Finance Technical Interview Questions
Corporate Finance
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
What could a company do with excess cash on the balance sheet?
What’s the difference between IRR, NPV and Payback?
What are the impacts on earnings if a company builds a new factory using debt? operating
lease? capital lease? cash?
Why would a company repurchase its own stock? What signals (positive & negative) does
this send to the market?
When would you take a project with a negative NPV?
What is Sarbanes Oxley and what are the implications?
Why might a company choose debt over equity financing, or vice versa?
What are the ways a company can manipulate cash flows?
What are the primary causes of bankruptcy and what are the options available to a company?
Let’s say that I have a bond with a 5% coupon. What happens to the market price when the
prevailing interest rates rise to 8%? How are the coupons affected?
Which corporate bond would have a higher coupon, a AAA or a BBB? What are the annual
payments received by the owner of a five year zero coupon bond?
Would you rather have $___ today or $1 a day for the rest of your life? How would you go
about valuing this amount?
What happens to a company’s equity when assets rise $1 million and liabilities fall $2
million?
What does it mean when cash flow from operations on a company’s cash flow statement is
negative? Is this bad news? If so, is it dangerous?
Suppose that you constructed a pro forma balance sheet for a company and the estimate for
external funding required was negative. How would you interpret this result?
How will a decrease in financial leverage affect a company’s cost of equity capital, if at all?
How will it affect a company’s equity beta?
If you want to assess the health of a company and you could choose between looking at 3
years of income statements or 3 years of balance sheets, which would you choose and why?
What are some reasons why a company might tap the high yield market?
Finance managers today face many challenges in governance and reporting as a result of
recent legislation and events. Given what you know about these recent news events and
legislation, what difficulties do you think finance managers are dealing with today?
Valuation
•
•
•
What are the different ways to value a company?
Walk me through a DCF valuation. What is free cash flow and how is it calculated? What
would you use for a discount rate? How do you determine the terminal value?
How do you calculate WACC?
•
•
•
•
•
•
•
•
•
•
•
What is the formula for CAPM?
What is beta? How and why do you unlever a beta?
What is the current market risk premium? What is the current risk-free rate?
What kinds of multiples do you think are most important when valuing a company and why?
What are some reasonable ranges for these multiples?
What makes a good comparable company for valuation purposes?
What is the difference between enterprise value and equity value?
Why should the fair market value of a company be the higher of its liquidation value and its
going-concern value?
What is an LBO? Why leverage up a firm?
Lets say I want to value a natural gas pipeline, how would you suggest I do that? What do
you think is the appropriate risk free rate to use with this pipeline? How would you finance
buying a pipeline like this?
What do you think an investment banker does?
As a manufacturing firm, assume you are producing at full capacity. Marketing comes to
you with a great new product idea and says the firm needs to begin producing it. What
analysis would you do, and what things would you look at in response to marketing’s
request?
Accounting
•
•
•
•
•
•
•
•
•
•
•
Walk me through a typical income statement, balance sheet or cash flow statement. Discuss
the inter-relationships between the income statement, balance sheet and cash flow statement.
What is EBITDA? Why is it important?
What is goodwill? How does it affect net income?
What is the difference between cash and accrual accounting?
If Accounts Receivable increases during the period, how does that impact cash?
What is a 10K? What is a 10Q?
What are deferred taxes? How do they arise?
If I under-depreciated by $3,000, walk me through how that would affect the financial
statements.
Which of the three financial reporting statements (balance sheet, income statement, statement
of cash flows) is most important and why do you believe this is so?
Assume that you have a significant amount of inventory on hand. What control measures
could you put in place to ensure employees aren’t running off with your inventory?
How would you go about forecasting balance sheet accounts in the future—specifically
inventory, accounts receivable, and accounts payable?
Mergers & Acquisitions
•
•
•
Why would two companies merge? What major factors drive mergers and acquisitions?
What’s the difference between I-banking and Private Equity?
Would you make an offer to buy a company at its current stock price?
•
•
•
•
•
If a company with a P/E of 20 acquires a company with a P/E of 15 with stock, is the
transaction accretive or dilutive?
What is the difference between a stock purchase and an asset purchase?
What are the major differences between purchase and pooling accounting? What is the
current state of both methods of accounting?
What are some common anti-takeover tactics?
Would you pay more for an asset/company with a tax basis of 100 or a tax basis of 0? Why?
Macroeconomics/Capital Markets/Investment Theory
•
•
•
•
•
•
•
•
•
•
•
•
Where do you think interest rates will be 1 year from now?
Who is Alan Greenspan and what does he do?
What do you think of Ben Bernacke and how is he likely to differ from Greenspan?
What do you think of the economy and interest rates?
What is LIBOR? How is it often used?
What does the yield curve currently look like, and what does that mean?
What happened in the markets during the past 3 months?
Do you read the Wall Street Journal everyday? What’s on today’s front page?
What sources of information would you use to analyze a company?
What are the factors that affect option pricing?
Explain put-call parity.
If the stock market in the United States is efficient, how do you explain the fact that some
people make very high returns? Would it be more difficult to reconcile very high returns with
efficient markets if the same people made extraordinary returns year after year?
Case Questions
•
•
•
“There are three ways to account for oil exploration costs: The FIRST is to write-off all
exploration costs as incurred, the SECOND is to capitalize successful explorations and write
off the rest, and the THIRD is to capitalize all exploration costs. Which one results in the
lowest Net Income, the highest Book Value, and the highest Cash Flow?”
Pitch me a stock. Multitude of follow-up questions about the stock including how the
company makes money, did they hit their last quarter, what is management's guidance going
forward, who are their primary competitors, what is their competitive advantage, what are the
stock's relevant valuation metrics (P/E, P/Cash flow, P/B, etc.), etc. Just know a lot about the
company.
You are a research associate: you get into the office at 9AM, a stock (XYZ) you have a
“strong buy” rating on has gone down 30% in the last 30 minutes, the analyst you work for is
currently on an airplane and not reachable, you have four calls on hold: 1) the CFO of the
XYZ, 2) one of your biggest institutional clients, 3) the head trader at your firm, and 4) the
director of research. In what order do you answer the calls and why?
•
•
•
You get into the office in the morning and there is a note from the analyst you work for. She
will be in the office in 5 hours and would like to see an analysis of a particular stock. What
do you do to analyze the stock and what do you present to the analyst.
A company has $10MM in negative net debt. What does this mean? (Follow-on question):
If you were an oil and gas company, what would you do with this excess cash? Projects or
dividends? What will shareholders prefer? How should the stock price react?
Your company’s weighted-average cost of capital is 12 percent. You believe the company
should make a particular investment, but its internal rate of return is only 10 percent. What
logical arguments would you use to convince your boss to make the investment despite its
low return? Is it possible that making investments with returns below capital costs will create
value? If so, how?