The working capital measures a company’s ability to pay off its current liabilities using its current assets. In short, it measures the liquidity of a company. The formula for calculating the working capital of a company is:
| Point of Distinction |
Cash Accounting |
Accrual Accounting |
| Transaction record |
Records transactions only when cash is exchanged. |
It records transactions when they are earned or incurred, even if cash has not been exchanged. |
| Accounts maintained |
Entries are made in two accounts: Cash A/c and Income and Expense accounts. |
Entries are made in three accounts: Accounts Payable or Receivable, Cash A/c, and Income and Expense accounts. |
13. What is a stock split and a stock dividend?
When a company distributes additional shares to existing shareholders, it’s called a stock dividend. When it divides the existing shares into multiple shares, it’s called a stock split.
14. Tell me about a time you worked under pressure.
In this type of question, you can use the STAR method:
- Situation: Tell them about the details of the situation and the pressure you faced.
- Task: Explain your role in that situation and what was needed to achieve it.
- Action: Describe in detail the action you took to address the pressure.
- Result: Lastly, highlight the outcome and how your action led to an effective solution.
This method especially helps structure answers for behavioural questions.
15. What are your strengths and weaknesses?
When discussing your strengths and weaknesses in a finance interview, focus on skills aligned with job requirements and frame weaknesses as an area for development. For example, in strengths, you can mention teamwork, problem-solving, and adaptability. While in weaknesses, you can mention being overly detail-oriented and issues with public speaking.
16. What is the difference between profit and cash flow?
Profit shows how much a company earns after deducting all expenses from revenue. On the other hand, cash flow shows the actual money moving in and out of the business. A company can make a profit but still face cash shortages, or have a positive cash flow but make losses. Therefore, both have their own importance for business growth.
17. What is EBITDA and how is it different from net income?
EBITDA means Earnings Before Interest, Taxes, and Depreciation and Amortization. It shows how well a company performs in its core operations by excluding financial costs, taxes, and non-cash expenses. Net income is the final profit after deducting all expenses, including interest, depreciation, taxes, and amortization. EBITDA highlights core operating performance, while net income shows total profit.
18. What is the matching principle?
The matching principle requires recording expenses in the same period as the revenue they generate. This approach shows a company’s true profitability by matching related revenues and expenses.
19. What is the difference between CapEx and OpEx?
CapEx (Capital Expenditure) is the money a company spends on acquiring or improving long-term assets like buildings or machinery for future growth. OpEx (Operating Expenditure) covers day-to-day business expenses such as salaries, rent, and utilities for current operations, recorded immediately on the income statement. So, the main difference lies in the benefit duration and how companies record these costs.
20. What are current assets and current liabilities?
Current assets are short-term resources, like cash, accounts receivable, and inventory, that a company can use or convert to cash within a year. Current liabilities are short-term obligations like accounts payable, accrued expenses, and taxes that the company must pay within the same period. Together, both these items help assess a company’s liquidity and short-term financial health.
Intermediate Finance Interview Questions
Here are the most asked questions in intermediate-level finance interviews. Additionally, you can find tips on how to answer them effectively:
21. What happens to the financial statements when depreciation increases by ₹10?
The financial statements are affected as follows when depreciation increases by ₹10: an increase in depreciation reduces net income on the income statement, but increases the cash flow from operations, i.e., cash flow statement, since it is a non-cash expense. It impacts the Balance Sheet as well, reducing asset value and equity.
22. If we purchase an asset, what would be its impact on our various financial statements?
On the balance sheet, the purchase will increase the assets, while on the income statement, this asset will have depreciation. The cash flow statement classifies this asset purchase as an investing activity.
23. What are the three main financial statements, and how are they connected?
The three main financial statements are the income statement, balance sheet, and cash flow statement. The three statements are interlinked. Retained earnings from the Income Statement flow into Shareholders’ Equity on the Balance Sheet, while changes in the current assets and liabilities help calculate the operating activities on the Cash Flow Statement. Overall, these three financial statements provide a detailed view of a company’s financial position.
24. What are the advantages of funding operations by issuing equity rather than debt for a company?
A company might issue equity to lower its risk factor. This is because equity financing is less risky compared to debt financing. The advantage of issuing equity is that there is no liability to repay the equity capital. Also, it helps a company gain valuable stability, providing financial flexibility and lower fixed obligations.
25. What are the different ways you can value a company, and how would you value ours?
There are three main approaches to valuing a company:
If I were valuing your company, I would begin with a Discounted Cash Flow model to calculate the true value based on projected cash flows. I would then verify this with trading multiples of industry peers (Comparable Company Analysis) and recent transactions in your sector (Precedent Transactions) to get a valuation estimate. I would also consider your company’s growth prospects, competitive advantages, and current performance metrics.
