eliminating competition

B. 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. Most often, the
logic behind the merger is to increase synergies created by merging firms that would be more
efficient in operating as one.

C. 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.

D. 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.

E. 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.

F. Regulators involved in the process of mergers and amalgamation?

The regulators involved are:
Competition Commission of India
Reserve Bank of India
Depositories
Stock exchanges
Registrar of Companies
Regional Director
Official liquidator
NCLT – replaced High Courts
Benefits and drawbacks of a merger.

G. Advantages of mergers
Economies of scale – bigger firms more efficient
More profit enables more research and development.
Struggling firms can benefit from new management.

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

103. 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.

A. 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
analyse 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.
B. 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.

104. 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.

105. 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.

106. What are the accounting concepts?

Business Entity Concept
Dual Aspect Concept
Going Concern Concept
Accounting Period Concept
Cost Concept
Money Measurement Concept
Matching Concept.

107. 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.
108. 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.

109. When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and
depreciated according to the company’s accounting policies.

110 “How many hairstylists or barbers do you estimate there are there in this city?
Explain your logic/assumptions.”
Answer: Explain the logic based on the population of the city, average number of cuts people
have per year, number of cuts one barber can do per year, and thus how many that implies
there must be. (e.g., 2 million people, each get an average of 4 cuts per year, which results in
8 million cuts per year. Each barber works an average of 8 hours per day, times five days per
week, times fifty weeks per year equals 2,000 hours of cutting time per year. Each haircut
takes 1 hour. Thus, 8 million haircuts, equal 8 million hours, divided by 2,000 hours per
barber requires 4,000 barbers in the city.)

111. “In the middle of a pond is a single lily pad; the lily pad doubles in size every day
and the pond is completely covered on the last day of the month (30 days). How long
does it take for the pond to be half covered?”
Answer: 29 days, because if it doubles in size each day it also halves each day. Thus at 29
days is half full in order to be completely full in 30 days.

112. “A windowless room contains three identical light bulbs. Each light is connected to
one of three switches outside of the room. Each bulb is switched off at present. You are
outside the room, and the door is closed. You have one, and only one, opportunity to flip
any of the external switches. After this, you can go into the room and look at the lights,
but you may not touch the switches again. How can you tell which switch goes to which
light?”
Answer: Switch on switches 1 & 2, wait a moment and switch off number 2. Enter the room.
Whichever bulb is on is wired to switch 1, whichever is off and hot is wired to switch number
2, and the third is wired to switch 3.

113. How would you determine the credit worthiness of a company?

There are two main approaches: (1) assets, and (2)cash flow. A thorough approach involves a
full financial analysis of the business based on its financial statements, market conditions,
and the management team.
On the asset approach, it’s important to understand how much the assets are truly worth, how
liquid they are, and how much you think you could get for them. On the cash flow approach,
the historical ability to generate cash flow (or net income, EBIT, EBITDA etc.) will be relied
on, in conjunction with a realistic forecast to assess how much debt they can service.

114. Name some important credit metrics.

There is a wide range of credit metrics. A few of the most common ones include:
Leverage: debt to equity, debt to capital, debt to EBITDA, interest coverage ratio (or fixed
charge coverage ratio), and other variations of these ratios.

Liquidity Ratios
liquidity ratios indicate the ability of companies to convert assets into cash. In terms of credit
analysis, the ratios show a borrower’s ability to pay off current debt. Higher liquidity ratios
suggest a company is more liquid and can, therefore, more easily pay off outstanding debts.
Liquidity ratios include: current ratio, quick ratio, cash ratio, working capital.

115. How do you model operating expenses for a company?

You can do a bottom-up build, however, typically, operating expenses move in line with
revenues. As a result, many models forecast operating expenses as a percent of revenues. It’s
important to separate fixed and variable costs and model them appropriately. Fixed costs
should only change in steps (as required), whereas variable costs will be a direct function of
revenue.

