Finance Technical Interview Questions

Corporate Finance
What could a company do with excess cash on the balance sheet? Whats 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? Lets 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 companys equity when assets rise $1 million and liabilities fall $2 million? What does it mean when cash flow from operations on a companys 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 companys cost of equity capital, if at all? How will it affect a companys 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 marketings 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 arent running off with your inventory? How would you go about forecasting balance sheet accounts in the futurespecifically inventory, accounts receivable, and accounts payable?

Mergers & Acquisitions

Why would two companies merge? What major factors drive mergers and acquisitions? Whats 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? Whats on todays 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 companys 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?

10194245802 Definition of 'Private Equity' Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company. Investopedia explains 'Private Equity' The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO. Read more: http://www.investopedia.com/terms/p/privateequity.asp#ixzz1mNKxYPeS