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Popular Corporate Finance Interview Questions

Corporate Finance is an ideal profession for those who have exceptional financial skills and are bright in solving problems. Skills such as managing finances, organizing information and having a knack for details are valued by companies when hiring for corporate finance jobs. Along with these, aspirants looking to secure a job in corporate finance must also ensure that they have good knowledge and understanding of the concepts. Below are few corporate finance interview questions (along with answers) that are frequently asked:

What is Financial Modeling?

Analysts use a financial model (usually in excel) to project the future performance of an organization. The steps to create an accurate model are – studying historical results, assumptions, preparing income statements, balance sheets, schedules, and cash flow statements. Afterward, analysts do sensitivity analysis, stress tests and audits to verify the model.

Components of Weighted Average Cost of Capital (WACC)

WACC is an important metric in the DCF (Discounted Cash Flow) valuation. It is the rate at which the company discounts the future cash flows to calculate the present value of the business. Components of WACC are: Market value of debt, Market value of equity, Cost of debt and Cost of equity

Build Cash Flow from Income Statement

Also known as the indirect method of creating cash flow. It starts by taking the net profit from the income statement and adjusting it for non-cash items. To prepare cash flow from operating activities, we add back depreciation to EBIT. Thereafter, we calculate the cash flow from investing activities and cash flow from financing activities.

Difference Between NPV and XNPV Function in Excel

While using NPV function, one assumes that the payments to be made in future are on a regular basis. XNPV comes into use when we know the exact date of each cash flow. The excel function for this is XNPV (Rate, Cash Flows, Dates of Cash Flow)

Sources for Short-term Financing

The three most common ways of raising short term financing are Bank Overdraft, Unsecured Bank Loans and Trade Credit.

Difference Between Macauley and Modified Duration

Both methods relate to the duration of the bonds. Modified duration comes with a tweak and is more precise than Macaulay’s duration. Macaulay duration is the weighted average of the years that an investor must retain the fixed income instrument to receive the initial investment. Modified duration suggests the percentage change in the value of the bond.

What is Deferred Tax Liability?

It is basically the tax that the company is due to pay for the current year, but it would pay it in the future. Such liability does not arise from the company not meeting tax obligations. Instead, it arises because of the timing when the company earns a specific income and when it pays the taxes for the current year.

When does a Company decide to Issue Debt?

A company might decide to add debt to optimize its capital structure. When a company has taxable income, issuing debt could help with the tax shield. Also, a company should go for debt, if it has steady cash flows as this ensures timely payment of interest amounts. This would help the company to bring down the weighted average cost of capital.

What is Negative Working Capital?

If a company is not able to recover money from debtors and pay current liabilities timely, the situation might result in negative working capital. Industries such as grocery retail and restaurants commonly face negative working capital but in a good way. They receive payment from customers upfront, but they don’t have to pay creditors so quick. These businesses have low inventory and account receivables and therefore, negative working capital works in favor.

Corporate Finance Interview Questions and Answers

What is Securitization?

When a company converts its illiquid assets into security for the purpose of selling them to the investors, it is  Securitization. Usually, a lot of financial engineering is involved in the process of securitization. One of the most common examples of Securitization is mortgage-backed securities (MBS).

Define Clean and Dirty Price of Bond?

A common difference between the two is that a clean bond price does not include the accrued interest, whereas dirty price includes the interest payment.

What is Interest Rate Risk?

A form of systematic risk, interest rate risk talks about the uncertainty in the general level of interest rates.

Historical Income Statement or Balance Sheet: Better Indicator of Health?

The balance sheet usually helps in calculating the different types of ratios. Therefore, it helps in assessing the health of the company in a better way.

Best Financial Statement to Review Company’s Health

If you could use just one financial statement, then it should be the Cash Flow. It gives the real picture of the cash that a company is generating. A point to note is that, you can also pick income statement or balance sheet as an answer. But, you will have to give proper justification for that.

Future vs. Forward Contracts

The biggest difference between the two is that the exchanges decide the futures contracts. On the other hand, a buyer or seller can customize forward contracts.

What is Capital Budgeting?

Companies use capital budgeting to assess long-term feasibility, as well as, the profitability of an investment project. Three most common methods under capital budgeting that companies use to select a project are payback period, internal rate of return (IRR) and net present value (NPV).

Relationship between Three Financial Statements

We can say all three financial statements are dependent on each other. Net income figure from the income statement goes into the cash flow statement and balance sheet. The closing balance of cash in the balance sheet comes from the adjustments made to last year’s closing balance for operating, investing, and financing activities. Also, we add back depreciation figure from the income statement to the capital expenditure in the Cash Flow statement. Moreover, the depreciation figure also comes in the balance sheet.

Final Words

The above list is not an exhaustive list of corporate finance interview questions. Rather, these are popular corporate finance interview questions based on the feedback from those who were interviewed recently. Thus, an aspiring candidate must do an in-depth study to clear their concepts. This would help them to answer every corporate finance interview questions accurately.1–3

1.
difference between npv and xnpv. differencebetween. December 2019. [Source]
2.
Duration – Definition, Types (Macaulay, Modified, Effective). Corporate Finance Institute. December 2019. [Source]
3.
Gallant C. What Is Securitization? Investopedia. December 2019. [Source]
Last updated on : April 13th, 2020
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  1. Avatar Irfan Kalam

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