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Preparing for a Corporate Finance Interview? This list contains the top corporate finance interview questions that are most frequently asked by employers.
- What are the Financial Statements of a company and what do they tell about a company?
Answer: Financial Statements of a company are statements, in which the company keeps a formal record about the company’s position and performance over time. The objective of Financial Statements is to provide financial information about the reporting entity that is useful to exist and potential investors, creditors, and lenders in making decisions about whether to invest, give credit or not. There are mainly three types of financial statements which a company prepares.
- Income Statement – Income Statement tells us about the performance of the company over a specific account period. Financial performance is given in terms of revenue and expense generated through operating and non-operating activities.
- Balance Sheet – Balance Sheet tells us about the position of the company at a specific point in time. Balance Sheet consists of Assets, Liabilities and Owner’s Equity. The basic equation of Balance Sheet: Assets = Liabilities + Owner’s Equity.
- Cash Flow Statement – Cash Flow Statement tells us the amount of cash inflow and outflow. Cash Flow Statement tells us how the cash present in the balance sheet changed from last year to the current year.
2) What is a clean and dirty price of a bond?
Ans. Clean price is a price of a coupon bond not including the interest accrued. In other words, clean price is the present value of the discounted future cash flows of a bond excluding the interest payments. Dirty price of a bond includes accrued interest in the calculation of bond. Dirty price of the bond is the present value of the discounted future cash flows of a bond which include the interest payments made by the issuing entity.
3) What are Stock Options?
Ans. Stock Options are the options to convert into common shares at a predetermined price. These options are given to the employees of the company in order to attract them and make them stay longer. The options are generally provided by the company to its upper management to align management’s interests with that of its shareholders.
Stock Options generally have a venting period i.e. a waiting period before the employee can actually exercise his or her option to convert into common shares. A Qualified option is a tax-free option which means that they are not subject to taxability after the conversion. An Unqualified option is a taxable option which is taxed immediately after conversion and then again when the employee sells the stock.
Terms and answers to learn
a. Make shareholders as wealthy as possible by investing in real assets.
b. Modify the firm’s investment plan to help shareholders achieve a particular time pattern of consumption.
c. Choose high- or low-risk assets to match shareholders’ risk preferences.
d. Help balance shareholders’ checkbooks.
However, in well-functioning capital markets, shareholders will vote for only one of these goals. Which one will they choose?
Should we stock up with inventory ahead of the holiday season?
Do we need a bank loan to help buy the inventory?
Should we develop a new software package to manage our inventory?
With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse.
With the savings we make from our new inventory system, it may be possible to increase our dividend.
Alternatively, we can use the savings to repay some of our long-term debt.
A fixed salary
A salary linked to company profits
A salary that is paid partly in the form of the company’s shares
(Financial decision or Investment decision)
(Real asset or Financial asset)
(Closely held corporation or Public corporation)
(Partnership or Corporation)
(The treasurer or The controller)
(The cost resulting from conflicts of interest between managers and shareholders or The amount charged by a company’s agents such as the auditors and lawyers)
Ownership can be transferred without affecting operations
Managers can be fired with no effect on ownership
Managers can be fired with no effect on ownership
Managers no longer have the incentive to act in their own interests.
The corporation survives even if managers are dismissed.
Shareholders can sell their holdings without disrupting the business.
Corporations, unlike sole proprietorships, do not pay tax; instead, shareholders are taxed on any dividends they receive.
A share of stock
A personal IOU
The balance in the firm’s checking account
An experienced and hardworking sales force
A bank loan agreement
Which company’s compensation would most help to mitigate conflicts of interest between managers and shareholders?
Other things equal, which company would experience the greatest variation in earnings?
the coupon rate.
the default premium.
A bond’s rate of return is equal to its coupon payment divided by the price paid for the bond.
bond has a high default premium.
bond is selling at a discount.
promised yield is not likely to materialize.
bond must be a Treasury Inflation-Protected Security.
A Treasury bond’s bid price will be lower than the ask price.
receives $971.62 upon the maturity date of the bond.
pays 97.162% of face value for the bond.
pays $10,971.62 for a $10,000 face value bond.
receives 97.162% of the stated coupon payments.
The coupon rate remains at 8%.
The coupon rate increases to 10%.
