Best basic interview questions for a finance analyst in the finance industry. Have you ever wondered what your interviewers need to know before inviting you for an interview? Read on to learn about basic interview questions for finance analysts.
Q1- Tell me what is the Debt Service Coverage Ratio. When computing DSCR, why is EBITDA used as a numerator while calculating DSCR?
Suggested Answer: DSCR is a ratio that measures the amount of net operating income that can be used to pay off short-term debt. (Debt Service Coverage Ratio) Individuals and businesses can use the debt service coverage ratio (DSCR) to determine their ability to pay their debts in full with cash. In general, a higher debt-to-equity ratio indicates that the entity is more creditworthy because it has sufficient funds to service its debt obligations – that is, to make the required payments on time.
But why is EBIDTA used as the numerator in this equation?
In some cases, EBITDA is used instead of EBIT in the calculation of the debt service coverage ratio because EBITDA is a more accurate representation of cash flow in these situations. Leases should be included in the denominator of the debt service ratio calculation, along with all other debt service expenses.
Q2- Explain me the different types of Ratios ?
Suggested Answer: There is Eight Different type of ratio
Liquidity ratios: Liquidity ratios are used to assess a company's ability to meet short-term obligations without the need to raise additional capital. When it comes to liquidity, everyone is concerned, but short-term creditors, such as banks and suppliers, are particularly concerned.
Activity ratios: Activity ratios measure how efficiently a company uses its assets to generate sales or cash, as well as the efficiency and profitability of the company's operations. Activity ratios are sometimes referred to as efficiency ratios or asset use efficiency ratios by some people. In order to evaluate a company's operating efficiency, activity ratios are calculated by comparing inventories with fixed assets and accounts receivable.
Leverage ratios: Leverage ratios take into account how the company is financed. Depending on your accounting background, you may recall that the balance sheet equation requires that assets equal liabilities plus owners' equity. The company already has assets in place. Leverage ratios are used to describe the proportions in which a company uses equity and debt to finance its assets.
Profitability ratios: In order to calculate profitability ratios, sales or asset investment can be used as inputs. The majority of the time, they are used to directly assess the profitability of a company and the effectiveness of management in their efforts to maximize shareholder wealth. For the majority of profitability ratios, a company's profitability in comparison to the previous year or to its competitors indicates how well the company is performing. For example, gross margin
Market ratios: Market ratios are used to evaluate the current share price of a publicly traded company's stock on the open market. These ratios are used by both current and prospective investors to determine whether a company's stock is undervalued or overvalued, depending on the situation. Investors use the undervaluation or overvaluation of stock shares to determine whether or not to purchase or sell shares of the company's stock. If a stock is undervalued, investors anticipate that the price will rise, and they will buy the stock in order to profit from the increase in value.
Current Ratio: It assists an analyst in determining whether or not a company will be able to meet its short-term obligations. A current asset is a piece of property that will generate cash in the coming year. When these two variables are compared directly, the current ratio is obtained. Generally speaking, a higher current ratio indicates a greater likelihood that the company will be able to meet its short-term obligations.
Activity ratios: In addition to accounts receivable turnover and average collection period, activity ratios also include total asset turnover, fixed asset turnover, and return on investment on operating income. Accounts receivable turnover and average collection period are two of the most commonly used activity ratios.
Quick Ratio: A liquidity ratio is calculated by dividing current assets less inventory by current liabilities; this ratio is also known as the acid-test ratio. This method is used to analyze the impact of a company's inventory on the company's ability to meet current obligations.
Q3- What is Liquidity Ratio? Why is 2:1 the ideal current ratio?
Suggested Answer: Liquidity ratios are used to assess a company's ability to meet short-term obligations without the need to raise additional capital. When it comes to liquidity, everyone is concerned, but short-term creditors, such as banks and suppliers, are particularly concerned.
Now why is 2:1 the ideal current ratio
The ideal current ratio for a company should be 2:1, according to industry standards. An asset-to-liability ratio of less than one indicates that the company does not have enough assets to pay off its obligations.
