FINANCE

Interview
Questions And Answers
1. What is Finance?

Finance encompasses a wide range of activities including banking, debt,

credit, capital markets, money, and investments. At its core, finance
involves managing money and securing necessary funds. Financial systems
deal with money, banking, credit, investments, assets, and liabilities.

There are three main types of finance:

1. Personal finance
2. Corporate finance
3. Government finance

2. What do you understand by working capital?

Working capital, also known as net working capital (NWC), is the difference between a
company’s current assets and current liabilities. Current assets include cash,
accounts receivable, and inventory, while current liabilities include accounts payable
and short-term debt. Working capital is crucial for assessing a company’s financial
health.
3. What is a cash flow statement? Explain.

A cash flow statement is an important tool for managing finances

and tracking an organization’s cash flow. It provides insights into
the sources and uses of cash, including operating, investing, and
financing activities. Cash flow statements help managers make
informed decisions about managing corporate operations
effectively.

4. Can a company show positive net income and yet go bankrupt?

Yes, a company can have positive net income and still face
bankruptcy. This can happen due to cash flow issues where expenses
exceed incoming cash. Even with positive net income, a company
may struggle if its debts outweigh its assets.
5. What is hedging? Explain.

Hedging is a risk management strategy that involves taking

offsetting positions to minimize losses.

It often involves paying a premium for protection against adverse

price movements. Derivatives like futures and options contracts are
commonly used in hedging strategies.

6. What is preference capital?

Preference capital refers to the portion of capital raised through the

issuance of preference shares.

These shares have characteristics of both equity and debt, providing

shareholders with priority in dividend payments over common
stockholders.
7. What do you understand by fair value?

Fair value refers to the current market price of an asset or liability. It

represents a reasonable price for the asset or liability in a fair
transaction between willing buyers and sellers.

Fair value is crucial for assessing asset worth during acquisitions or

sales.

8. What is RAROC?

The risk-adjusted return on capital (RAROC) is a risk-adjusted

return on investment measurement. RAROC is one of the most
accurate techniques for determining a bank’s profitability.

Expected returns may be computed using a more informed method

that includes the determined economic capital and risk exposure.
9. What is the secondary market?

The secondary market is where securities are traded after their

initial issuance in the primary market.

Investors buy and sell securities among themselves, and prices are
determined by market demand and supply.
10. What is cost accountancy? What are its objectives?

Cost accountancy involves recording, classifying, and allocating

expenditures related to production.

Its objectives include determining the cost of goods and services

accurately to support decision-making.

11. What is a put option?

A put option is a contract that gives the buyer the right to sell a
specified quantity of an underlying asset at a predetermined price
within a set period.

It allows investors to profit from a decline in the asset’s price.

12. What are adjustment entries? How can you pass them?

Adjustment entries are entries that are passed at the end of the
accounting period to adjust the marginal and other accounts so that
the correct net profit or net loss is shown in the profit and loss
account, and the balance sheet can also portray the true and fair view
of the business’s financial condition.

Before preparing final statements, these adjustment entries must be

passed. Otherwise, the financial report would be deceptive, and the
balance sheet will not reflect the genuine financial status of the
company.

13. What is Deferred Tax Liability?

A deferred tax liability represents taxes that a company owes but is

not yet due for payment. It arises due to timing differences between
when taxes are accrued and when they are paid.
14.What is goodwill?

Goodwill is an intangible asset associated with the acquisition of a

business. It represents the excess of the purchase price over the fair
value of net assets acquired.

15. How can we calculate WACC (weighted average cost of capital)?

The weighted average cost of capital (WACC) is a figure that

represents the average cost of capital for a company. Long-term
obligations and debts, such as preferred and ordinary stocks and
bonds, that corporations pay to shareholders and capital investors,
are examples of capital expenses.
Rather than calculating capital expenses, the WACC takes a
weighted average of each source of capital for which a firm is
responsible.
WACC = [(E/V) x Re] + [(D/V) x Rd x (1 – Tc)]
E = equity market value
Re = equity cost
D = debt market value
V = sum of the equity and debt market values
Rd = debt cost
Tc = Current tax rate – corporations

16. What is investment banking?

Investment banking involves raising funds for individuals and

businesses and providing financial advice. It facilitates capital raising
through activities like initial public offerings (IPOs) and mergers and
acquisitions.
17. What are derivatives?

