Read Your Key To Success Basic Interview Questions Asked For Finance Analyst Role With Answer
Q1) What is WACC?
Suggested Answer: WACC referred to as the weighted average cost of capital, and it is concerned with the return that lenders and shareholders expect to receive in exchange for lending money to a company. The WACC is calculated by multiplying the cost of each capital source (debt and equity) by the relevant weight by market value, and then adding the products together to determine the total cost of capital.
Q2) What is Cost of Equity?
Suggested Answer: When an investor invests in a firm, the cost of equity is the rate of return that the investor expects in exchange for the investment, or the rate of return that a company expects in exchange for making an investment or executing a project, whichever is greater. It provides an answer to the question of whether or not it is worthwhile to take a risk with your money. Also known as WACC, or weighted average cost of capital, it is used in conjunction with the cost of debt in the calculation of a company's weighted average cost of capital, which is also known as weighted average cost of equity.
Q3) Tell me the logic behind of valuing of cost of equity through CAPM ?
Suggested Answer: Calculating the cost of equity, or how much risk and profit an investment will bring, can be done with the CAPM, which is a formula. It helps people figure out how much it costs to own risky individual stocks or whole portfolios. Investors need to be compensated for risk and time value when they put money in the bank.
Q4) What is Risk free return ?
Suggested Answer: Risk-free return is the theoretical return that would be expected from an investment that has no risks and a guaranteed return. The risk-free rate of return is the interest an investor would get on their money if they invested it in a risk-free way for a certain amount of time.
Q5) Why do you take risk free return of 10 year bond. why not any other period?
Suggested Answer: The yield on the 10-year Treasury bond is more important than just knowing how much money you will get back if you invest in the security. The 10-year is used as a proxy for a lot of other important financial things, like how much bond yield rates will go up.
Q6) What is risk free return in India and what is the meaning of risk free return?
Suggested Answer: The risk-free rate of return is the minimum rate of return that an investor can expect or get from an investment that has no risk.
Risk free return = 6.66
Q7) What is risk premium?
Suggested Answer: A risk premium is the difference between the rate of return an asset is expected to earn and the rate of return that an asset would get if it had no risk. Risk premiums are a way for investors to be compensated for taking a risk. It's a way for investors to get paid for taking on more risk than they would with a risk-free asset.
Q8) What is Beta?
Suggested Answer: The beta factor tells how much the stock price changes when the value of its underlying market changes (index). The Beta factor is used to figure out how much risk there is in a specific investment. In statistics, beta is the slope of a line, which can be found by regressing the returns of a stock against the returns of the stock market. Beta is the slope of a line in this case (or vice versa).
Q9) How would you find the cost of Equity which is a unlisted company and a private company ?
Suggested Answer: The Capital Asset Pricing Model (CAPM) is used to calculate the cost of equity (CAPM) The CAPM formula states that the return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of the security in question. We calculate the beta of the company by taking the beta of the industry as a whole.
Q10) How to calculate beta of Private company?
Suggested Answer: First choose 10 to 12 companies that are similar in size, risk, profitability, and other ways. Then, take the mean or median beta of these 10 to 12 companies and add it up. Mean or median beta of a company is smoothed out when we take it. When you figure out the right beta, the first thing you need to do is figure out which companies are similar to your own. Debt in a company's capital structure makes it more risky and increases the risk of bankruptcy. Second, the debt-equity ratio of our subject company may not be the same as the debt-equity ratio of our other subject companies. Then, we must take debt out from the beta for all our comps so that the beta doesn't change (unlevered the beta). The risk of our subject company because it has debt in its capital structure should now be taken into account by re-levering the unlevered beta of the comparable using the debt equity ratio of our subject company, as shown in the figure.
Q11) Why you take median of the Beta of the peer group ?
Suggested Answer: Because The Peer data section lets you figure out the Unlevered Betas of your peers and use the average or median to figure out the Unlevered Beta of the industry. It's important to know the Levered Betas, tax rates, and leverage of other companies.
