30 Interview Questions to Ask during a Corporate Finance Interview
Tell me about Financial Statements of a company and what do they tell about a company?
Financial statements are a key way for a company to communicate its financial information to interested parties such as investors, creditors, and analysts. There are four main financial statements that are typically prepared by a company: the balance sheet, the income statement, the statement of cash flows, and the statement of stockholders' equity.
The balance sheet presents a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and equity. The assets include things like cash, investments, and property. The liabilities are the debts and obligations that the company owes to others. The equity represents the residual interest in the assets of the company after liabilities are paid. The balance sheet shows how much a company is worth and how it is financed, either through debt or equity.
The income statement shows a company's revenues and expenses over a specific period of time, such as a month or a year. It shows the company's profitability by calculating the difference between the revenues and the expenses. The statement of cash flows shows the inflows and outflows of cash for a specific period of time. It shows where the cash came from (such as from operating activities, investing activities, or financing activities) and where it was used.
The statement of stockholders' equity shows the changes in the equity of the company over a specific period of time. It includes information about the issuance and repurchase of shares of stock, as well as dividends paid to shareholders.
Together, these financial statements provide a comprehensive overview of a company's financial performance and position. They can be used to assess the company's financial health, its ability to generate profits, and its potential for growth.
Explain the Cash Flow Statement in detail?
The statement of cash flows, also known as the cash flow statement, is a financial statement that shows the inflows and outflows of cash for a specific period of time, such as a month or a year. The purpose of the statement of cash flows is to show how a company's operations, investments, and financing activities have affected its cash position.
The statement of cash flows has three main sections: operating activities, investing activities, and financing activities.
Operating activities include the cash inflows and outflows that are related to the company's main business operations. For example, if a company sells products or services, the cash it receives from its customers would be considered an operating inflow. On the other hand, the cash it pays to suppliers for raw materials or to employees for wages would be considered an operating outflow.
Investing activities include the cash inflows and outflows that are related to the company's investments in long-term assets, such as plant and equipment. For example, if a company buys a piece of equipment, it would be considered an investing outflow. On the other hand, if the company sells an investment, it would be considered an investing inflow.
Financing activities include the cash inflows and outflows that are related to the company's financing arrangements, such as borrowing money or issuing new shares of stock. For example, if a company borrows money from a bank, it would be considered a financing inflow. On the other hand, if the company repays a loan, it would be considered a financing outflow.
The statement of cash flows also includes a reconciliation of the net change in cash during the period. This is calculated by adding the net cash inflows from operating, investing, and financing activities and then subtracting any net increase in cash and cash equivalents.
Overall, the statement of cash flows provides important information about a company's ability to generate cash and how it is using that cash. It is often used in conjunction with the other financial statements to get a complete picture of a company's financial position and performance.
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Explain three sources of short Deﬁne Working Capital
Working capital is the capital available for a company to fund its day-to-day operations. It is calculated as the difference between a company's current assets and its current liabilities. Current assets are assets that are expected to be converted into cash or used up within one year, such as cash, accounts receivable, and inventory. Current liabilities are debts and other obligations that are due within one year, such as accounts payable and short-term loans.
There are several sources of short-term financing that a company can use to increase its working capital. These include:
Trade credit: This is credit that is extended to a company by its suppliers. A company can use trade credit to pay for goods or services that it receives from its suppliers on credit, rather than paying for them upfront.
Short-term loans: A company can obtain a short-term loan from a bank or other financial institution to increase its working capital. These loans are typically due within one year and are used to finance the company's day-to-day operations.
Overdraft facility: An overdraft facility is a line of credit that a company can use to draw on when it needs extra cash. The company can draw on the overdraft up to a certain limit, and it is typically required to pay interest on the amount it borrows.
Overall, these sources of short-term financing can help a company meet its short-term cash needs and maintain a healthy level of working capital.
A company buys an machinery and tell me the impact on the 3 ﬁnancial statements?
If a company buys machinery, it will have an impact on the company's three main financial statements: the balance sheet, the income statement, and the statement of cash flows.
On the balance sheet, the machinery will be recorded as an asset. The company will either pay for the machinery with cash, in which case the cash balance on the balance sheet will decrease, or it will pay for the machinery with a loan, in which case the loan will be recorded as a liability on the balance sheet.
On the income statement, the cost of the machinery will be recorded as an expense in the period in which it is purchased. This will reduce the company's net income for that period.
On the statement of cash flows, the purchase of the machinery will be recorded as an investing outflow. If the company pays for the machinery with cash, the outflow will be recorded in the "cash outflows from investing activities" section of the statement of cash flows. If the company finances the purchase with a loan, the outflow will be recorded in the "cash outflows from financing activities" section.