Derivatives are financial contracts whose value is derived from an

underlying asset. They include options, futures, and swaps, and are used
for hedging and speculation.

18. What does an inventory turnover ratio show?

The time it takes for an item to be acquired by a corporation to be sold is

referred to as inventory turnover.

A full inventory turnover indicates the firm sold all of the merchandise it
bought, minus any items lost due to damage or shrinking.

Inventory turnover is common in successful businesses, however it varies

by sector and product type.
19.What is ROE or return on equity?

The Return On Equity (ROE) ratio effectively assesses the rate of

return on a company’s common stock held by its shareholders. The
company’s ability to generate returns for investors it acquired from its
shareholders is measured by its return on equity.

Investors choose companies with larger returns on investment.

This can, however, be used as a standard for picking stocks within the
same sector.

Profit and income levels differ dramatically among industries. Even

within the same industry, ROE levels might differ if a business decides
to pay dividends rather than hold profits as idle capital.
20. What is SENSEX and NIFTY?

Sensex and Nifty are stock market indexes, whereas BSE and NSE are
stock exchanges. A stock market index is a real-time summary of the
market’s moves. A stock market index is built by combining stocks of
similar types.

The Bombay Stock Exchange’s stock market index, known as the

Sensex, stands for ‘Stock Exchange Sensitive Index.’ The Nifty is the
National Stock Exchange’s index and stands for ‘National Stock
Exchange Fifty.’

21. What are EPS and diluted EPS?

Only common shares are included in earnings per share (EPS),

whereas diluted EPS includes convertible securities, stock options,
and secondary offerings.EPS is a metric that quantifies a company’s
earnings per share. Basic EPS, unlike diluted EPS, does not take into
account the dilutive impact of convertible securities on EPS.
In fundamental analysis, diluted EPS is a statistic that is used to
assess a company’s EPS quality after all convertible securities have
indeed been exercised.

All existing convertible preferred shares, debt securities, stock

options, and warrants are considered convertible securities.

22. What are swaps?

Both investors and traders utilize derivatives contracts as one of the

greatest diversification and trading instruments. It may be separated
into two types according to its structure: contingent claims, often
known as options, and forward asserts, such as exchange-traded
futures, swaps, or forward contracts.

Swap derivatives are efficiently utilized to exchange obligations from

these groups. These are contracts in which two parties agree to
exchange a series of cash flows over a set period of time.
23. What is financial risk management?

Financial risk management is the process of identifying and addressing

financial hazards that your company may face now or in the future. It’s
not about avoiding risks since few organizations can afford to be
completely risk-free.

It’s more about putting a clear line. The goal is to figure out what risks
you’re willing to face, which dangers you’d rather avoid, and how you’ll
design a risk-averse approach.

24. What is deferred tax liability and assets?

A deferred tax asset (DTA) is a balance sheet item that shows a

discrepancy between internal accounting and taxes owing. Because it is
not a physical entity like equipment or buildings, a deferred tax asset is
classified as an intangible asset. Only on the balance sheet does it exist.
A deferred tax obligation (DTL) is a tax payment that is recorded on a
company’s balance sheet but is not due until a later tax filing.
25. Understanding Cash Equivalents

Legal currency, banknotes, coins, cheques received but not deposited,

and checking and savings accounts are all examples of cash. Any
short-term investment security having a maturity time of 90 days or
less is considered a cash equivalent.

Bank certificates of deposit, banker’s acceptances, Treasury bills,

commercial paper, and other money market instruments are examples
of these products.
Due to their nature, cash and its equivalents vary from other current
assets such as marketable securities and accounts receivable.

26.What is liquidity?

Liquidity refers to how soon you can receive your money. To put it
another way, liquidity is the ability to obtain your money whenever you
need it. Liquidity could be your backup savings account or cash on
hand that you can use in the event of an emergency or financial
catastrophe.
Liquidity is also crucial since it helps you to take advantage of
chances. If you have cash on hand and ready access to funds, it will
be simpler for you to pass up a good chance. Liquid assets are
cash, savings accounts, and checkable accounts that can be readily
turned into cash when needed.