Q12) Tell me about something in finance?
Suggested Answer: Finance is the management of money, and it includes things like investing, borrowing, lending, budgeting, saving, and forecasting, as well as other things.
Q13) How terminal value calculated ?
Suggested Answer: In order to calculate terminal value, divide last cash flow forecast by the difference between the discount rate and terminal growth rate, and multiply the result by one hundred. The terminal value calculation provides an estimate of the value of the company at the end of the forecast period.
Q14) Tell me why we use EBITDA multiple instead of EBIT multiple?
Suggested Answer: EBIT reveals the results of operations on an accrual basis, whereas EBITDA is a rough approximation of the cash flows generated by operations on a cash basis. Because acquisition-related company valuations are typically based on cash flows, EBITDA is more likely to be used in the development of a company valuation for acquisition purposes.
Read Related Concept On EBIDTA Multiple
Q15) What factors are taken into consideration while selecting comparable companies
Select a Peer : Choose a group of competitors or similar businesses that operate in similar industries and have similar fundamental characteristics.
Calculate Market Capitalization: Share price × Number of Shares Outstanding.
Calculate Enterprise Value: Market Capitalization + Debt + Preferred Stock + Minority Interest (less common) – Cash.
Historical & Projected Financials: Make use of historical financial information from filings as well as projections from management, sell-side equity analysts, and other sources.
Spread Multiples: Spread (i.e., calculate) EV/EBITDA and P/E multiples based on the company's market capitalization, enterprise value, and historical/projected financial data.
Value Target Company: Select the most appropriate benchmark valuation multiple for the peer group and use that multiple to determine the value of the target company. In most cases, an average or median is used instead.
Q16) How will FCFF using EBITDA and without deducting depreciation?
Suggested Answer: FCFF will be calculated by adding D&A, interest, and tax and then deducting capex.
Q17) Tell me why book value of debt is used for wacc, not market value.?
We cannot calculate WACC using book value because it will not reflect the accurate returns we need to earn. Book value is used to represent the accounting worth of the enterprise. Taking book weights for future returns calculation implies that I am taking the historical cost of debt into consideration in our comparison with the market.
Q18) Give me the formula of cost of equity, cost of debt , cost of preferred stock?
Cost of Equity = Risk free rate + ( β x Equity Risk Premium)
Pre Tax cost of debt = Annual Interest Expense / Total debt
After Cost of Debt = Pre Tax cost of debt x (1 - Tax Rate)
Cost of preferred stock = Preferred stock dividend per share (DPS)/ Current price of preferred stock
Q19) Tell me under which heading unearned revenues are shown in balance sheet ?
Suggested Answer: This unearned revenue is recorded on the balance sheet as a liability under the heading current liabilities.
Q20) Why FCFF and FCFE are require different discount rate ?
Suggested Answer: Due to the difference in risk between equity and debt (i.e., lower risk to debt holders given greater protection), the discount rates used in the DCF for FCFF and FCFE must be different as well. A common way to discount FCFF is to use the weighted average cost of capital (WACC), whereas FCFE is often discounted using the cost of equity.
Q21) Think you have a task to prepare real estate development model then how you will prepare and what will be your assumptions ?
When it comes to real estate development models, the Deal Summary and the Cash Flow Model are the two most common sections to find. The Deal Summary contains a list of all of the important assumptions, including the schedule (which outlines the timeline), property statistics, development costs, financing assumptions, and sales assumptions, which are all used to calculate the project's economics and profitability.
Initially, the Cash Flow Model focuses on the development of revenue, followed by monthly expenses and financing, and finally the project's levered free cash flows, net present value (NPV), and internal rate of return (IRR). Throughout the remainder of this section, we will walk you through the essential steps of creating a well-organized real estate development model.
Q22) What will your approach while building the financial models?