Q4- What is Capital Budgeting?
Suggested Answer: A measure of the amount of time it takes a corporation to save money A financial analysis process that a corporation uses to determine whether or not they should proceed with a potential investment or project is known as financial analysis. A corporation's planning process for determining how much money can be saved to pay federal taxes while still making a profit is known as tax planning. A company's financial tracking process is the process of determining where and how its money is being spent.
Q5-What are the the techniques used in Capital Budgeting
Suggested Answer: There is Five techniques use in capital budgeting.
Payback period method: In this technique, the entity determines the amount of time it will take to recoup the initial investment in a project or investment, as well as the amount of money it will need to do so. When choosing a project or investment, the one with the shortest duration is preferred.
Net Present value: It is possible to calculate the net present value of a transaction by calculating the difference between the present value of cash inflows and the present value of cash outflows over a given period of time. The investment that has a positive net present value (NPV) will be considered. In the event that there are multiple projects, the project with the highest net present value (NPV) is more likely to be chosen.
Accounting Rate of Return: To determine the most profitable investment, the total net income of an investment is divided by the initial or average investment, which results in the most profitable investment.
Internal Rate of Return (IRR): A discount rate is used to compute the net present value. The internal rate of return (IRR) is the rate at which the NPV becomes zero. Typically, the project with the highest internal rate of return (IRR) is chosen.
Profitability Index: The Profitability Index measures the relationship between the present value of future cash flows generated by a project and the amount of initial investment required to complete the project. Each technique has its own set of benefits and drawbacks that must be considered. When it comes to budgeting, an organization must employ the most effective technique available. It can also choose from a variety of techniques and compare the results in order to identify the most profitable projects to pursue.
Q6-Tell me the between Payback period and Discounted Payback period?
Payback Method- In a project, it determines the number of years it will take to recover the initial cash investment and compares that time to a pre-determined maximum payback period
Discounted Payback period- Calculates the number of years required to recover the initial cash investment in a project using discounted cash flows and compares that time to a pre-established maximum payback period for similar projects.
Q7- Define Enterprise Value. How to calculate it?
Suggested Answer: Company's core business operations valued at a level attributable to ALL investors (debt and equity). Enterprise value is not affected by the company's capital structure.
EV = Equity Value + Debt + Preferred Stock + Minority Interest - Cash
Q8- What is Market Capitalization?
Suggested Answer: The total value of all of a company's shares of stock is referred to as the market capitalization. It is calculated by multiplying the price of a stock by the total number of shares that are currently in circulation. Using this method, investors can determine the relative size of one company compared to another.
Q9- What is excess cash ?
Suggested Answer: The amount of excess cash flow generated by a company is different from the amount of free cash flow generated by a company. Excess cash flow is defined in the credit agreement, which may specify that certain expenditures be excluded from the calculation of excess cash flow in certain circumstances.
Q10- What types of debt are included in EV (Enterprise Value)?
Suggested Answer: The Short-term and long-term debt are included in Enterprise value.
Q11- Why cash deducted while calculating EV?
Suggested Answer: Because cash is considered a non-operating asset and because cash is already implicitly accounted for within the equity value of a company, cash is subtracted from the total enterprise value when calculating enterprise value. It is important to note that when we subtract cash, we should say "excess cash" rather than "excess cash.”
Q12- What is Unfunded Pension Liabilities and Why do they form a part of debt?
Suggested Answer: A liability is a legal obligation imposed on a person, organization, or government entity to pay a debt incurred as a result of a previous or current contract or action. An asset is defined as anything that can be claimed against the debtor's current or future assets.
An unfunded liability is a debt that does not have any assets to cover it, either currently or in the future. The entity that owes the debt does not have the financial resources to pay the debt.
Q13-Define Minority Interest. State the reason for its inclusion in EV?
