80 Essential

Finance
Questions
By Abhishek Giri
"Designed for Students, Professionals, and Financial Enthusiasts!"

You Must
Know
1. What is the time value of money?
A: The concept that money available today
is worth more than the same amount in the
future due to its potential earning capacity

2. What is the difference between NPV

and IRR?
A: NPV is the difference between the
present value of cash inflows and outflows.
IRR is the discount rate that makes the
NPV of all cash flows from a project zero.

3. What is CAPM?
A: The Capital Asset Pricing Model
(CAPM) calculates the expected return on
an asset based on its risk (beta) relative to
the market.
4. What is WACC?
A: The Weighted Average Cost of
Capital(WACC) is the average rate of return
a company is expected to pay its investors,
weighted by the proportion of debt and
equity.

5. What is the difference between a

balance sheet and an income
statement? A: The balance sheet shows a
company’s assets, liabilities, and equity at a
specific point in time, while the income
statement reports revenue and expenses
over a period.

6. What is financial modeling?

A: Financial modeling involves building
abstract representations (models) of a
company ' s financial situation to forecast
future performance
7. What is EBITDA?
A: EBITDA stands for Earnings Before
Interest, Taxes, Depreciation, and
Amortization. It measures a company’s
profitability before accounting for these
expenses.

8. What is a DCF analysis?

A: A Discounted Cash Flow (DCF) analysis
is a valuation method that estimates the
value of an investment based on its future
cash flows, discounted back to present
value.

9. What are working capital and its

components?
A: Working capital is the difference
between current assets and current
liabilities. Components include cash,
accounts receivable, inventory, and
accounts payable.
10. What is accrual accounting?
A: Accrual accounting records revenues and
expenses when they are incurred, regardless
of when cash is exchanged.

11. What is a liquidity ratio?

A: A liquidity ratio measures a company’s
ability to meet its short-term obligations,
with common examples being the current
ratio and quick ratio

12. What is the debt-to-equity ratio?

A: The debt-to-equity ratio measures a
company’s financial leverage by dividing its
total liabilities by shareholders ' equity

13. What is free cash flow (FCF)?

A: Free cash flow is the cash a company
generates after accounting for capital
expenditures. It’s used to pay dividends,
reduce debt, or invest.
14. What are derivatives?
A: Derivatives are financial contracts whose
value is derived from an underlying asset,
index, or interest rate, like options or
futures.
15. What is a leveraged buyout (LBO)?
A: An LBO is when a company is acquired
using a significant amount of borrowed
money, with the acquired company’s assets
often serving as collateral.
16. What is the difference between a
merger and an acquisition?
A: In a merger, two companies combine to
forma new entity, while in an acquisition,
one company takes over another.
17. What is beta in finance?
A: Beta measures a stock’s volatility
relative to the overall market. A beta
greater than 1indicates higher volatility,
while less than 1indicates lower volatility
18. What is the efficient market
hypothesis(EMH)?
A: The EMH suggests that asset prices fully
reflect all available information, meaning it'
s impossible to consistently outperform the
market
19. What is a bond?
A: A bond is a debt security in which an
investor loans money to an entity that
borrows the funds for a defined period at a
fixed interest rate.
20. What is a stock option?
A: A stock option gives the holder the right,
but not the obligation, to buy or sell a stock
at a specified price before a specified date.
21. What is the payback period?
A: The payback period is the amount of time
it takes to recover the initial investment in
a project.
22. What is the purpose of a financial
audit?
A: A financial audit provides an
independent assessment of whether a
company’s financial statements are accurate
and free from material misstatement.
23. What are retained earnings?
A: Retained earnings are the portion of net
income that is not paid out as dividends but
reinvested in the business.
24. What is a capital structure?
A: Capital structure is the mix of a
company’s debt, equity, and other financial
instruments used to finance its operations.
25. What is the difference between a
primary and secondary market?
A: The primary market is where new
securities are issued, while the secondary
market is where investors buy and sell
previously issued securities.
26. What is an IPO?
A: An Initial Public Offering (IPO) is when a
company offers shares to the public for the
first time.
27. What are the four main financial
statements?
A: The four main financial statements are
the balance sheet, income statement, cash
flow statement, and statement of
shareholders’ equity
24. What is a capital structure?
A: Capital structure is the mix of a
company’s debt, equity, and other financial
instruments used to finance its operations.
29. What is a corporate bond?
A: A corporate bond is a debt security issued
by a corporation to raise capital, with fixed
interest payments made to bondholders.
30. What is goodwill in accounting?
A: Goodwill is an intangible asset that
arises when a company acquires another for
more than its fair market value.
31. What is financial leverage?
A: Financial leverage refers to using
borrowed funds to increase the potential
return on investment.
32. What is the DuPont analysis?
A: DuPont analysis breaks down Return on
Equity (ROE) into three components: profit
margin, asset turnover, and financial
leverage
33. What is a dividend?
A: A dividend is a portion of a company’s
earnings paid out to shareholders.
34. What is capital expenditure
(CapEx)?
A: CapEx refers to funds used by a company
to acquire or upgrade physical assets like
property, buildings, or equipment.
35. What is ROI?
A: Return on Investment (ROI) measures
the gain or loss generated relative to the
amount of capital invested.
36. What is a hedge fund?
A: A hedge fund is an investment vehicle
that uses various strategies to earn active
returns for its investors.
37. What is a mutual fund?
A: A mutual fund pools money from multiple
investors to invest in a diversified portfolio
of securities.
38. What is alpha in investing?
A: Alpha is a measure of an investment’s
performance relative to a benchmark,
representing the excess return achieved.
38. What is alpha in investing?
A: Alpha is a measure of an investment’s
performance relative to a benchmark,
representing the excess return achieved.
40. What is a credit default swap
(CDS)?
A: A CDS is a financial derivative that
allows an investor to swap or offset credit
risk with another party.