Overall, the purchase of machinery will have a negative impact on the company's net income and will result in a reduction in cash or an increase in debt, depending on how the company finances the purchase.
What is EPS and how is it calculated?
EPS, or earnings per share, is a measure of a company's profitability that is calculated by dividing the company's net income by the number of shares outstanding. EPS is often used as a way to compare the profitability of different companies, or to compare the profitability of a single company over time.
The formula for calculating EPS is:
EPS = (Net income - Dividends on preferred stock) / Average number of common shares outstanding
Net income is the company's total profits, which is calculated by subtracting the company's total expenses from its total revenues. Dividends on preferred stock are payments that the company makes to the holders of preferred stock. Preferred stock is a type of equity that has a higher claim on the company's assets and earnings than common stock.
The average number of common shares outstanding is the average number of common shares that were outstanding during the period being measured. Common stock is the most common type of stock and represents ownership in a company.
EPS can be a useful measure of a company's profitability, but it is important to consider other factors as well, such as the company's financial position, growth potential, and risk profile.
What is deferred tax?
Deferred tax is an accounting concept that refers to the difference between the amount of tax that a company is required to pay in the current period and the amount of tax that it has actually paid. Deferred tax is a result of temporary differences between the accounting basis and the tax basis of an asset or liability.
For example, if a company's tax return shows that it is required to pay $100 in taxes for the current year, but its financial statements show that it has only paid $80 in taxes, the difference of $20 is recorded as a deferred tax liability. This means that the company will have to pay the remaining $20 in taxes in a future period.
On the other hand, if the company's tax return shows that it is required to pay $100 in taxes, but its financial statements show that it has paid $120, the difference of $20 is recorded as a deferred tax asset. This means that the company will receive a tax credit of $20 in a future period.
Deferred tax is recorded on the balance sheet as either a deferred tax asset or a deferred tax liability. It is important to consider deferred tax when evaluating a company's financial statements, as it can impact the company's net income and cash flow.
When you analyze foreign firm what types of information would you look for to value a foreign company?
There are several types of information that you might look for when analyzing a foreign company in order to value it:
Financial statements: Reviewing the company's financial statements, including the balance sheet, income statement, and statement of cash flows, can give you an idea of the company's financial position, profitability, and cash flow.
Market conditions: Consider the current market conditions in the country where the company operates. This includes economic factors such as GDP growth, inflation, and unemployment, as well as industry-specific factors such as supply and demand trends.
Competitive landscape: Look at the company's competitors and how it compares in terms of market share, profitability, and growth potential.
Management and leadership: Evaluate the company's management team and their track record of success. Consider factors such as the team's experience, expertise, and leadership style.
Legal and regulatory environment: Consider the legal and regulatory environment in the country where the company operates, as this can impact the company's operations and financial performance.
Risk factors: Identify any risk factors that could impact the company's future performance, such as political instability, currency risk, or environmental regulations.
Overall, by analyzing these and other factors, you can get a better understanding of the company's strengths, weaknesses, opportunities, and threats, which can help you to make informed decisions about its value.
What is securitization?
Securitization is the process of pooling together financial assets and selling them to investors as securities. The assets are typically loans, such as mortgages, auto loans, or credit card debt. The securities that are created through the process of securitization are called asset-backed securities (ABS).
The purpose of securitization is to transfer the risk of default on the underlying assets from the issuer of the securities to the investors. This is done by creating a legal structure, known as a special purpose vehicle (SPV), that holds the assets and issues the securities. The SPV is a separate entity from the issuer, and it is typically structured in such a way that the issuer is not responsible for the debts of the SPV.
Securitization has been used for decades as a way for banks and other financial institutions to raise capital and manage risk. It has also been used as a way for investors to diversify their portfolios and earn a return on their investments.
However, securitization has been criticized in the past for contributing to the financial crisis of 2007-2008. This is because some asset-backed securities were backed by subprime mortgages, which had a high default rate, and because the risks of these securities were not fully disclosed to investors. As a result, the process of securitization has been subject to increased regulatory scrutiny in recent years.
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What is disintermediation?
Disintermediation is the process of bypassing traditional financial intermediaries, such as banks and other financial institutions, in order to access financial services directly. It can occur in both the borrowing and lending markets.
In the borrowing market, disintermediation refers to the process of borrowers bypassing traditional financial intermediaries, such as banks, in order to borrow directly from lenders. This can be done through platforms such as peer-to-peer (P2P) lending platforms, which allow borrowers to borrow directly from individual investors.
In the lending market, disintermediation refers to the process of lenders bypassing traditional financial intermediaries, such as mutual funds or insurance companies, in order to lend directly to borrowers. This can be done through platforms such as direct lending platforms, which allow lenders to lend directly to businesses or individuals.