Suggested Answer: Being a minority shareholder in a company means that you own less than 50% of the total number of shares and have fewer voting rights than the majority shareholders in the company. Minority investors, on the other hand, do not have the ability to exercise control over a company through voting, which means they have little influence over the company's overall decision-making process.
The purpose of including a minority interest in EV is to make it easier to compare EV to other figures such as total sales, EBIT, and EBITDA on a "apples to apples" comparison basis. EBITDA focuses on the operational decisions of a business because it examines the profitability of the business' core operations before taking into account the impact of the company's capital structure.
Q14- What is EBITDA? As an investor would you consider EBITDA or Net Profit for judging a potential investment?
Suggested Answer: EBITDA (earnings before interest, taxes, depreciation, and amortization) is a financial performance metric that can be used in place of other metrics such as revenue, earnings, or net income to assess a company's financial performance. It is calculated as earnings before interest, taxes, depreciation, and amortization divided by revenue. It is calculated as the difference between earnings before interest, taxes, depreciation, and amortization and the total amount of revenue. Despite the fact that it is frequently included on a profit and loss statement, it is not always included on the statement.
The EBITDA of a company is used to determine its profitability, whereas the net profit is used to calculate the company's earnings per share of common stock. The preferred method of measurement for many businesses is EBITDA, because it reduces the impact of factors that are beyond their control and focuses attention on factors that can be controlled.
Q15- What is accrued revenue and deferred revenue?
Suggested Answer: A business's accrued revenue is income that it has earned in one fiscal period but has not yet received until the following fiscal period, whereas a business's deferred revenue is a liability that is recognized when cash is received prior to the provision of a service or before the shipment of goods to customers.
Q16- Explain me what is the CAPM formula to calculate the cost of equity?
Suggested Answer: Using the CAPM, you can determine how risky an investment is in relation to the overall market environment. In part, this is due to the estimations made during the calculation, which makes the model less accurate (because it uses historical information).
E(Ri) = Rf + βi * [E(Rm) – Rf]
E(Ri) = Expected return on asset i
Rf = Risk-free rate of return
βi = Beta of asset i
E(Rm) = Expected market return
Q17- Explain me about risk free rate, risk premium and beta?
Risk free rate - In financial terms, the risk-free rate of return is the interest rate that an investor can expect to earn on an investment that carries no risk at all. In practice, the risk-free rate is generally regarded as being equal to the interest rate paid on a three-month government Treasury bill, which is considered to be the safest investment a person can make in general.
Risk Premium - The market risk premium is the additional return that an investor will receive (or expects to receive) as a result of holding a risky market portfolio rather than a risk-free portfolio of assets.
Beta- The beta factor measures how sensitive the stock price is to changes in its underlying market (index). In order to assess the systematic risks associated with a specific investment, the Beta factor is calculated. In statistics, beta is the slope of a line, which can be calculated by regressing the returns of a stock against the returns of the stock market (or vice versa).
Q18- What is the Formula for FCFF how you will calculate?
Suggested Answer: FCFF= Net Income + Depreciation & Amortization +Interest Expense (1 – Tax Rate) – Capital Expenditures – Net Change in Working capital
Q19- How you will calculate cost of equity for private companies.
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.
Q20- How you will calculate cost of equity of stocks?
Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of return)
E(Ri) = Expected return on asset i
Rf = Risk-free rate of return
βi = Beta of asset i
E(Rm) = Expected market return
Q21- What are the steps to calculate beta in Excel?
Suggested Answer: Take a look at historical security prices for the asset whose beta you're interested in calculating. Download historical security prices in order to use them as a benchmark for comparison. Calculate the percent change in value from one period to the next for both the asset and the reference. Every day if you're using daily data; each week if you're using weekly data, and so on. Calculate the asset's variance by dividing the asset's value by =VAR.S. (all the percent changes of the asset). =COVARIANCE.S is used to calculate the covariance of an asset with respect to a benchmark (all the percent changes of the asset and all the percent changes of the benchmark).
