Corporate Finance

Finance is a vast field. If you are looking to crack you next finance interview then checkout our latest interview questions on corporate finance, these questions may play a vital role in the interview.

Q.1 What do you understand by Cash System of Accounting?
Cash System of Accounting records only cash receipts and payments. Cash system of Accounting assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. Cash System of Accounting is used by the organizations that are established for non-profit purpose. This system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization
Q.2 Can you explain the difference between share capital and reserves and surpluses?
Share Capital is defined as that portion of a company's equity that has been obtained by issuing share to a shareholder. Such that the amount of share capital increases as new shares are sold to public in exchange for cash. On the other hand Reserves and Surpluses indicates that portion of the earnings, receipt or other surplus of the organization appropriated by the management for a general or specific purpose other than provisions for depreciation or for a known liability.
Q.3 How can a company manipulate cash flows?
A company can manipulate cash flow in the following ways - 1. Using revenue and expense recognition: In this case the management can either defer or accelerate certain expenses and revenues based on cash vs accrual method of accounting (for example: sales contracts, deferred taxes, bad debt expense, warranty expense, returns). 2. Using depreciation expense: The management can decide on useful life and ending salvage value 3. By capitalizing expenses as oppose to expensing them this affects balance sheet and income statement.
Q.4 In order to assess the health of a company you can choose between looking at 3 years of income statements or 3 years of balance sheets, which of the following would you choose and why?
When we want to assess the health of a company we must look at 3 years of balance sheet data. As it is simpler to derive the income statements from 3 years of Balance Sheet data than going the other way. Also with balance sheet data we can calculate all sorts of ratios and measures indicating the financial health of a company. Using Balance Sheet data will give a clear picture of whether you are using the assets efficiently.
Q.5 Let us suppose your company's weighted-average cost of capital is 12%. It is believed that the company should make a particular investment, but its internal rate of return is only 10%. What logical arguments would you use to convince your senior to make the investment despite its low return?
When we capitalize these costs as opposed to expensing them then the - 1. Net income (1st year) is higher as capitalizing costs only delays expense recognition for future periods. 2. Net income (future years) is lower as overall net income for both capitalizing and expensing is the same. 3. Book Value of equity is higher as book value equity is affected from retained earnings from income statement. 4. Cash flow from operating activities is higher 5.Cash flow from investing activities is lower We must note that certain investments may increase the intangible value of assets of the company. For instance we might have to perform a marketing campaign that might not make any money, but helps to create brand awareness and identity which will help boost sell products in the future. I will convince my senior that future benefits will outweigh current costs because of new expanding markets that haven't developed yet.
Q.6 What is the characteristic of the straight line method of calculating depreciation?
Reduces the value of capital by the same absolute amount each year.
Q.7 What is the interaction with an investor in an annuity?
Pays a lump sum and in return receives regular fixed amounts over a specified time period.
Q.8 What does the weighted average cost of capital consists of?
The weighted average cost of capital consists of the cost of debt, the cost of preferred stock and the cost of equity.
Q.9 What does increased use of debt financing will lead to?
Increased use of debt financing will lead to increased fluctuations in the return on equity and increase in the interest rate on debts.
Q.10 What is Interest rate Risk?
Interest rate Risk is a type of systematic risk, refers to the uncertainty of future market values and of the size of future income, caused by fluctuations in the general level of interest rates.
Q.11 Which method calculates that rate of discount which makes net present value = 0?
The internal rate of return
Q.12 When does NPV and IRR method always yield the same decision?
When a single project is evaluated.
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