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 Illustrate short-term finance measures for an organization
Companies opt for short-term financing to address their current cash requirements which are to be paid within a financial year or 12 months. Short-term finance measures for an organization includes Commercial Papers, Secured Short-term loans, Trade Credit, Unsecured Bank Loan and Bank Over-draft.
Q.2 What is trade credit?
Trade credit refers to credit purchases based on mutual trust, done by the buyer of goods or services and which are paid at a later date.
Q.3 Describe bank overdraft
A bank overdraft is a credit facility from the bank, in which the company has an account. The credit facility is provided for short term on basis of bank's regulations so that the company can withdraw more cash as available in its account for short term needs.
Q.4 Explain unsecured bank loan
Unsecured bank loans are provided by banks without any collateral against it but for short term, usually 12 months.
Q.5 What do you understand by cash flow statement for a company?
The cash flow statement enlists the flow of cash going in or out of the company. It is prepared in Direct or indirect method. In direct method which is usually followed by companies involves starting with adding up all the cash collected from customers then from interests and dividends and finally deducting any cash amount which was paid against interest paid, taxes or to suppliers. Indirect method starts with net income and adding up all the non-cash charges and then adding up the working capital changes.
Q.6 What is Cash Flow from Operations?
Cash Flow from Operations is a part of cash flow statement which refers to all cash being generated by company’s operations or the cash which is spent on the company’s operations.
Q.7 Describe Cash Flow from Investing
Cash Flow from Investing is a part of cash flow statement which refers to all cash flows by the company against investments made like purchase or sale of equipment, property, etc.
Q.8 Explain Cash Flow from Financing
Cash Flow from Financing is a part of cash flow statement which refers to all cash flows realized due to financing activities like bond issuance or closure of debt.
Q.9 What do you understand by EPS in corporate finance?
EPS in corporate finance expands to Earnings per Share of the company and refers to earnings against per-share of the company. It is a good pointer for a company's profitability. It is calculated by reducing amount for preferred dividends from net income and divided the resultant by the number of shares outstanding
Q.10 Under which situation does IRR will be unreliable?
If more than one sign change in the CF stream then IRR will be unreliable
Q.11 Describe Sensitivity Analysis in corporate finance
Sensitivity analysis in corporate finance refers to analyzing % changes in NPV due to change in a single input
Q.12 Explain Scenario Analysis in corporate finance
Scenario Analysis in corporate finance refers to analyzing % changes in NPV due to change in multiple or more than one input
Q.13 Calculate the required rate of return for a stock if the 182-day annualized T bills rate = 9%p.a. with return on market = 15% p.a., and the beta of stock = 1.5
The required rate of return for the stock is 18% p.a.
Q.14 What will be the impact on the debt equity ratio due issuance of bonus shares
The debt equity ratio of the company will improve.
Q.15 What will be the impact on the present value of future amount for an investment which will result in Rs.10,000 in two years and the interest rate suddenly decreases
The present value of future amount for the investment will rise
Q.16 What do you understand by payback period?
It is the period in which a project will start generating the necessary cash flow to cover the initial investment.
Q.17 Compute the IRR having initial outlay of Rs. 50,000/ with 5 yrs life and approx annual cash flow of Rs. 12,500/-
The IRR is 8%
Q.18 Calculate the payback period for a new project costing Rs. 1,00,000/- with annual cash flow of Rs. 20,000 present for 8 years
% years, is the payback period.
Q.19 What will be the discounted payback period for a 5 year project costing Rs. 6,00,000/- having annual cash flow of Rs. 2,00,000/- with cut off rate is 10%
The discounted payback period is 3 yrs 9 months.
Q.20 What adjustment should be done on the discounted rate so that the given present value increases?
The discounted rate should be adjusted downwards.
Q.21 What is major factor in using the debt capital?
A main factor in the debt capital usage is the security of assets.
Q.22 Which bond type is far superior as compared to the ordinary bonds when compared in the sale ability?
Convertible bonds are superior to the ordinary bonds for their sale ability.
Q.23 List valuation method which is based on the Going concern concept
The book value method of valuation is based on the Going concern concept
Q.24 What is the utility of P/E ratio?
The P/E ratio indicates the amount that investors will pay against per unit of company's earnings.
Q.25 How does the P/E ratio is relevant for the investors?
The P/E ratio is very important for the investors as it indicates if the company's shares are underpriced or overpriced
Q.26 A high P/E ratio indicates
A high P/E ratio indicates that the shares of the company are overpriced
Q.27 Calculate the P/E ratio of a company having EPS as Rs. 20 and the share price is Rs. 600/-
The P/E ratio for the company is 30
Q.28 Does increasing EPS is related to increasing the net income
No, increasing EPS does not relates to increasing the net income
Q.29 If the NPV of a project is more than zero, then the profitability index for the project will exceed 1
Yes, the profitability index for the project will exceed 1
Q.30 How does the wealth of shareholders wealth increases
The wealth of shareholders wealth increases with increase in market value of the company whose shares they hold.
Q.31 Net profit is used as the basis for calculation of
Average rate of return uses net profit is used as the basis for calculation
Q.32 Does NPV uses net profit as the basis for calculation
No, NPV does not use net profit as the basis for calculation
Q.33 What is included in the Book value of assets?
The Book value of assets includes the fixed assets, current asset and the intangible asset.
Q.34 How will you value an unlisted company?
An unlisted company is valued by using the net asset method
Q.35 Calculate the P/E ratio for a company having a share price at Rs. 100/- and EPS being Rs. 2/-
The P/E ratio for the company is 50.
Q.36 Does every project have a unique IRR?
No, projects can have same IRR
Q.37 Does IRR does not regards the time value of money
No, IRR considers the time value of money
Q.38 What does a high P/E ratio signify for a company’s future?
A high P/E ratio indicates quick grow of the company in future
Q.39 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.40 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.41 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.42 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.43 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.44 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.45 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.46 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.47 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.48 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.49 Which method calculates that rate of discount which makes net present value = 0?
The internal rate of return
Q.50 When does NPV and IRR method always yield the same decision?
When a single project is evaluated.
Get Govt. Certified Take Test