A person can choose from three different methods or approaches to employ. The Cost Approach considers the amount of money it would take to rebuild or replace an asset. If you are valuing real estate, such as commercial property, new construction or special-use property, the cost approach method can be very useful to you. It is not commonly used by finance professionals to determine the value of a company that is still in operation.
The Market Approach, which is a type of relative valuation that is widely used in the industry, is the next method to consider. Precedent Transactions and Comparable Analysis are included in this section.
In the end, the discounted cash flow (DCF) approach to valuation is a type of intrinsic valuation and is the most detailed and thorough approach to valuation modelling available.
Q23) Is there anything apart from comparison of IRR to that of expectations that would help you in analyzing the best options?
Suggested Answer: Yes the Modified Internal Rate of Return (MIRR)
The Modified Internal Rate of Return (MIRR) attempts to overcome this limitation of the Internal Rate of Return (IRR) by assuming that positive cash flows are reinvested at the cost of capital rather than at the IRR rate. The Net Present Value method is an alternative method for determining the relative attractiveness of projects that are mutually exclusive.
Q24) How do you calculate FCFF in different ways?
Suggested Answer: There is 3 ways to calculate FCFF
Free Cash Flow from Net Income
FCFF= Net Income + Depreciation & Amortization +Interest Expense (1 – Tax Rate) – Capital Expenditures – Net Change in Working capital
Free Cash Flow from Cash from Operations
FCFF = Cash Flow from Operations + Interest Expense (1-Tax Rate) – Capital Expenditures
Free Cash Flow EBIT
FCFF = EBIT(1 – Tax Rate) + Depreciation & Amortization – Δ Net Working Capital – Capital Expenditure*
Q25) Tell me why free cash flow use?
Suggested Answer: The free cash flow calculation informs a company about how much cash it is generating after paying the expenses associated with remaining in operation. In other words, it informs business owners of the amount of money that is available for them to spend at their discretion. It is a critical indicator of a company's financial health and desirability to investors, as well as other factors.
Q26) Explain about changes in Net WC while calculating FCF?
When calculating free cash flow, whether on an unlevered FCF or a levered FCF basis, an increase in the change in net working capital (NWC) is subtracted from the amount of cash flow being calculated.
Alternatively, if the change in net working capital is negative, the net effect of the two negative signs is that the amount is added to the net working capital.
So an increase in net working capital causes less free cash flows, while a decrease in net working capital causes more free cash flows.
Read Related Concept On FCF
Q27) Formula to calculate Terminal Value?
Suggested Answer: Terminal Value = (Free Cash Flow x (1+g)) / (WACC – g)
Free Cash Flow = FCF from the last 12 months
WACC = Weighted Average Cost of Capital
g = Perpetuity growth rate
Q28) In which case EV/Sales multiple use?
Suggested Answer: EV/EBITDA and EV/EBIT multiples will not be significant in the case of a company with negative EBITDA. In such instances, the EV/Sales multiple may be the most appropriate to employ. For example, in the valuation of start-up Internet companies, EV/Sales is frequently used to account for the fact that operating costs exceed revenues at this point in the company's life cycle. However, revenue is a poor metric to use when comparing companies because two companies with identical revenues can have vastly different profit margins from one another.
Q29) What is the actual term real estate Valuations?
Suggested Answer: Typically, property valuation is performed to determine fair market value, which is defined as the price at which a knowledgeable seller will willingly sell her property and a knowledgeable buyer will willingly purchase the property. In other words, it is predicated on the assumption that both parties have all of the necessary information and that neither is under any obligation to buy or sell. The fair market value is not always the same as the sales price in a transaction. For example, a short sale of real estate may not achieve fair market value because the seller is in a state of distress and needs to sell the property as soon as possible. Potential buyers are aware of this, and as a result, they have a negotiating advantage and are able to obtain the property for a lower price than the market value.
Q30) Tell me which industry you follow and why?
Suggested Answer: I follow tech and healthcare industry because they have low debt compare than other.