26. What does a high P/E ratio indicate for a company’s future?
A high P/E ratio may simply indicate high future growth expectations. Though it could also mean the stock is overpriced and its price may fall in the future.
27. What are the common multiples used in valuation?
The common multiples used in valuation are Price-to-Earnings (P/E), Price-to-Book (P/B), Price-to-Sales (P/S), EV/Revenue, and EV/EBITDA.
28. What does having negative working capital mean?
A negative working capital can indicate efficient operations as well as potential liquidity issues. This happens when a company’s current liabilities exceed its current assets. In some industries, like retail, supplier fund operations make this normal.
29. If cash collected from customers is not yet recorded as revenue, what happens to it?
If cash collected from customers is not recorded as revenue, it usually goes into “Deferred Revenue” in the liability section of the balance sheet. It happens when a company receives payment before delivering goods or services, creating an obligation.
30. What are the key market and economic indicators you monitor as a financial analyst?
As a financial analyst, the key market and economic indicators I monitor are:
- Inflation Rate
- Interest Rate
- Gross Domestic Product
- Stock Market Indexes
- Consumer Price Index
- Volatility Index
- Credit Growth
- Forex Reserves and Exchange Rate Movements
- Valuation Ratios (P/E ratio, P/B ratio)
31. Walk me through how you would build a simple financial model to forecast revenue.
These are the 8 steps I would use to build a simple financial model to forecast revenue:
- Understanding the business model: Identifying key revenue drivers (examples: units sold × price).
- Collecting past data: Using the past 3-4 years of sales, pricing, and growth trends.
- Selecting a forecasting approach: Top-down (market size × market share) and bottom-up ( units sold × price).
- Defining the revenue formula: Example – Revenue = Customers × orders per customer × average selling price.
- Setting key assumptions: Customer growth rate, order frequency, and price changes.
- Building the model: Organising it in a time series and linking all inputs to an assumption table.
- Testing and validating: Checking for unrealistic assumptions and errors.
- Visualising output: Adding simple charts to show revenue trends.
32. What is enterprise value, and how is it different from market capitalization?
Enterprise value measures the total value of the company, including both equity and debt. This shows the actual cost to buy the entire business. Market capitalization measures only equity, calculated by multiplying the current share price by the total number of shares. Because it accounts for debt and excludes cash, enterprise value gives a more accurate picture of the company’s value.
33. How do you calculate free cash flow from the income statement and balance sheet?
Free cash flow is calculated by adjusting net income for non-cash expenses and changes in working capital, then subtracting capital expenditures. It can be calculated as:
Free Cash Flow = Net Income + Depreciation and Amortization – Change in Working Capital – Capital Expenditure
It shows the cash a company has left after turning its operations and making investments.
34. What happens to financial statements when inventory is written down?
When a company writes down inventory, it reduces its balance sheet value and records an expense on the income statement, which reduces net income. Since inventory write-down is a non-cash expense, the company adds it back in the operating section of the cash flow statement, leaving cash unaffected.
35. What is operating leverage and why does it matter?
Operating leverage measures the extent to which a company uses fixed costs in its operations. A company with high operating leverage has a higher proportion of fixed costs compared to variable costs, which means that a small change in sales can lead to a large change in operating profit. It matters because higher operating leverage increases both the potential for higher profits and the risk of higher losses when sales decline.
36. What is ROIC and how is it different from ROE?
Return on Invested Capital (ROIC) measures how efficiently a company generates returns from all the capital invested by both debt and equity holders. Return on Equity (ROE), on the other hand, measures the return generated only on shareholders’ equity. ROIC provides a better picture of a company’s overall capital efficiency, while ROE focuses only on returns to equity investors.
Advanced Finance Interview Questions for Experienced
Here are the most asked finance-related interview questions, advanced level. Additionally, you can find tips on how to answer them effectively:
37. How do you value a company?
Valuing a company is a process of finding its economic value using various financial tools and models. I value a company by analysing its financial performance and applying valuation methods:
- Discounted Cash Flow (DCF): It estimates future cash flows and discounts them to present value.
- Comparable Company Analysis: Compares with similar public companies using valuation metrics like P/B, P/E, etc.
- Precedent Transactions: This method uses valuation data from similar past acquisitions.
- Asset-Based Valuation: The difference between total assets and liabilities of a company.
- Market Capitalization: Multiply the share price by the total outstanding shares for public companies.