116. How do you model working capital for a company?

There are three core components of working capital – accounts receivable, inventories, and
accounts payable. These items are usually modeled to match what is happening with
revenues and cost of sales by using “turns” or “days” ratios (e.g., inventory turns or inventory
days). For example, you could look at the historic relationship between revenues and
accounts receivable by calculating receivable days. Next, you would forecast receivable days
– linking it to forecast revenues. Connect the three statements.

Conclusion

The above finance interview questions are designed to give you a better
understanding of the finance industry and what to expect during your interview.
Financial interview questions are designed to assess a candidate’s knowledge,
skills, and experience in various areas of finance. Preparing for these questions
can help you demonstrate your expertise and stand out as a strong candidate.
Whether you are applying for a job in investment banking, corporate finance, or
any other field, being well-versed in financial interview questions can give you
a competitive edge. By showcasing your ability to analyse financial statements,
build financial models, and evaluate investment opportunities, you can
demonstrate your value to potential employers and pave the way to a successful
career in finance.
Behavioural commercial banking interview questions:
1. How do you manage risk in your personal life?

This is an opportunity to show you can think on your feet and apply the principles of risk
management in a different way. There is no right or wrong answer. The key is to point out
that there are various ways to think about risk (risk of loss, the risk of missing out, risk vs.
reward, etc.). You could talk about your finances, or you could even talk about personal
activities.

2. What does it take to be a great commercial banker?

This is a wide-open commercial banking interview question. There are lots of ways to
answer it; the key is to think about the skillset required in commercial banking and tie your
response to that. The main two skills required are (1) analytics and (2) sales/relationship
management.

More reading: how to be a good financial analyst

3. Where do you see yourself in five years, if you’re hired?

This is a sensitive topic. It’s likely to be one of the commercial banking interview questions
because so many people try to go into it as a stepping stone, trying to get into corporate
finance or investment banking, so it’s important not to make them think you want to leave in
a few years. You want to come across as ambitious, but not too ambitious (e.g., don’t say “in
five years, I see myself in your job”).

To manage a transition, check out our corporate finance courses.

4. Describe your approach to sales

You may or may not be asked a question along these lines, depending on what role you’re
going for in commercial banking. A lot of commercial banking is sales-oriented, so it’s
important to be able to demonstrate you’ve got what it takes to thrive in a sales environment.
There are many approaches to sales: relationship-based, need-based, value-based, etc., so this
is a very open-ended question.

Answers: Grade the interviewee based on how well they expand on their ideas. There
are no right or wrong answers. The key is to determine the following: do they
demonstrate maturity, are they comfortable with ambiguity, can they work as a team,
do they have emotional intelligence, would they fit well in our culture, etc. .

5. If you had $1 million to invest, what would you do with it?

Tell me about a company you admire and what makes it attractive.

Pitch me a stock (typically will be followed-up with a challenge – e.g., Why has the
market not priced this in?)
These are all variants on one of the most common equity research interview questions – pitch
me a stock. Be prepared to pitch three or four stocks – for example, a large cap stock, a small
cap stock, and a stock that you would short. For any company you are going to pitch, make
sure that you have read a few analyst reports and know key information about the company.
You must know basic valuation metrics (EV/EBITDA multiples, PE multiples, etc.), key
operational statistics, and the names of key members of the management team (e.g.,
the CEO). You also must have at least three key points to support your argument.

6. Tell me when you would see a company with a high EV/EBITDA multiple but a low
PE multiple.

This relationship implies a significant difference between the firm’s enterprise value and its
equity value. The difference between the two is “net debt”. As a result, a company with a
significant amount of net debt will likely have a higher EV/EBITDA multiple.

7. Why does Warren Buffett prefer EBIT multiples to EBITDA multiples?

EBITDA excludes depreciation and amortization on the basis that they are “non-cash items.”
However, depreciation and amortization also are a measure of what the company is spending
or needs to spend on capital expenditure. Warren Buffett is credited as having said: “Does
management think the tooth fairy pays for capital expenditures?” Here is an article on why
Buffett does not like EBITDA.