27. What do you understand by leverage ratio and solvency ratio?

A leverage ratio is one of numerous financial metrics used to

evaluate a company’s capacity to satisfy its financial commitments.
A leverage ratio may also be used to estimate how changes in
output will influence operating income by measuring a company’s
mix of operating costs.

Solvency ratios are an important part of financial analysis since

they assist in determining if a firm has enough cash flow to meet its
debt commitments. payments.
Leverage ratios are another name for solvency ratios. It is thought that
if a company’s solvency ratio is low, it is more likely to be unable to
meet its financial obligations and to default on debt
28. What is an NPA?

Financial institutions classify loans and advances as non-performing

assets (NPAs) if the principle is past due and no interest payments have
been paid for a certain length of time. Loans become non-performing
assets (NPAs) when they are past due for 90 days or more, while other
lenders have a narrower window in which they consider a loan or
advance past due.
29. What is a dividend growth model?

The dividend yield is a valuation model that determines the fair value of
a stock by assuming that dividends grow at a constant rate in perpetuity
or at a variable rate over the time period under consideration. The
dividend growth model assesses if a company is overpriced or
undervalued by subtracting the necessary rate of return (RRR) from the
projected dividends
30. What do you understand about loan syndication?

A syndicated loan is provided by a group of lenders who pool their

resources to lend to a big borrower. A firm, a single project, or the
government can all be borrowers. Each lender in the syndicate
provides a portion of the loan amount and shares in the risk of the
loan.

The manager is one of the lenders who manages the loan on account
of the other lenders within the syndicate. The syndicate might be made
up of several distinct types of loans, each with its own set of
repayment terms negotiated between the lenders and the borrower.
31. What is capital budgeting? List the techniques of capital budgeting.

The process through which a company evaluates possible big projects or

investments is known as capital budgeting. Capital budgeting is required
before a project is authorized or denied, such as the construction of a new
facility or a large investment in an outside business.

A corporation could evaluate a prospective project’s lifetime cash inflows

and outflows as part of capital planning to see if the anticipated returns
generated match an acceptable goal benchmark. Investment assessment is
another name for capital budgeting. The following are the capital
budgeting methods used in the industry
Payback period method
Accounting rate of return method
Discounted cash flow method
Net present Value (NPV) Method
Internal Rate of Return (IRR)
Profitability Index (PI)
32. What is a payback period?

The time it takes to recoup the cost of an investment is

referred to as the payback period. Simply explained, it is
the time it takes for an investment to break even.

People and businesses spend their money primarily to be

paid back, which is why the payback time is so critical.

In other words, the faster an investment pays off, the

more appealing it gets.

Calculating the payback period is simple and may be

accomplished simply dividing the initial investment by the
average cash flows.
33. What is a balance sheet?

A balance sheet is a financial statement that shows the assets,

liabilities, and shareholder equity of a corporation at a certain point in
time.

Balance sheets serve as the foundation for calculating investor returns

and assessing a company’s financial structure.

In a nutshell, a balance sheet is a financial statement that shows what a

firm owns and owes, as well as how much money shareholders have
invested.

To conduct basic analysis or calculate financial ratios, balance sheets

can be combined with other essential financial accounts.
34. What is a bond? What are the types of bonds?

When governments and enterprises need to raise funds, they issue

bonds. You’re giving the issuer a loan when you buy a bond, and
they pledge to pay you back the face value of the loan on a
particular date, as well as periodic interest payments, generally
twice a year.Interest rates and bond rates are inversely related: as
rates rise, bond prices fall, and vice versa.

Bonds have maturity period after which the principal must be

paid in full or the bond will default. Treasury, savings, agency,
municipal, and corporate bonds are the five basic types of bonds.
Each bond has its unique set of sellers, purposes, buyers, and
risk-to-reward ratios.
35. Can you explain the difference between equity and debt financing?

Equity financing involves raising funds by selling ownership in the

company, whereas debt financing involves borrowing money that
must be repaid with interest.

Equity financing is typically riskier for investors but offers

potential for higher returns, while debt financing is generally less
risky but carries the obligation of repayment.