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Q: Define Finance?
A: Finance is the study of managing money, assets, and liabilities. It encompasses
activities like financial planning, investing, borrowing, saving, and risk management.
Q: Explain the difference between Capital Budgeting and Working Capital
Management?
A: Capital budgeting deals with long-term investment decisions and allocating funds
for projects with a long payback period. Working capital management focuses on
managing short-term assets and liabilities to ensure smooth day-to-Day operations.
Q: What are the three main financial statements, and what information do they
provide?
A: The three main financial statements are:
Income Statement: Shows a company's profitability over a period.
Balance Sheet: Provides a snapshot of a company's financial position at a specific
point in time.
Cash Flow Statement: Shows the movement of cash inflows and outflows.
Corporate Finance:
Q: What is the Capital Asset Pricing Model (CAPM)?
A: CAPM is a model used to estimate the expected return of an asset based on its
systematic risk (beta) and the market risk premium.
Q: Explain the different types of capital structures a company can have?
A: Companies can have varying capital structures with a mix of debt and equity
financing. Some common structures include debt-heavy, equity-heavy, and balanced
capital structures.
Q: What is the purpose of a dividend payout policy?
A: A dividend payout policy determines how much of a company's profit is distributed
to shareholders as dividends and how much is retained for reinvestment.
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Investments:
Q: Differentiate between primary and secondary markets?
A: Primary markets are where new securities are issued and sold for the first time.
Secondary markets facilitate trading of existing securities between investors.
Q: Explain the concept of Modern Portfolio Theory (MPT)?
A: MPT suggests that investors can achieve optimal portfolio returns by considering
risk and diversification. By diversifying their holdings, investors can reduce overall
portfolio risk without sacrificing potential returns.
Q: What are the different types of investment vehicles available?
A: There are various investment vehicles like stocks, bonds, mutual funds, exchangetraded funds (ETFs), derivatives, and real estate.
1. Explain the difference between NPV and IRR.
Answer: Net Present Value (NPV) and Internal Rate of Return (IRR) are both methods used in
capital budgeting to evaluate the profitability of an investment.


NPV: NPV is the sum of the present values of all cash flows (both incoming and outgoing)
associated with an investment, discounted at the project's required rate of return. A positive
NPV indicates that the projected earnings (in present dollars) exceed the anticipated costs,
hence the investment is profitable.
IRR: IRR is the discount rate that makes the NPV of all cash flows from a particular project
equal to zero. In other words, it is the rate of return at which an investment breaks even.
An investment is considered good if its IRR is higher than the required rate of return.
2. What is the Capital Asset Pricing Model (CAPM)?
Answer: The Capital Asset Pricing Model (CAPM) is a formula used to determine the expected
return on an investment based on its risk relative to the market. The formula is:
Expected Return=Rf+β(Rm−Rf)\text{Expected
R_f)Expected Return=Rf+β(Rm−Rf)
Return}
=
R_f
+
\beta
(R_m
-
Where:



RfR_fRf is the risk-free rate of return.
β\betaβ (beta) is the measure of the asset's volatility relative to the market.
RmR_mRm is the expected return of the market.
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CAPM helps investors understand the relationship between expected return and risk, aiding in the
construction of a diversified portfolio.
3. Describe the Efficient Market Hypothesis (EMH).
Answer: The Efficient Market Hypothesis (EMH) asserts that financial markets are
"informationally efficient," meaning that asset prices reflect all available information at any given
time. There are three forms of EMH:



Weak Form: All past trading information is already reflected in stock prices. Technical
analysis is of no use.
Semi-Strong Form: All publicly available information is reflected in stock prices.
Fundamental analysis is of no use.
Strong Form: All information, both public and private (insider information), is reflected
in stock prices. No one can achieve higher returns consistently.
4. What are derivatives, and can you explain the types?
Answer: Derivatives are financial instruments whose value is derived from the value of an
underlying asset. They are often used for hedging risks or for speculative purposes. Common types
of derivatives include:




Futures: Standardized contracts to buy or sell an asset at a predetermined price at a
specified time in the future.
Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an
asset at a predetermined price before or at the expiration date.
Swaps: Agreements between two parties to exchange sequences of cash flows for a set
period.
Forwards: Customized contracts between two parties to buy or sell an asset at a specified
future date for a price agreed upon today.
5. How does monetary policy influence the economy?
Answer: Monetary policy involves the management of a country's money supply and interest rates
by its central bank to control inflation, consumption, growth, and liquidity. Key tools include:




Interest Rates: Lowering interest rates makes borrowing cheaper, encouraging spending
and investment. Raising rates has the opposite effect.
Open Market Operations: Buying or selling government securities to influence the
money supply.
Reserve Requirements: Adjusting the amount of funds banks must hold in reserve,
impacting their ability to lend.
Quantitative Easing: Purchasing longer-term securities to increase money supply and
encourage lending and investment.
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These tools help stabilize the economy by controlling inflation, managing employment levels, and
maintaining financial stability.
6. What is the difference between financial and managerial accounting?
Answer:


Financial Accounting: Focuses on providing historical financial information to external
stakeholders, such as investors, creditors, and regulators. It adheres to standardized
principles like GAAP or IFRS.
Managerial Accounting: Provides information for internal management to assist in
decision-making, planning, and controlling processes. It is more flexible and focuses on
future projections and operational reports.
7. What is risk management in finance?
Answer: Risk management in finance involves identifying, analyzing, and mitigating uncertainties
associated with financial investments. It includes various strategies to manage financial risk:




Diversification: Spreading investments across different assets to reduce risk.
Hedging: Using derivatives like options and futures to protect against adverse price
movements.
Insurance: Purchasing insurance to protect against significant losses.
Asset Allocation: Adjusting the mix of different asset classes to balance risk and reward
according to an investor's risk tolerance and investment goals.
8. Explain the concept of leverage in finance.
Answer: Leverage in finance refers to the use of borrowed funds to increase the potential return
of an investment. It can amplify both gains and losses. Common types of leverage include:


Operating Leverage: The extent to which a firm uses fixed costs in its operations. Higher
operating leverage means a higher percentage of fixed costs, leading to greater variability
in operating income with changes in sales.
Financial Leverage: The use of debt to acquire additional assets. High financial leverage
increases the potential return on equity but also increases the risk of insolvency.
9. What are financial ratios, and why are they important?
Answer: Financial ratios are quantitative measures derived from a company's financial statements
used to evaluate its performance and financial health. Important types of financial ratios include:


Liquidity Ratios: Measure the ability to meet short-term obligations (e.g., Current Ratio,
Quick Ratio).
Profitability Ratios: Assess the ability to generate profit (e.g., Net Profit Margin, Return
on Equity).
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Leverage Ratios: Evaluate the degree of financial leverage (e.g., Debt-to-Equity Ratio).
Efficiency Ratios: Measure how effectively a company uses its assets (e.g., Inventory
Turnover, Asset Turnover).
These ratios help investors, analysts, and management make informed decisions.
10. Can you explain the time value of money (TVM)?
Answer: The Time Value of Money (TVM) is the concept that money available today is worth
more than the same amount in the future due to its potential earning capacity. This principle
underpins many financial concepts such as discounting, compounding, annuities, and perpetuities.
Key formulas include:


Present Value (PV): PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV
Future Value (FV): FV=PV×(1+r)nFV = PV \times (1 + r)^nFV=PV×(1+r)n
Where PVPVPV is present value, FVFVFV is future value, rrr is the discount/interest rate, and
nnn is the number of periods.
These questions and answers cover fundamental topics in finance that are likely to be addressed in
an MBA viva. Understanding and articulating these concepts will help demonstrate your
knowledge and readiness for professional challenges in finance.
1. Finance Theories
a. Time Value of Money (TVM)
Formula:


Present Value (PV): PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}PV=(1+r)nFV
Future Value (FV): FV=PV×(1+r)nFV = PV \times (1 + r)^nFV=PV×(1+r)n
Example: If you invest $1,000 at an annual interest rate of 5% for 3 years, the future value is:
FV=1000×(1+0.05)3=1000×1.157625=1157.63FV = 1000 \times (1 + 0.05)^3 = 1000 \times
1.157625 = 1157.63FV=1000×(1+0.05)3=1000×1.157625=1157.63
b. Capital Asset Pricing Model (CAPM)
Formula: Expected Return=Rf+β(Rm−Rf)\text{Expected Return} = R_f + \beta (R_m R_f)Expected Return=Rf+β(Rm−Rf)
Example: If the risk-free rate RfR_fRf is 2%, the expected market return RmR_mRm is 8%, and
the
beta
β\betaβ
of
the
stock
is
1.5,
then:
Expected Return=2%+1.5(8%−2%)=2%+1.5×6%=2%+9%=11%\text{Expected Return} = 2\% +
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1.5(8\%
2\%)
=
2\%
+
1.5
\times
6\%
=
11\%Expected Return=2%+1.5(8%−2%)=2%+1.5×6%=2%+9%=11%
Banik
2\%
+
9\%
=
c. Modigliani-Miller Theorem (M&M Theory)
Formula:


Without taxes: Vu=VlV_u = V_lVu=Vl
With taxes: Vl=Vu+TcDV_l = V_u + T_cDVl=Vu+TcD
Example: If an unlevered firm's value VuV_uVu is $1,000,000, and it issues $400,000 in debt at
a corporate tax rate of 30%, then the value of the levered firm VlV_lVl is:
Vl=1,000,000+(0.3×400,000)=1,000,000+120,000=1,120,000V_l = 1,000,000 + (0.3 \times
400,000)
=
1,000,000
+
120,000
=
1,120,000Vl
=1,000,000+(0.3×400,000)=1,000,000+120,000=1,120,000
2. Stock Market Theories
a. Efficient Market Hypothesis (EMH)
Theory: EMH states that asset prices fully reflect all available information, making it impossible
to consistently achieve higher returns without taking additional risk.
Example: If EMH holds true, then news about a company's breakthrough technology should
immediately be reflected in its stock price, leaving no room for investors to gain abnormal returns
by trading on that news.
b. Dividend Discount Model (DDM)
Formula: P0=D1r−gP_0 = \frac{D_1}{r - g}P0=r−gD1
Where P0P_0P0 is the current stock price, D1D_1D1 is the expected dividend next year, rrr is the
required rate of return, and ggg is the growth rate of dividends.
Example: If a company is expected to pay a dividend of $2 next year, with a growth rate of 5%
and a required return of 10%, the stock price is: P0=20.10−0.05=20.05=40P_0 = \frac{2}{0.10 0.05} = \frac{2}{0.05} = 40P0=0.10−0.052=0.052=40
c. Gordon Growth Model
Formula: P0=D0(1+g)r−gP_0 = \frac{D_0 (1 + g)}{r - g}P0=r−gD0(1+g)
Where D0D_0D0 is the most recent dividend.
Example: If a company just paid a dividend of $1.50, dividends grow at 4%, and the required
return is 9%, then: P0=1.50×(1+0.04)0.09−0.04=1.50×1.040.05=1.560.05=31.20P_0 = \frac{1.50
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\times (1 + 0.04)}{0.09 - 0.04} = \frac{1.50 \times 1.04}{0.05} = \frac{1.56}{0.05} = 31.20P0
=0.09−0.041.50×(1+0.04)=0.051.50×1.04=0.051.56=31.20
3. Dividend Theories
a. Walter's Model
Formula: P=D+E−Dr×rkP = \frac{D + \frac{E - D}{r} \times r}{k}P=kD+rE−D×r
Where DDD is the dividend per share, EEE is earnings per share, rrr is the internal rate of return,
and kkk is the cost of equity capital.
Example: If a company has earnings per share of $4, pays a dividend of $2, has an internal rate of
return of 15%, and a cost of equity of 10%, then: P=2+4−20.10×0.150.10=2+300.10=320.10=320P
= \frac{2 + \frac{4 - 2}{0.10} \times 0.15}{0.10} = \frac{2 + 30}{0.10} = \frac{32}{0.10} =
320P=0.102+0.104−2×0.15=0.102+30=0.1032=320
b. Miller and Modigliani's Dividend Irrelevance Theory
Theory: This theory posits that dividend policy is irrelevant in determining the value of a firm,
and the value is determined solely by the firm's earnings power and investment policy.
Example: If two firms are identical except one pays dividends and the other reinvests earnings,
the value of both firms should be the same if markets are perfect.
4. Accounting Theories
a. Historical Cost Accounting
Theory: Assets and liabilities are recorded at their historical cost, i.e., the original purchase price.
Example: If a company buys machinery for $100,000, it records the machinery on its balance
sheet at $100,000, regardless of its current market value.
b. Accrual Accounting
Theory: Revenues and expenses are recorded when they are earned or incurred, not necessarily
when cash is received or paid.
Example: If a company delivers goods worth $10,000 in December but will receive payment in
January, it records the revenue in December.
c. Matching Principle
Theory: Expenses should be matched with revenues in the period in which they are incurred to
generate those revenues.
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Example: If a company incurs $2,000 in advertising expenses in November to generate sales in
December, it records the advertising expenses in December.
5. Valuation Theories
a. Discounted Cash Flow (DCF) Analysis
Formula: Value=∑CFt(1+r)t\text{Value} = \sum \frac{CF_t}{(1 + r)^t}Value=∑(1+r)tCFt
Where CFtCF_tCFt is the cash flow in period ttt and rrr is the discount rate.
Example: If expected cash flows for the next three years are $10,000, $12,000, and $14,000 with
a
discount
rate
of
8%,
the
value
is:
Value=10000(1+0.08)1+12000(1+0.08)2+14000(1+0.08)3\text{Value} = \frac{10000}{(1 +
0.08)^1} + \frac{12000}{(1 + 0.08)^2} + \frac{14000}{(1 + 0.08)^3}Value=(1+0.08)110000
+(1+0.08)212000+(1+0.08)314000 Value=100001.08+120001.1664+140001.2597\text{Value} =
\frac{10000}{1.08} + \frac{12000}{1.1664} + \frac{14000}{1.2597}Value=1.0810000
+1.166412000+1.259714000 Value=9259.26+10289.62+11111.42=30700.30\text{Value} =
9259.26 + 10289.62 + 11111.42 = 30700.30Value=9259.26+10289.62+11111.42=30700.30
What is Financial Market, Capital Market, and Money Market?
Financial Market: A financial market is a marketplace where buyers and sellers trade financial
assets such as stocks, bonds, currencies, and derivatives. It facilitates the raising of capital, transfer
of risk, and international trade.
Capital Market: The capital market is a segment of the financial market where long-term debt or
equity-backed securities are bought and sold. It is crucial for the economy as it provides a platform
for
companies
to
raise
long-term
funds.
Real-life example: A company like Apple might issue new shares of stock (IPO) on the stock exchange to
raise capital for developing new products.
Money Market: The money market is a segment of the financial market where short-term debt
instruments, typically with maturities of less than one year, are traded. It provides liquidity for the
financial
system.
Real-life example: A bank might borrow money from another bank overnight to meet its daily reserve
requirements.
Types of Financial Markets
1. Capital Markets:
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Primary Market: Where new securities are issued and sold for the first time, allowing
companies to raise fresh capital. Example: Initial Public Offering (IPO) of a company.
Secondary Market: Where existing securities are traded among investors. Example: New
York Stock Exchange (NYSE).
2. Money Markets:



Treasury Bills: Short-term government securities with maturities ranging from a few days
to 52 weeks. Example: 3-month Treasury Bill.
Commercial Paper: Unsecured, short-term debt issued by corporations, typically used for
financing payroll, accounts payable, and inventories. Example: A corporation issuing 30day commercial paper.
Certificates of Deposit (CDs): Time deposits offered by banks with specific maturity
dates and interest rates. Example: A 6-month CD from a bank.
What is Derivatives?
Derivatives are financial contracts whose value is derived from the performance of an underlying
asset, index, or rate. They are used for hedging risk or for speculative purposes.
Capital Market Derivatives:



Stock Options: Contracts giving the right to buy or sell a stock at a specific price before a
certain date. Example: Call options on Apple Inc. stock.
Stock Futures: Agreements to buy or sell a stock at a future date for a predetermined price.
Example: Futures contract on S&P 500 Index.
Real-life example: An airline might use options to hedge against rising fuel costs.
Money Market Derivatives:



Interest Rate Swaps: Contracts where two parties exchange cash flows based on different
interest rates. Example: A company swapping its variable interest rate payments for fixed
interest rate payments to hedge against interest rate fluctuations.
Forward Rate Agreements (FRAs): Contracts that determine the interest rate to be paid
or received on an obligation beginning at a future start date. Example: An agreement to
borrow $1 million in three months at a 3% interest rate.
Real-life example: A bank might use interest rate swaps to manage its exposure to fluctuating
interest rates.
What is Bond, Debenture, Bond Maturity, Bond Duration, Bond Valuation, Bond
Yield or YTM?
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Bond: A bond is a fixed income instrument representing a loan made by an investor to a borrower
(typically corporate or governmental). It includes the terms of the loan, the interest payments, and
the date of repayment.
Debenture: A debenture is a type of debt instrument that is not secured by physical assets or
collateral. Debentures are backed only by the creditworthiness and reputation of the issuer.
Bond Maturity: The maturity date is the date on which the principal amount of a bond is to be
paid in full.
Bond Duration: Duration measures a bond's sensitivity to changes in interest rates, indicating
how long it takes for the price of a bond to be repaid by its internal cash flows.
Bond Valuation: Bond valuation involves calculating the present value of a bond's future interest
payments and its maturity value, discounted at the appropriate discount rate.
Bond Yield or YTM (Yield to Maturity): YTM is the total return anticipated on a bond if the
bond is held until it matures. It is the internal rate of return (IRR) of the bond.
Examples:






Bond: U.S. Treasury Bonds, Corporate Bonds like those issued by Apple Inc.
Debenture: Unsecured corporate debt issued by companies like Tesla.
Bond Maturity: A 10-year Treasury Bond maturing in 2034.
Bond Duration: A bond with a duration of 5 years means its price will change by
approximately 5% for a 1% change in interest rates.
Bond Valuation: A bond with a face value of $1,000, a 5% coupon rate, and 10 years to
maturity might be valued at $950 if the market interest rate is higher than the coupon rate.
Bond Yield/YTM: A bond purchased for $950 that pays a $50 annual coupon and returns
$1,000 at maturity might have a YTM of 5.32%.
Difference Between Bond and Debenture
Feature
Bond
Debenture
Security
Typically secured by assets Usually unsecured
Risk
Lower risk due to collateral Higher risk due to lack of collateral
Interest Rate Generally lower
Generally higher to compensate for higher risk
Examples U.S. Treasury Bonds
Corporate Debentures like Tesla's
Types of Bonds with Examples
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Type of Bond
Example
Major Difference
Issued by governments, low risk
Government Bonds U.S. Treasury Bonds
Apple Inc. Bonds
Issued by companies, moderate risk
Corporate Bonds
New York City Bonds Issued by municipalities, tax-free interest
Municipal Bonds
Sold at a discount, no periodic interest
Zero-Coupon Bonds U.S. Savings Bonds
Convertible Bonds Tesla Convertible Bonds Can be converted to company stock
What is Stock Valuation, Describe Types and Purpose of Stock Valuation
Stock Valuation: Stock valuation is the process of determining the intrinsic value of a company's
stock. It helps investors decide whether a stock is overvalued, undervalued, or fairly valued.
Types of Stock Valuation:


Absolute Valuation: Uses discounted cash flow models to determine the present value of
a stock based on its future cash flows. Example: Discounted Cash Flow (DCF) model.
Relative Valuation: Compares a stock's value to that of other similar stocks using
multiples like P/E ratio, P/B ratio. Example: Comparing the P/E ratio of a tech company to
other tech companies.
Purpose of Stock Valuation:



Investment Decisions: Helps investors decide whether to buy, hold, or sell a stock.
Portfolio Management: Aids in constructing and balancing a diversified portfolio.
Mergers and Acquisitions: Assists in determining fair prices during corporate
transactions.
What is Portfolio Analysis, Describe Types, Stages, and Purposes of Portfolio
Analysis
Portfolio Analysis: Portfolio analysis involves evaluating the performance, risk, and return of a
portfolio of investments to ensure it aligns with the investor's goals and risk tolerance.
Types of Portfolio Analysis:



Markowitz Mean-Variance Analysis: Focuses on maximizing return for a given level of
risk through diversification.
Capital Asset Pricing Model (CAPM): Evaluates expected return of an asset based on its
systematic risk.
Performance Attribution: Analyzes the sources of a portfolio's return, attributing it to
various factors like asset allocation and security selection.
Stages of Portfolio Analysis:
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Determination of Objectives: Establishing investment goals and risk tolerance.
Selection of Asset Mix: Choosing the appropriate mix of asset classes.
Security Selection: Picking individual securities within each asset class.
Performance Measurement: Evaluating the portfolio's performance against benchmarks.
Rebalancing: Adjusting the portfolio to maintain the desired asset mix.
Purpose of Portfolio Analysis:




Risk Management: Ensures the portfolio's risk is within acceptable limits.
Performance Evaluation: Measures how well the portfolio is achieving its objectives.
Optimization: Identifies opportunities to enhance returns and reduce risk.
Strategic Planning: Guides long-term investment decisions and adjustments.
Real-Life Examples for Easy Understanding
Primary Market Example: A company like Airbnb going public through an IPO, where new
shares are sold to investors.
Secondary Market Example: Buying and selling of Apple Inc. stock on the NASDAQ.
Treasury Bill Example: The U.S. government issuing a 3-month T-bill to finance short-term
needs.
Corporate Bond Example: Apple issuing bonds to fund new projects, offering periodic interest
payments to investors.
Debenture Example: Tesla issuing unsecured debentures to raise capital without pledging assets.
Convertible Bond Example: A bond issued by Netflix that can be converted into Netflix stock if
certain conditions are met.
Stock Valuation Example: Using the DCF model to estimate the intrinsic value of Amazon stock
based on projected future cash flows.
Portfolio Analysis Example: An investment advisor using Markowitz's mean-variance analysis
to create a diversified portfolio that maximizes return for a client's risk tolerance level.
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