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Finance Analyst Role Interview Questions and Answer you should practice
Q1. Tell me what is WACC?
Suggested Answer: It is referred to as the weighted average cost of capital (WACC), 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 did you learn during your studies?
Suggested Answer: The interviewer is interested in what you learned in college/university and how you plan to apply your knowledge.
Sample Response: As part of my graduate studies, I plan to put my data analysis skills and knowledge to use. During my studies, I worked on some financial modelling projects for IT and manufacturing companies.
Q3. Which deal did you track recently?
Suggested Answer: The purpose of this interview is to assess your knowledge of financial market news. It can be any type of transaction, whether it is a private equity or a merger and acquisition transaction.
Tip. It is important to be informed about current financial market news before preparing for any interview.
Sample Answer: I track recent deals between Morgan Stanley and E Trade. Here Morgan Stanley acquired brokerage firm E Trade for $13 billion.
Q4. Tell me about a Vodafone and idea deal?
Suggested Answer: In this interview, you will be asked about any recent transactions you have read and how you have analyzed them on your own.
Sample Answer: It was recently announced that Idea will merge with Vodafone for a total of US $ 23 billion. The combined company will have a subscription base of 394 million customers and a customer market share of 35% and 41%, respectively. Vodafone is valued at Rs.82,800 crore (EV), while Idea is valued at Rs.72,200 crore (EV), with debts of Rs.55,200 and Rs.52,700 crores, respectively, according to the transaction.
Q5. What is EV? How do you calculate it?
Suggested Answer: Enterprise value (EV) is a way to figure out how much a company is worth. It's often used as a more complete alternative to equity market capitalization. To figure out how much money a company has, add up its market value and total debt, then subtract all cash and cash equivalents.
Q6. As you indicated, EBITDA reflects operational efficiency; however, don't you believe we should compare apples to apples ?
Suggested Answer: People often use EBITDA as a way to figure out how much a business is worth. Those who don't like this value often say this number can be dangerous and misleading because people often think it means cash flow. However, this number can actually help investors make apples-to-apples comparisons.
Q7. What does positive EBITDA mean?
Suggested Answer: If a company has a positive EBITDA, it means that it is profitable on an operating level: it sells its products for more money than it costs to manufacture them. If, on the other hand, EBITDA is negative, it indicates that the company is experiencing operational difficulties or that it is being poorly managed.
Q8. What is EBITDA and how to calculate, do you think EBITDA give true picture of firm?
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. Despite the fact that it is frequently shown on a profit and loss statement.
EBITDA alone does not provide a true and complete picture of a company's performance.
Q9. What is FCFE and FCFF?
Suggested Answer: FCFE is an stand for free cash flow to equity. Amount of cash that can be distributed to equity shareholders in the form of dividends or stock buybacks after all expenses, reinvestment and debt repayments have been paid is known as distributable cash.
FCFF, which stands for Free Cash Flow to Firm, it is defined as the amount by which a company's operating cash flow exceeds its working capital needs and expenditures.
Q10. Company A wants to value a company using FCFF and company B wants to value a company using FCFE. Do you think there would be a difference in their DCF valuations?
Suggested Answer: No It doesn't work that way. When we do DCF with FCFF, we get the value of a company by discounting the cash flows with the weighted average cost of capital (WACC). Here, the costs of all sources of capital are taken into account because FCFF takes into account the whole capital structure of the company.
As a result, this cash flow is also known as leveraged cash flow. if the company only has common equity, its FCFF and FCFE are the same because both come from the same source of capital,
After tax operating EBIT is usually adjusted for a non-cash expense, interest expense, capital investment costs, and debt repayments. FCFE is usually calculated by subtracting these costs from post-tax operating EBIT.
Q11. Which is more risky -1.0 beta or 1.2? Why?
Suggested Answer: It is more risky because -1.0 is less than 1.0 if a stock moves less than the market. High-beta stocks are thought to be more risky, but they also have a better chance of making money. Low-beta stocks are thought to be less risky, but they also make less money.
Q12. How is FCFF calculated?
Suggested Answer: FCFF begins with net income, which is calculated after taxes and interest are deducted. Following that, we deduct any non-cash expenses that apply, such as depreciation and amortization.
Q13. What is the DCF valuation method?
Suggested Answer: DCF analysis is an intrinsic valuation method that is used to estimate the value of an investment based on the expected cash flows.
Q14. How will you put a money tag on a football team? How will you evaluate it?
Suggested Answer: This question simply assesses your ability to analyze. There is no right or wrong answer. It will only put your ability to respond to the test.
Sample Response: I will look at the team's past history, such as winning percentage, playing performance, market value, who are the top key players, what are the ups and downs, what are the chances of getting a good return on investment, how they play games and what quality players we have to pay them, and what is the team's capital value. After conducting the analysis, I will review the team's financial performance, including revenue, profit, and expenses, among other things.
Q15. What are the main ratios used for evaluation?
Suggested Answer: The main ratio used for evaluation for performance is
Leverage: Debt-to-Equity Ratio = Total Liabilities / Shareholders Equity
Liquidity: Current Ratio = Current Assets / Current Liabilities
Liquidity: Quick Ratio= (Current Assets - Inventories)/ Current Liabilities
Profitability: Return on Equity (ROE)= Net Income/Shareholder's Equity
Efficiency: Net Profit Margin=Net Profit / Net Sales
Q16. What is PE Ratio ?