The coupon rate remains at 9%.
The coupon rate decreases to 8%.
lower coupon payments.
higher purchase prices.
lower yields to maturity.
higher default possibilities.
Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.
its yield to maturity.
the yield to maturity when the bond sells at a discount.
a defined percentage of its face value.
the annual interest divided by the current market price.
Yield to maturity
price changes but not the current yield.
neither the current yield nor any price changes.
current yield but not any price changes.
both the current yield and any price changes.
dividing the price by the par value.
multiplying the price by the coupon rate.
dividing the annual coupon payments by the price.
dividing the price by the annual coupon payments.
By lowering the bond’s coupon rate upon resale
By maintaining bid prices higher than ask prices
By maintaining bid prices lower than ask prices
By retaining the bond’s next coupon payment
Its current yield is lower than its coupon rate.
Its yield to maturity is higher than its coupon rate.
Its coupon rate is lower than the current market rate on similar bonds.
Its coupon rate is variable.
The current yield measures the bond’s total rate of return.
A bond’s payment at maturity is referred to as its face value.
it must be a zero-coupon bond.
its coupon rate equals its yield to maturity.
it has a very low level of default risk.
the bond is quite close to maturity.
will provide the same rankings as an NPV criterion.
will maximize NPV, but not IRR.
is technically impossible.
can result in misguided selections.
equal to the average return on all company projects.
the return earned by investing in the project.
the foregone return from investing in the project.
designed to be less than the project’s IRR.
positive profitability index.
acceptable payback period.
highest NPV, discounted at the opportunity cost of capital.
lowest equivalent annual cost.
project should be rejected.
net present value will be positive.
net present value will be zero.
project has no cash inflows.
invest now to maximize the NPV.
postpone until costs reach their lowest level.
invest at the date that provides the highest NPV today.
postpone until the opportunity cost reaches its lowest level.
reject all projects lasting longer than 10 years.
reject all projects with rates of return exceeding the opportunity cost of capital.
accept all projects with positive net present values.
accept all projects with cash inflows exceeding the initial cost.
with late cash inflows.
with short lives.
that have negative NPVs.
with long lives.
changes in the sign of the cash flows.
periods of cash flow.
larger initial size.
Accepting projects with the highest IRRs first
Bypassing projects that have positive NPVs
Accepting projects with the highest NPVs first
Bypassing projects that have zero IRRs
a single project with cash outflows at time 0 and the final year and inflows in all other time periods.
a single project with alternating cash inflows and outflows over several years.
mutually exclusive projects of differing sizes.
a single project with only cash inflows following the initial cash outflow.
soft capital rationing budget.
project’s initial cost.
project’s discounted cash inflows.
Net present value
Internal rate of return
highest net discounted value at time zero.
highest internal rate of return.
largest return per dollar invested.
largest dollar investment per rate of return.
A decrease in the discount rate
An increase in the initial cost of the project
A decrease in the size of the cash inflows
A decrease in the number of cash inflows
Profitability index, internal rate of return, and net present value
Internal rate of return and net present value only
Profitability index and net present value only
Net present value only
Inventory levels will be reduced when the project is introduced.
The project will require additional inventory which will be financed by a supplier.
All sales related to the project will be cash sales to a subsidiary.
The project will increase inventory more than accounts payable.
have no incremental effect.
reduce the project’s net present value.
revert at the end of the investment.
are usually small in magnitude.
A decrease in accounts receivable
An increase in inventories
An increase in accounts payable
An increase in notes payable
is typically ignored in capital budgeting.
can differ depending on market conditions.
should be depreciated annually.
is important only for parcels of land.
Discounting nominal cash flows with real rates.
Discounting nominal cash flows with either real or nominal rates.
Discounting real cash flows with real rates.
Discounting real cash flows with nominal rates.
A sunk cost
Increase in accounts receivable
nontaxable only if accelerated depreciation was used.
taxable to the extent that the sales price exceeds book value.
overhead will not be recovered at the end of the project.
project actually changes the total amount of overhead expenses.
accountant is required to allocate costs to this project.
overhead is not currently fully allocated to existing projects.