41. What is corporate governance?

A: Corporate governance refers to the
system of rules, practices, and processes by
which a company is directed and controlled.
42. What is the cost of equity?
A: The cost of equity is the return that
equity investors expect to receive from an
investment in a company, often estimated
using CAPM.
43. What is a cash flow statement?
A: The cash flow statement shows the inflow
and outflow of cash from operating,
investing, and financing activities over a
period of time.
44. What is an equity multiplier?
A: The equity multiplier measures a
company’s financial leverage by dividing
total assets by total equity, indicating the
proportion of a company’s assets financed
by shareholders.
45. What is financial distress?
A: Financial distress occurs when a
company cannot meet or has difficulty
paying off its financial obligations, which
may lead to bankruptcy.
46. What is a variable cost?
A: A variable cost changes in proportion to
the level of output or sales, such as raw
materials or production supplies.
47. What is an economic moat?
A: An economic moat refers to a company’s
competitive advantage that allows it to
protect its market share and profitability
from competitors
48. What is the Modigliani-Miller
theorem?
A: The Modigliani-Miller theorem states
that, in a perfect market, the value of a
firm is unaffected by how it is financed,
whether through debt or equity.
49. What is an interest rate swap?
A: An interest rate swap is a financial
derivative where two parties exchange
interest rate payments, typically switching
between fixed and floating rates.
50. What is securitization?
A: Securitization is the process of pooling
various types of debt, like mortgages, and
selling them as securities to investors.
51. What is venture capital?
A: Venture capital is funding provided by
investors to startups or small businesses
with long-term growth potential in
exchange for equity.
52. What is operating leverage?
A: Operating leverage refers to the extent
to which a company uses fixed costs in its
operations, which can magnify profits as
sales increase.
53. What is a credit rating?
A: A credit rating assesses the
creditworthiness of a borrower, indicating
the risk level of default for bonds or loans.
54. What is systematic risk?
A: Systematic risk is the inherent risk that
affects the entire market or a large segment
of the market, such as interest rate changes
or recessions
55. What is unsystematic risk?
A: Unsystematic risk is the risk that is
unique to a specific company or industry,
such as management changes or regulatory
impacts.
56. What is a leveraged loan?
A: A leveraged loan is a loan extended to
companies or individuals with high levels
of debt, usually at higher interest rates due
to increased risk.
57. What is the dividend payout ratio?
A: The dividend payout ratio measures the
proportion of earnings a company pays out
to shareholders in the form of dividends,
calculated as dividends per share divided by
earnings per share.
58. What is a convertible bond?
A: A convertible bond is a bond that can be
converted into a specified number of shares
of the issuing company’s stock.
59. What is return on equity (ROE)?
A: ROE measures a company’s profitability
by showing how much profit it generates
with the money shareholders have invested,
calculated as net income divided by
shareholders ' equity
60. What is a junk bond?
A: A junk bond is a high-yield, high-risk
security issued by companies with lower
credit ratings.
61. What is the internal rate of return
(IRR)?
A: IRR is the discount rate that makes the
net present value (NPV) of all cash flows
from an investment equal to zero
62. What is the primary market?
A: The primary market is where new
securities are issued and sold to investors
directly, often through initial public
offerings (IPOs).
63. What is goodwill impairment?
A: Goodwill impairment occurs when the
carrying value of goodwill on a company’s
balance sheet exceeds its fair market value,
requiring a write-down.
64. What is the price-to-earnings (P/E)
ratio?
A: The P/E ratio measures a company’s
current share price relative to its per share
earnings, used to gauge market
expectations of future earnings growth.
65. What is an earnings call?
A: An earnings call is a conference call in
which a company discusses its financial
results with investors, analysts, and the
media.
66. What is the difference between
forward and futures contracts?
A: A forward contract is a customized
agreement between two parties to buy or
sell an asset at a specific price in the future,
while a futures contract is standardized and
traded on exchanges.

