Top Finance Interview Questions and Answers

12-Jul-2024

Finance is an expeditiously evolving industry that offers promising career growth and decent salary hikes. If statistics are to be believed, this field alone is about to generate approximately more than 9 lakh jobs per year by 2032. To grab a decent job in this rapidly growing industry, students have to be fully prepared. In the approaching section, we have curated and presented some of the most frequently asked technical finance questions and answers to ensure that students are familiar with the concepts and fully prepared to crack the interviews.

How should I prepare for a finance interview?

Before jumping to a series of questions and answers, it is important that readers pay attention to the importance of planning to face a finance interview. They must consider the following:

• Brush your technical concepts and be clear about the subject: The foremost requirement is to be well-versed in the subject. Interviewer always wants to check the basics of the candidate, and they wish to know their commitment to their subject. Students must have a basic understanding of finance and accounting and be willing to expand their knowledge.

• Give brief yet satisfactory solutions: Students must never stretch their answers long as this might end the interviewer's interest. Also, if they do not know the answer, they must say the same; otherwise, they will increase the complexities on their own. Try to stay calm, answer each question according to your best understanding and never make up any answer. It is best to keep each answer within 4-5 minutes.

• Practice is the key to building a strong foundation: Students must always keep practicing and learning. It is always easier to face questions from the interviewer when practiced properly rather than mugging up from the question banks.

Important topics that must be covered in preparing for finance interviews:

It is very crucial to prepare well for the finance interview since there is a lot of competition in the field. Students must make sure that they cover the following important topics in their preparation and be aware of the common finance interview questions and answers related to the same fields:

• Financial management: basic concepts and introduction.
• Financial Accounting
• Financial analytics
• Risk Analysis
• Corporate finance

Important finance interview questions and answers:

Some of the best-asked finance interview questions and their explanatory solutions are given below. Refer to the list of questions to clarify your concepts and complete your last-minute preparations:

Ques 1: What is the definition of Finance, and what are its types?

Ans: The study and management of money, currency, and capital assets. In broader terms, finance refers to monetary resources. The three main kinds of finance are personal finance, corporate finance, and government finance.

Ques 2: What is the meaning of fair value?

Ans: Fair value refers to the current market price of a commodity. The fair value of any asset or liability is important in analyzing the worth of the product during selling or purchasing.

Que 3: Explain the meaning of the cash flow statement

Ans: A Cash flow statement refers to the statement that consists of all the data related to cash inflows and outflows of an organization. The examples of cash flow statements are income tax payments, salary payments, etc.

Que 4: What is equity?

Ans: Equity refers to residual value after the shareholder settles his liability and pays in debt. In short, this is the amount of capital owned by the company's owner.

Que 5: What is meant by working capital?

Ans: Working capital is the capital that a company requires for its day-to-day operations. This financial metric is calculated by considering all the current assets and deducting current liabilities. The formula to calculate Working capital is:

Working Capital= Current Assets - Current liability

Que 6: Among debt and equity, which is cheaper?

Ans: Among the two depts is cheaper than equity as the former option is backed up by collateral. However, for a business, simply considering the cheaper option is not sufficient; they must always consider different tradeoffs.

Que 7: What is the meaning of Goodwill?

Ans: Goodwill is an intangible asset that can neither be touched nor seen, but it is essential to measure the brand value and intellectual property when a firm acquires another.

Que 8: What is financial risk management?

Ans: The procedure that involves identifying the risks, analyzing them, and making investment decisions is known as financial risk management. Understand in this way that financial risk management is about figuring out all the risks that an organization might encounter, the risks that are bearable, and planning an action plan to avoid other hazards.

Que 9: What is the difference between a firm and a sole proprietorship?

Ans: The key difference between a firm and a sole proprietorship is ownership. A Firm is known to be owned and operated by two or more members. On the other hand, the other option is single-handedly owned and managed by an individual. To get more clarification, you must know that a proprietorship is known to be a separate legal entity; on the other hand, a firm is a separate legal entity from all its partners.

Que 10: What is meant by leverage ratio and Solvency ratio?

Ans: The Leverage ratio is a kind of financial ratio that is known to measure the capacity of a company to satisfy its financial commitments. It is also used to calculate the estimation of operating income by considering changes in the output. On the other hand, the Solvency ratio is a crucial part of financial analysis that determines whether the company has sufficient capital or cash flow to met their dept commitments.

Que 11: What is the dividend growth model? 

Ans: The Dividend growth model is an important aspect of measuring the company's stock without taking note of the market conditions. It is also a measure to conclude whether the company is overpriced or undervalued by deducting the rate of return from the projected dividends.

Que 12: What is capital budgeting?

Ans: Capital budgeting is a process that evaluates the possibilities of big projects and investments. Before any project is authorized or rejected, it is crucial to plan a capital budgeting. It is usually used by companies to evaluate the profit of upcoming projects or investments.

Que 13: What are the differences between futures contracts and forward contracts?

Ans: Future contracts are standardized and traded on an exchange where the prices are finalized and settled daily until the last day of the contract; on the other hand, the forward contract is private and is customized, and the agreement is settled over the counter. It must be carefully noted that both futures contracts and forward contracts are agreements that are used to purchase or sell any asset at a fixed and predecided fee at a future date.

Que 14: What is the cost of capital?

Ans: The cost of capital is known to be a rate of return that any company must earn to maintain capital structure and attract other investors.

Que 15: What is the meaning of bond?

Ans: Bonds are issued by the governments or the enterprises whenever they wish to raise funds. It must be clear that interest rates and bonds are inversely proportional, and one rises as the other goes down. Whenever you purchase a bond, you are providing a loan to the issuer. They are liable to pay you back the face value on the specified date, along with the periodic interest. It must be clear that bonds have maturity limits, and within this time, the principal amount must be paid, or else the bond will default.

Que 16: What is the meaning of WACC, and how is it calculated?

Ans: WACC is an abbreviated form of weighted average cost of capital and is calculated using the formula given below, where E stands for the market value of equity, V is the total market value of equity and debt, Re is the cost of equity, D is the market value of debt, and Tc is the corporate tax rate:

WACC=(E/V*Re)+ (D/V*Rd*(1-Tc))

Que 17: What is the meaning of net present value?

Ans: Net present value, commonly known as NPV, is an important method that evaluates an investment by calculating the present value of the expected cash flows discounted required at the return rate. To generate a greater return on an investment, it is essential to have a positive NPV.

Que 18: What are the three main financial statements?

Ans: The three main financial statements are balance sheets, income statements, and cash flow statements.

Que 19: What is the difference between audit and review?

Ans: Audit is the official examination and verification of any company's financial statements, records, and operations, which is expensive to process. On the other hand, review is a cost-effective process that is beneficial for small or newly growing companies.

Que 20: What is negative working capital?

Ans: It is a sign of efficiency in any business that has low-inventory. in other word it specifies that company will be in trouble if doesn't have sufficient-amount-to-pay-debts.

Conclusion: It is essential to be clear about the basic principles of finance in order to crack the interviews. No matter you are a beginner or a field expert, you must have your fundamentals-clear, and to get all the to point answer it is essential that you have a look at the set of questions and answers already given above.

Top Finance Interview Questions Finance Interview Questions and Answers