Disintermediation can occur as a result of technological advances, such as the rise of online platforms, which have made it easier for borrowers and lenders to connect directly. It can also be driven by changes in regulations or market conditions, such as low interest rates or the availability of alternative sources of financing.
Overall, disintermediation can increase competition and reduce costs for borrowers and lenders, but it can also increase risk if investors do not fully understand the risks associated with the investments they are making.
Where is the US budget deﬁcit in 2020 and what impact would be in economy ?
The U.S. budget deficit hit a record $3.13 trillion in 2020 due to more than $5 trillion in CARES Act spending and other outlays. This is almost twice as large than at the worst of the Great Recession in 2009. The large deficit is likely to have a significant impact on the economy as increased federal spending can lead to higher inflation and interest rates, putting a strain on businesses and households.
Tell me about convexity?
Convexity is a measure of the curvature of a bond's price-yield relationship. It reflects the sensitivity of a bond's price to changes in interest rates. A bond with high convexity will experience larger price changes for a given change in interest rates than a bond with low convexity.
Convexity is typically measured in terms of the percentage change in a bond's price for a given change in its yield. For example, if a bond has a convexity of 10, it means that its price will increase or decrease by 10% for every 1% change in its yield.
Convexity can be positive or negative. A bond with positive convexity will experience increasing price changes as its yield increases or decreases. This means that its price will rise more quickly as its yield falls, and it will fall more slowly as its yield rises. A bond with negative convexity will experience decreasing price changes as its yield increases or decreases. This means that its price will rise more slowly as its yield falls, and it will fall more quickly as its yield rises.
Convexity is an important consideration for bond investors, as it can affect the potential returns on their investments. It is also an important factor for bond issuers, as it can impact their funding costs.
What is the most liquid debt market in the world? How do derivatives work?
The most liquid debt market in the world is the market for U.S. Treasuries. U.S. Treasuries are government bonds issued by the United States Department of the Treasury. They are considered to be among the safest and most liquid investments in the world, as they are backed by the full faith and credit of the U.S. government.
Derivatives are financial instruments that are derived from an underlying asset, such as a commodity, currency, or bond. They are called derivatives because their value is derived from the value of the underlying asset.
There are several types of derivatives, including futures, options, and swaps.
Futures are contracts that obligate the buyer to purchase a specific asset at a predetermined price on a specific date in the future. They are commonly used to hedge against price fluctuations in the underlying asset.
Options are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on a specific date in the future. There are two types of options: call options, which give the holder the right to buy the underlying asset, and put options, which give the holder the right to sell the underlying asset.
Swaps are agreements to exchange cash flows or other financial instruments at predetermined intervals in the future. They are often used to hedge against interest rate risk or currency risk.
Derivatives can be complex instruments and involve a high degree of risk. They are often used by financial institutions, hedge funds, and other large investors to manage risk and speculate on price movements in the underlying asset. However, they can also be used by individuals and smaller investors. It is important for investors to understand the risks and potential rewards of derivatives before deciding to use them.
Why we look balance sheet?
The balance sheet is a financial statement that presents a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and equity. The balance sheet shows how much a company is worth and how it is financed, either through debt or equity.
There are several reasons why it is important to look at a company's balance sheet:
Financial health: The balance sheet can provide insight into a company's financial health by showing whether it has enough assets to cover its liabilities. This can help investors to determine whether the company is financially stable or if it is at risk of financial distress.
Liquidity: The balance sheet can help to gauge a company's liquidity, or its ability to meet its short-term obligations. This is important because a company that is not liquid may have difficulty paying its bills on time, which could lead to financial problems.
Solvency: The balance sheet can also be used to assess a company's solvency, or its ability to pay its long-term debts. This is important because a company that is not solvent may be at risk of bankruptcy.
Growth: The balance sheet can provide information about a company's growth potential. For example, if a company has a lot of assets, it may be able to use those assets to generate profits and grow its business.
Overall, looking at a company's balance sheet is an important part of financial analysis and can provide valuable insights into the company's financial position and prospects.
Tell me why we use Financial Modeling in Corporate Finance?
Financial modeling is a tool that is used in corporate finance to analyze and forecast a company's financial performance. It involves creating a mathematical representation of a company's financial situation using assumptions about future conditions and trends.
There are several reasons why financial modeling is used in corporate finance:
Decision making: Financial modeling can help companies to make informed decisions about investments, financing, and other financial matters. It allows companies to test different scenarios and see how they would impact the company's financial performance.
Forecasting: Financial modeling can be used to forecast a company's future financial performance. This can help companies to set financial targets and make plans for the future.