38. How does the DCF model method differ from the comparable company analysis method?
The difference between the DCF model and the Comparable Company Analysis method is as follows:
| Point of Distinction |
DCF Model |
Comparable Company Analysis Method |
| Valuation Approach |
The DCF model determines a company’s intrinsic value on the basis of its projected future cash flows and discount rate. |
It provides a valuation on the basis of the market prices of similar companies. |
| Data Dependency |
It relies on company-specific forecasts. |
It relies on peer group market data. |
| Strengths |
Over time, it captures intrinsic value. |
It reflects current market situations. |
39. How do you calculate terminal value?
To calculate terminal value, I use the formula:
Here,
- FCF_(n+1) refers to the free cash flow for the year after the last projected year (year n+1). FCF in the year after the projection period.
- WACC is the weighted average cost of capital.
- g is the assumed long-term, stable growth rate of free cash flow.
40. What is the discount rate you should use in an unlevered DCF analysis?
The weighted average cost of capital (WACC) is the proper discount rate to use for an unlevered DCF.
FCFF matches WACC as FCFFs are the cash flows that belong to both debt and equity providers.
The discount rate, i.e., the cost of capital, needs to include all providers of capital, both debt and equity, which the WACC does. On the contrary, the cost of equity would be the right discount rate for a levered DCF.
The weighted average cost of capital (WACC) formula is:
41. What is free cash flow to the firm?
Free cash flow to the firm (FCFF) is the total cash flow a firm generates from its operations. It is available to all investors after accounting for all taxes, investments, and expenses.
42. What is Beta, and why would you unlever it?
Beta is a measure of how much an asset’s returns move with the market. It shows how sensitive the returns of an investment are.
Unlevered beta, also known as asset beta, calculates the market risk of the company without the impact of debt. ‘Unlevering’ a beta eliminates the financial effects of leverage, thus identifying the company-specific risks.
Formula to calculate unlevered Beta:
43. Which is more expensive: the cost of debt or the cost of equity?
The cost of equity is more expensive than the cost of debt. Equity is riskier for investors; hence, they demand a higher return, making it more expensive. And because debt is less risky for creditors due to the fixed repayments, and their preference over equity holders in case of liquidation. Additionally, debt interest payments are eligible for tax deduction, lowering the cost.
44. Can you explain the liquidation valuation method?
By valuing all tangible assets and subtracting a company’s liabilities from its financial report, the liquidation value can be calculated. In simpler terms, subtracting the liabilities from the assets will give investors the liquidation value. It is basically the “floor” value, showing the minimum worth of the company if it were to discontinue operations. This method focuses on tangible assets like inventory, real estate, and equipment, with intangible assets like brand recognition and patents often excluded.
45. How would you perform a sensitivity analysis in a valuation method?
Sensitivity analysis is used to evaluate how a valuation of a stock can be impacted by various risk factors in the model’s inputs. Specifically, it examines how changes in key assumptions, like terminal growth rates and discount rates, impact the overall stock’s valuation.
Steps to Perform Sensitivity Analysis in Valuation:
Step 1: Choosing the Valuation Method
Most commonly used in DCF analysis, but also useful for comps or LBO models.
Step 2: Identifying Key Assumptions (Drivers)
Typical variables include:
- Discount rate (WACC)
- Terminal growth rate
- EBITDA margin
- Revenue growth rate
- Exit multiple (for terminal value)
Step 3: Defining a Range of Values
For each variable, create a realistic range. For example:
- WACC: 8% to 12%
- Terminal growth rate: 1% to 3%
- Revenue growth: 5% to 10%
Step 4: Building Sensitivity Tables
Using Excel data tables or modeling tools to calculate how changes in assumptions impact the result (e.g., enterprise value or equity value).
Common formats:
- One-way sensitivity table: Change one input, observe how the valuation responds.
- Two-way sensitivity table: Change two inputs together (e.g., WACC vs terminal growth rate).
Sample Sensitivity Table: (Enterprise Value in Millions)
| WACC \ Terminal Growth |
1.0% |
2.0% |
3.0% |
| 8.0% |
120M |
130M |
145M |
| 9.0% |
110M |
120M |
135M |
| 10.0% |
100M |
110M |
125M |
Step 5: Interpreting Results
- Identifying which variables have the largest impact on value.
- Using the range of outcomes to guide decision-making or risk analysis.
These insights are extremely helpful during investment decision-making or risk planning.
46. How does an increase in interest rates affect bond prices?
When interest rates rise, existing bond prices fall, and when rates fall, bond prices rise. This occurs because bonds with fixed coupon rates become more or less attractive compared to newly issued bonds offering current market rates. To align the yield of existing bonds with prevailing rates, their market prices adjust inversely to interest rate movements.