Suggested Answer: Price-to-earnings (p/e) Ratio Is Mainly Used By Investors to help this ratio tell how much the market is willing to pay for every rupee the firm earns.
Q17. How do you calculate WACC? Tell me the steps?
Suggested Answer:
1. Identify the equity and debt market values
2. Calculate the costs of the debt and equity
3. Combine the debt and equity market values
4. Identify the current corporate tax rate
5. Final apply the formula
Q18. How do you calculate beta?
Suggested Answer: Beta is calculated by dividing the standard deviation of the asset's returns by the standard deviation of the market's returns. The result is then multiplied by the correlation between the return on the security and the return on the market.
Q19. What is the formula for calculation of cost of equity?
Suggested Answer: Cost of equity = Risk free rate of return + Premium expected for risk. Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of return)
Q20. Why do you discount cash flow in valuation?
Suggested Answer: Discounted cash flow (DCF) is a way to figure out how much an investment is worth based on how much money it will make in the future. Analysis of the value of an investment today is called the DCF method. It looks at how much money it will make in the future to figure out how much it is worth now. This applies to investors who want to buy a company or stock, as well as business owners and managers who want to spend money on capital projects or operating expenses.
Q21. Tell me the Steps used in DCF valuation ?
Suggested Answer: Steps are build DCF Valuation
1. Project a company's Free Cash Flows
2. Calculate the company's Terminal Value
3. Discounting the cash flows to the present at the weighted average cost of capital (WACC)
4. Add the value of non-operating assets to the present value of unlevered free cash flows
5. Subtract debt and other non-equity claims
6. Divide the equity value by the shares outstanding
Q22. What are the main inputs used in DCF technique?
Suggested Answer: The main input used in DCF techniques is Net cash flow projections, Discount rate and Terminal value or future business sale gain value.
Q23. What do you mean by EV/Sales multiple?
Suggested Answer: The enterprise value to sales ratio is a financial ratio that compares the total value of a company (as measured by enterprise value) to the total amount of money it generates in sales. Despite the fact that the ratio is expressed in years, it illustrates how many dollars of EV are generated by every dollar of yearly sales.
Q24. What do you mean by precedent transaction comps?
Suggested Answer: Comparable analysis includes a section on precedent transactions. When you value a company, you look at how other businesses with similar market caps, revenue, locations, and industries have been valued in the past. You can figure out how much other companies have sold or been bought for by looking at how much other companies have sold or been bought for. If you can figure out how much other companies have sold or been bought for, you can use an average of those multiples to figure out how much the company is worth. It is good to look at precedent transactions because they are based on information that is available to the public. It can show how much demand there is for certain types of businesses, and it can show which other businesses in the market might be willing to join in on the deal.
Q25. What are pro forma financials?
Suggested Answer: Pro forma financial statements are financial reports issued by an entity that are based on assumptions or hypothetical conditions regarding events that may have occurred in the past or may occur in the future.
Q26. What is Your current job profile?
Suggested Answer: Highlight everything you do in your current or previous roles that fits the description with a highlighter.
Example Response: I work as a financial analyst for ABC company. I'm working with five different clients and am in charge of ensuring their success through research. I've met or exceeded quota for the past six quarters and work closely with my client to identify where we can find the best new business opportunities.
Q27. What is NPV? And how to calculate?
Suggested Answer: Net present value, or NPV, is used to calculate the current total value of a future stream of payments. If the NPV of a project or investment is positive, it means that the discounted present value of all future cash flows related to that project or investment will be positive, and therefore attractive.
Formula Of NPV
Z = Cash flow
r = Discount rate
X = Cash outflow in time 0 (i.e. the purchase price / initial investment)
Q28. What is IRR? What is the formula for calculating IRR?
Suggested Answer: The internal rate of return (IRR) is a financial analysis metric that is used to estimate the profitability of potential investments in real estate. In a discounted cash flow analysis, the internal rate of return (IRR) is the discount rate that causes the net present value (NPV) of all cash flows to equal zero.
0 (NPV) = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
Where:
P0 = initial investment (cash outflow)
P1, P2, P3., equals the cash flows in periods
IRR= equals the project's internal rate of return
NPV =the Net Present Value
N = the holding periods
Q29. Define FCFF. Differentiate the between FCFF and FCFE?
Suggested Answer: Free cash flow to the firm (FCFF) is the amount of cash flow from operations that can be distributed after depreciation costs, taxes, working capital, and investments are taken into account. FCFF is a way to figure out how profitable a company is after all of its expenses and new investments.
Free cash flow to firm (FCFF)
All of a company's investors have access to the company's cash flow.
The impact of leverage on unlevered cash flow is not considered.
Calculates the enterprise value of a company.
The capital structure takes into account the weighted average cost of capital.
Companies with a high level of leverage prefer this option.
Free cash flow to Equity (FCFE)
Equity shareholders are the only ones who have access to cash flow.
The impact of leveraged cash flow is taken into consideration.
This function computes the equity value.
It is necessary to maintain consistency by using the cost of equity.
Analysts prefer this option.
Q30. Why is interest not deducted while calculating FCFF?
Suggested Answer: In order to arrive at FCFF, the after-tax interest expense must be added back to net income. As a result of the deduction of interest expense net of the related tax savings in the computation of net income, as well as the fact that interest is a cash flow available to one of the company's capital providers (i.e., one of the company's creditors), this step is required.