Valuation: Financial modeling can be used to value a company or a specific asset. This is important when a company is considering making an acquisition or raising capital.
Risk analysis: Financial modeling can help companies to identify and assess financial risks, such as interest rate risk or currency risk. It can also be used to develop strategies to mitigate those risks.
Overall, financial modeling is a powerful tool that is used in corporate finance to help companies make informed decisions about their financial affairs and to plan for the future.
Can you tell me what are the most common multiples used in valuation and why?
Multiples are ratios that are used to compare the value of a company to a specific financial metric, such as earnings or revenue. They are often used in valuation to determine the value of a company or a specific asset.
Some of the most common multiples used in valuation include:
Price-to-earnings ratio (P/E ratio): This is a measure of a company's valuation in relation to its earnings. It is calculated by dividing the company's share price by its earnings per share (EPS). The P/E ratio is used to determine whether a company's shares are overvalued or undervalued based on its earnings.
Price-to-sales ratio (P/S ratio): This is a measure of a company's valuation in relation to its sales. It is calculated by dividing the company's share price by its revenue per share. The P/S ratio is used to determine whether a company's shares are overvalued or undervalued based on its sales.
Price-to-book ratio (P/B ratio): This is a measure of a company's valuation in relation to its book value, which is the value of its assets minus its liabilities. It is calculated by dividing the company's share price by its book value per share. The P/B ratio is used to determine whether a company's shares are overvalued or undervalued based on its book value.
Enterprise value-to-EBITDA ratio (EV/EBITDA ratio): This is a measure of a company's valuation in relation to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It is calculated by dividing the company's enterprise value (which is the value of the company's equity and debt) by its EBITDA. The EV/EBITDA ratio is used to determine whether a company is overvalued or undervalued based on its earnings potential.
Overall, these multiples are commonly used in valuation because they provide a way to compare the value of a company to key financial metrics, which can help investors to determine whether the company is overvalued or undervalued.
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Describe WACC and its components
WACC stands for Weighted Average Cost of Capital. It is a measure of a company's cost of capital that reflects the relative mix of debt and equity that the company uses to finance its operations. WACC is important because it represents the minimum rate of return that a company must earn on its investments in order to create value for its shareholders.
WACC is calculated by taking into account the cost of each component of a company's capital structure, including debt and equity, and weighting them by their relative importance. The formula for calculating WACC is:
WACC = (E/V) * Re + (D/V) * Rd * (1-Tc)
E = the market value of the company's equity
V = the market value of the company's debt and equity (also known as the capital structure)
Re = the cost of equity, which is the required rate of return that shareholders expect to earn on their investment
D = the market value of the company's debt
Rd = the cost of debt, which is the interest rate that the company pays on its debt
Tc = the company's effective tax rate
The cost of equity represents the return that shareholders expect to earn on their investment in the company. It is typically calculated using the capital asset pricing model (CAPM), which takes into account the risk-free rate of return, the market risk premium, and the company's beta.
The cost of debt represents the interest rate that the company pays on its debt. It is typically based on the company's credit rating and the prevailing market interest rates.
What is DCF method?
The discounted cash flow (DCF) method is a technique used to value an asset or a company by estimating the future cash flows it is expected to generate and discounting them to present value using a required rate of return.
The DCF method involves three main steps:
Forecasting future cash flows: This involves estimating the future cash flows that the asset or company is expected to generate, based on assumptions about future conditions and trends.
Discounting the cash flows: This involves using a discount rate to convert the future cash flows to present value. The discount rate represents the required rate of return that investors expect to earn on their investment.
Summing the present value of the cash flows: This involves adding up the present value of all the expected cash flows to arrive at an overall valuation for the asset or company.
The DCF method is a widely used valuation technique, particularly for long-term investments or assets with stable, predictable cash flows. It is based on the principle that the value of an asset or a company is equal to the sum of its future cash flows, discounted to present value.
However, the DCF method is highly sensitive to the assumptions used to forecast future cash flows and to determine the discount rate. As a result, it is important to carefully consider these assumptions and to be aware of the potential limitations of the DCF method.
What is Rights Issue?
A rights issue is a type of capital raising event in which a company offers its existing shareholders the opportunity to purchase additional shares of stock at a discounted price. Rights issues are often used by companies to raise additional capital to fund growth or to pay down debt.
In a rights issue, the company will typically issue rights, which are coupons that entitle the holder to purchase a certain number of additional shares at a discounted price. The rights are typically issued on a pro-rata basis, meaning that each shareholder will receive the same number of rights per share that they own.
For example, if a company is offering a rights issue with a subscription ratio of 2:1, it means that for every 1 share that a shareholder owns, they will receive 2 rights. These rights can then be used to purchase 2 additional shares at a discounted price.