67. What is portfolio diversification?

A: Portfolio diversification is the practice of
spreading investments across various asset
classes or sectors to reduce risk.
68. What is the Sharpe ratio?
A: The Sharpe ratio measures the risk
adjusted return of an investment, calculated
by dividing the difference between the
investment return and the risk-free rate by
its standard deviation.
69. What is capital allocation?
A: Capital allocation is the process of deciding
how to distribute financial resources across
various investment opportunities to maximize
returns.
70. What is a rights issue?
A: A rights issue is an offer by a company to
existing shareholders to purchase additional
shares at a discounted price, typically to
raise capital.
71. What is inflation?
A: Inflation is the rate at which the general
price level of goods and services rises,
eroding purchasing power over time.
72. What is a zero-coupon bond?
A: A zero-coupon bond does not pay periodic
interest; instead, it is issued at a discount
and redeemed at face value upon maturity.
73. What is the Altman Z-score?
A: The Altman Z-score is a formula that
predicts the likelihood of a company going
bankrupt based on its financial ratios and
performance metrics.
74. What is operational risk?
A: Operational risk refers to the potential
loss resulting from inadequate or failed
internal processes, people, systems, or
external events.
75. What is asset-backed security
(ABS)?
A: An ABS is a security whose income
payments and value are derived from and
backed by a pool of underlying assets,
typically loans, leases, or credit card debt.
76. What is diversification in
investing?
A: Diversification is the practice of
spreading investments across various asset
classes, industries, or geographic regions to
reduce risk. It ensures that poor
performance in one area doesn’t
significantly impact the overall portfolio.
77. What is the difference between
fixed and variable costs?
A: Fixed costs remain constant regardless of
production levels (e.g., rent, salaries), while
variable costs fluctuate with production
output (e.g., raw materials, sales
commissions).
78. What is an ETF (Exchange-Traded
Fund)?
A: ETF is a fund that tracks assets like
stocks or bonds and trades on exchanges. It
offers diversification and low costs.
79. What is quantitative easing (QE)?
A: QE is a monetary policy where a central
bank purchases government securities or
other financial assets to inject liquidity into
the economy and encourage lending and
investment.
80. What is book value?
A: Book value is the value of a company ' s
assets as reported on the balance sheet,
calculated as total assets minus liabilities.
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