Top Finance Interview Questions and Model
Answers:
1. How
do you value a company?
Companies
are valued using methods like Discounted Cash Flow (DCF), Comparable Company
Analysis (CCA), and Precedent Transactions.
2. Explain
the concept of free cash flow (FCF).
FCF
= Operating Cash Flow – Capital Expenditures. It shows the cash available after
a company pays for its operational and capital expenses.
3. What
is EBITDA, and why is it important?
EBITDA
(Earnings Before Interest, Taxes, Depreciation, and Amortisation) measures a company's
profitability before accounting for financing and accounting decisions.
4. How
do you determine the cost of equity?
Cost
of Equity (Ke) = Risk-Free Rate + Beta × Equity Risk Premium (using the CAPM
model).
5. What
is the purpose of financial forecasting?
It
helps in budgeting, strategic planning, and decision-making by predicting a
company's future financial performance.
6. How
do interest rates affect financial markets?
Higher
rates make borrowing expensive, reducing investment & stock prices. Lower
rates encourage borrowing & boost the economy.
7. How
do you analyse a company’s capital structure?
By evaluating its mix of debt vs.
equity financing and metrics like debt-to-equity ratio & interest coverage
ratio.
8. What
is the role of a financial analyst in a company?
Financial
analysts evaluate investments, analyse financial data, and assist in decision-making.
9. How
does inflation impact financial decision-making?
Higher
inflation increases costs, reduces purchasing power, and raises interest rates,
impacting investments.
10 What is the CAPM model, and how is it used
in finance?
The
Capital Asset Pricing Model (CAPM) calculates the expected return on an
investment based on its risk.
11. How would you assess the financial health
of a company?
By
analyzing its financial statements, ratios, cash flow, debt levels, and
profitability trends.
12 How
do you calculate and interpret the break-even point?
Break-even
= Fixed Costs / Contribution Margin per Unit. It's the point where revenue =
costs.
13 Explain
the difference between a merger and an acquisition.
Two
companies combine to form a new entity, whereas an Acquisition = One company
takes over another.
14 Explain
the difference between a merger and an acquisition.
Yes,
if profits are tied in receivables or inventory, cash flow may be negative.
15 What
are the differences between public and private equity?
Public
equity is traded on stock markets, while private equity involves direct
investments in companies.
16 What
is the difference between fixed costs and variable costs?
Fixed
costs (rent, salaries) stay constant, while variable costs (raw materials,
commissions) change with output.
17 Why
is DCF important?
DCF
calculates a company's value based on the present value of its future cash
flows.
18
What is working capital, and why is it important?
Working
Capital = Current Assets - Current Liabilities. It indicates a company's
short-term financial health.
19 What
are derivatives, and how are they used in financial markets?
Derivatives
(futures, options, swaps) are financial contracts whose value depends on an
underlying asset.
20 How
do you calculate WACC?
WACC
= (E/V × Re) + (D/V × Rd × (1 - Tax Rate)), where E = equity, D = debt, Re =
cost of equity, Rd = cost of debt.
21 What
are the risks of debt financing compared to equity financing?
Debt
= Fixed payments, risk of bankruptcy. Equity = No fixed payments, but dilutes
ownership.
22 What
is sensitivity analysis, and why is it important in financial modelling?
It
tests how financial models react to changes in key variables (e.g., revenue, costs).
23 What
are the three main financial statements, and how are they connected?
Income
Statement → Net Income → Affects Equity in Balance Sheet → Links to Cash Flow
Statement.
24 How
would you handle financial data for a company with fluctuating revenues?
Use
rolling forecasts, scenario analysis, and cash flow management techniques.
Regards!
Librarian
Rizvi Institute of Management