Q22- How to value company using DCF valuation?
Suggested Answer: To value a business or asset, the DCF method involves projecting future cash flows (FCF) over a period of time (horizon period), calculating the terminal value at the end of that period, and discounting the projected future cash flows and terminal value using a discount rate to arrive at the net present value of the total expected cash flows (NPV) of the company or asset.
Estimate unlevered FCFs (UFCFs) - Determine a discount rate Calculate the TV Calculate the enterprise value (EV) by discounting the projected UFCFs and TV to net present value Calculate the equity value by subtracting net debt from the enterprise value (EV)
Q23- What is WACC and steps for calculation ?
Suggested Answer: The weighted average cost of capital (WACC) is the sum of the various types of capital a company can use to finance its operations: debt, preferred stock, retained earnings, and external equity, among others. The weighted average cost of capital (WACC) is also used as the discount rate applied to a firm's cash flows in a capital budgeting project.
Comparing and contrasting the capital structures of each comparable company
Septs to calculate WACC in detail
Find the "Levered Beta" for each of the comparable.
Lever each comparable company's Levered Beta by a factor of two.
Locate the "Equity Risk Premium" on the balance sheet (also known as the Market Risk Premium)
Find the risk-free interest rate.
Calculate the cost of equity for each comparable company by applying the Capital Asset Pricing Model to the information (CAPM).
Calculate the Cost of Debt for each comparable company using the formula below.
Calculate the Cost of Preferred Stock for each comparable company, if any, and then multiply that figure by 100.
Create an Excel spreadsheet to calculate the WACC for each comparable company.
Calculate the Levered Beta for the company that you are researching.
Recalculate the cost of equity for each comparable company using the Capital Asset Pricing Model to arrive at the final cost of equity (CAPM)
Determine or estimate the cost of debt for your subject company.
Locate or make an educated guess at the cost of preferred stock in your subject company, if applicable.
Q24- What are the Cost of capital components?
Kd - Rate at which a firm can issue new debt. YTM on existing debt. Also called before tax component.
Kd (1-t) - After tax cost of debt. Used to calculate WACC.
Kps - Cost of preferred stock.
Ke - Cost of common equity. Its the required rate of return on common stock and is difficult to estimate.
Q25- Explain the main difference between EV and EV multiples?
Suggested Answer: In business valuation, enterprise value is the value of the company's core business operations, which are available to all investors (i.e. debt, equity, preferred, etc.) All assets (i.e., all assets) that are available to common equity investors are represented by the equity value of the company. Equity value represents the value of both core and non-core operating assets.
Only denominators that are relevant to equity holders are used in the calculation of equity value multiples. Consequently, the relevant denominator must be computed after interest, preferred dividends, and minority interest expense have been deducted from the total.
Q26- Which of the following will you choose to invest your money stocks or bond?
Suggested Answer: Bonds are considered safer for a reason; however, you should expect a lower rate of return on your investment. The stock market, on the other hand, is typically characterized by a certain amount of unpredictability over a short period of time combined with the potential for a higher return on your investment.
Q27- How you will calculate EBIT?
Suggested Answer: A company's earnings before interest and taxes (EBIT) are calculated by subtracting the cost of goods sold (COGS) and operating expenses from the company's revenue. Put it another way, EBIT can be calculated as the difference between operating revenue and non-operating income, less operating expenses.
Q28- How you will calculate EBITBA?
Suggested Answer: EBITDA can be calculated in one of two ways: the first is by adding together operating income, depreciation, and amortization. the second is by subtracting operating income from depreciation and amortization. The second is calculated by increasing net income by the sum of taxes, interest expense, depreciation and amortization, and other expenses.
Q29- Did you prepare any Models?
Suggested Answer: Basically if you prepare any financial model or any statistically model you should share in your resume or interview
Q30- What are your interests?
Suggested Answer: You can tell your interviewer what interests you have like reading, gaming, playing outdoor games, etc