47. How do you calculate WACC step by step?
The Weighted Average Cost of Capital (WACC) represents a company’s average cost of financing from both equity and debt. It is calculated by weighting the cost of equity and the after-tax cost of debt based on their proportion in the company’s capital structure.
The formula for WACC is:
WACC = (E/V × Re) + (D/V × Rd × (1 – T))
Where,
- E = Market value of equity
- D = Market value of debt
- V = Total value (E + D)
- Re = Cost of equity
- Rd = Cost of debt
- T = Corporate tax rate
WACC is widely used as the discount rate in valuation models. It reflects the required return for all providers of capital, giving a comprehensive measure of a company’s financing cost.
48. What is the difference between levered and unlevered free cash flow?
Unlevered free cash flow (UFCF) represents the cash a company generates that is available to all capital providers, both debt and equity holders, before any interest payments. Levered free cash flow (LFCF) shows the cash available only to equity holders after paying interest and repaying debt.
Unlevered free cash flow is used in enterprise valuation and discounted using the WACC, while levered free cash flow is used in equity valuation and discounted using the cost of equity.
49. What is enterprise value to EBITDA, and when do you use it?
EV/EBITDA is a valuation multiple that compares a company’s enterprise value to its earnings before interest, taxes, depreciation, and amortisation. Because it excludes the effects of financing and accounting policies, it allows analysts to compare companies with different capital structures more fairly.
This multiple is commonly used in mergers and acquisitions and for industry peer comparisons, as it provides a clear view of a company’s operating performance and relative valuation.
50. Walk me through a basic discounted cash flow valuation.
A DCF valuation estimates a company’s intrinsic value by projecting its future free cash flows and discounting them to present value using the WACC. First, you forecast cash flows for a period, usually five to ten years, based on revenue, margins, capex, and working capital. Then, you calculate a terminal value to account for cash flows beyond that period.
Next, you discount both the projected cash flows and the terminal value to present value. Adding them gives the enterprise value, and after adjusting for net debt, you arrive at the equity value. This method captures both operational performance and capital structure.
Why Are Finance Interviews Challenging?
Finance interview questions can be challenging, highly technical, and very different from traditional job interviews. For freshers, it might be quite overwhelming. To crack a finance interview, you require a strong understanding of financial concepts and the ability to apply them in difficult scenarios.
The main intention behind these interviews is to test the candidate’s response under pressure and ability to explain complex problems easily. For cracking a finance interview, it is important to prepare for both accounting and finance interview questions.
Tips to Prepare for a Finance Interview
To get a job in the finance industry, you must have a strategic approach. Here are tips to prepare for a finance role interview:
- Carefully read the job description: It provides you with a roadmap for your interview preparation. You can anticipate the possible questions based on the roles and responsibilities mentioned in the job description.
- Know about the company: It’s better to know about the company well before the interview process. Understand its products and services, competitors, recent news, company culture, industry, employee reviews, etc. This will help you to see whether the company fits your requirements or not, as well as prepare you for the basic interview questions, like ‘Tell me what you know about the company.
- Role-related knowledge: Check whether the job role, responsibilities, and the company’s needs align with your skills, experience, and knowledge or not. It is not just looking at how well you might fit the current role you are interviewing for, but future growth potential as well.
- Practice common and technical questions: You can start practicing basic finance questions for an interview, including behavioral and technical questions. You can practice the finance interview questions and answers in front of a mirror or with a person to boost your confidence and communication skills.
- Follow financial news & market trends: Being up to date with the news and market trends can help you prepare for finance interviews well. Keep yourself informed about the policy changes, their influence on the market, and market conditions.
- Listen to the interviewer’s questions carefully: Listen to the finance interview questions asked by the interviewer carefully before answering. Take a moment to properly frame your answer and try to avoid asking them to repeat the question.
- Ask questions: In the end, if the interviewer asks “Do you have any questions?”, ask them questions like how my day-to-day work would look, or what the key performance indicators (KPIs) for this role are. This shows your keenness for the position.
You can also get free downloadable finance interview questions and answers pdf online.
Conclusion
The job interview process can be quite overwhelming and time-consuming for a candidate. However, thorough preparation for the interview can take you one step closer to your dream job. These finance interview questions test more than just knowledge. They check how well you can apply concepts, communicate clearly, and think critically in difficult scenarios.
Practice these finance interview questions and other relevant questions for your job role. Remember that confidence and preparation are key to cracking your next finance interview.