The increase in annual depreciation resulting from the asset purchase
A reduction in the firm’s total variable costs due to the purchase of the new machine
A loss of current sales due to the introduction of the new product
The sale of the machine after it is fully depreciated
The proposal to solve pollution problems cited by the EPA
The proposal with the longest payback period
The proposal with the highest IRR and quickest payback
The proposal with the highest NPV
variable costs should be traded for fixed costs.
fixed costs should be traded for variable costs.
additional marketing analysis may be beneficial before proceeding.
the project should not be undertaken.
An increase in the discount rate
A decrease in the fixed costs
A decrease in the estimated annual sales
An increase in the initial investment
consideration of opportunity cost.
inclusion of income taxes.
consideration of interest expense.
allowance of the sales level to vary in response to changes in demand.
how price changes affect break-even volume.
seasonal variation in product demand.
the optimal level of capital expenditures.
how variables in a project affect profitability.
This cannot be determined without knowing the length of the investment horizon.
It reduces the break-even level.
It has no effect on the break-even level.
It raises the break-even level.
be forced to operate with a high degree of operating leverage.
be forced to capture larger market shares to be profitable.
have difficulty finding positive NPV projects for investment.
avoid the need to conduct sensitivity analyses.
variable costs are covered.
fixed costs, variable costs, and depreciation are covered.
fixed costs and variable costs are covered.
fixed costs are covered.
make an investment’s NPV appear more attractive.
correctly calculate an investment’s NPV, regardless of expected inflation.
correctly calculate an investment’s NPV if inflation is expected.
make an investment’s NPV appear less attractive.
Real option analysis
earn the risk-free rate of return.
are included in the S&P 500 index.
earn the average market rate of return.
possess the same level of risk.
U.S. Treasury bonds
U.S. Treasury bill
lower the variance.
lower the expected rate of return.
lower the real rate of return.
higher the standard deviation.
the market portfolio minus the rate of return on Treasury bills.
Treasury bonds plus a maturity premium.
the market portfolio.
average value of squared deviations from the mean.
average value of deviations from the mean.
sum of the deviations from the mean.
square root of the average value of deviations from the mean.
Long-term Treasury bonds
low beta stocks.
high beta stocks.
stocks that plot below the security market line.
stocks with large amounts of unique risk.
offering too little return to justify its risk.
underpriced, a situation that should be temporary.
ignoring all of the security’s unique risk.
a defensive security, which expects to offer lower returns.
the unique risks have been diversified away.
the market portfolio contains only risk-free securities.
the firm-specific events would be too numerous to quantify.
only macro events are tracked by economists.
losses of less than 8%.
gains of less than 8%.
gains greater than 8%.
losses greater than 8%.
time value of money and market risk.
unique risk and firm-specific risk.
market risk and unique risk.
diversification and portfolio risk.
greater exposure to interest rate risk.
higher level of unique risk.
greater default risk.
excellent for high beta stocks.
precise in its calculations of risk premiums.
imprecise, but generally an acceptable guideline.
excellent for all well-diversified portfolios.
stock’s standard deviation.
market risk premium.
A regional airline
A large producer of flour
A major commercial bank
A machine tool manufacturer
greater than the expected market return.
proportionate to the market return.
greater than the risk-free rate of return.
proportionate to the stock’s beta.
Inflation increase of 2.3%
Revision to the corporate tax laws
Reduction in the overall economic output
Retirement of a company executive
elimination of macro risk through diversification.
level of systematic risk for an undiversified investor.
dispersion of possible returns.
possibility of changes in the cost of capital.
free cash flows.
after-tax net profits.
aftertax cost of debt.
weighted-average cost of capital.
cost of equity.
pre-tax cost of debt.
Decreasing the marginal tax rate
Substituting preferred stock for debt
Selling the debt at less than par value
Reducing the risk level of the project
is the proper discount rate for every project the firm undertakes.
is used to value all of the firm’s existing projects.
is a benchmark discount rate that is adjusted for the riskiness of each project.
is an informational value only and should never be used as a discount rate.
The value of retained earnings is excluded.
There is a tax shield on the dividends paid.
Preferred equity is a separate component of WACC.
Market values should be used in the calculations.
appropriate discount rate for the project is between 11.8% and 12.2%.
expansion should be undertaken as it has a positive net present value.
project will have a lower debt-equity ratio than the firm’s current operations.
project has slightly more risk than the firm’s current operations.