Most Common Finance Interview Questions

General Finance Interview Tips

There are two main categories of finance interview questions you will face:

1. Behavioral/fit questions

2. Technical questions

#1 Behavioral and fit questions relate more to soft skills such as your ability to work with a team,
leadership. Traits Leadership traits refer to personal qualities that define effective
leaders. Leadership refers to the ability of an individual or an organization to guide individuals,
teams, or organizations toward the fulfillment of goals and objectives. Leadership plays an important
function in management, commitment, creative thinking, and your overall personality type. Being
prepared for these types of questions is critical and the best strategy is to pick 5-7 examples of
specific situations from your resume that you can use as examples of leadership, teamwork, Public
Speaking Weakness. The "public speaking weakness" answer is a great way to get around the
question, "what is your biggest weakness?". If public speaking is not required for the job, then it's a
safe answer because it will not really impact your job performance, and yet it's a very common and
relatable weakness for most people. This guide, hard work, problem-solving, etc. Interview questions
and answer for finance, accounting, investment banking, equity research, commercial banking,
FP&A, more! Free guides and practice to ace your interview.

#2 Technical questions are related to specific accounting .Our Accounting guides and resources are
self-study guides to learn accounting and finance at your own pace. Browse hundreds of guides and
resources. and Finance CFI's Finance Articles are designed as self-study guides to learn important
finance concepts online at your own pace. Browse hundreds of articles! topics. This guide focuses
exclusively on technical finance interview questions.

General best-practices for finance interview questions include:

 Take a couple of seconds to plan your answer and repeat the question back to the
interviewer out loud (you buy some time by repeating part of the question back at the start
of your answer).

 Use a structured approach to answering each question. This typically means having points 1,
2, and 3, for example. Be as organized as possible.

 Demonstrate your line of reasoning (show that you have a logical thought process and can
solve problems, even if you don’t know the exact answer).

Finance Interview Questions (and Answers):

Walk me through the three financial statements.

The balance sheet Balance Sheet The balance sheet is one of the three fundamental financial
statements. These statements are key to both financial modeling and accounting. The balance sheet
displays the company’s total assets, and how these assets are financed, through either debt or
equity. Assets = Liabilities + Equity shows a company’s assets, its liabilities, and shareholders’ equity
(put another way: what it owns, what it owes, and its net worth). The income statement Income
Statement The Income Statement is one of a company's core financial statements that shows their
profit and loss over a period of time. The profit or loss is determined by taking all revenues and
subtracting all expenses from both operating and non-operating activities. This statement is one of
three statements used in both corporate finance (including financial modeling) and accounting.
outlines the company’s revenues Sales Revenue Sales revenue is the income received by a company
from its sales of goods or the provision of services. In accounting, the terms "sales" and "revenue"
can be, and often are, used interchangeably, to mean the same thing. Revenue does not necessarily
mean cash received., expenses, and net income. The cash flow statement Cash Flow StatementA
Cash Flow Statement (officially called the Statement of Cash Flows) contains information on how
much cash a company has generated and used during a given period. It contains 3 sections: cash
from operations, cash from investing and cash from financing. shows cash inflows and outflows from
three areas: operating activities, investing activities, and financing activities.

If I could use only one statement to review the overall health of a company, which statement would I
use and why?

Cash is king. The statement of cash flows Statement of Cash Flows The Statement of Cash Flows (also
referred to as the cash flow statement) is one of the three key financial statements that report the
cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The
statement of cash flows acts as a bridge between the income statement and balance sheet gives a
true picture of how much cash the company is generating. Ironically, it often gets the least
attention. You can probably pick a different answer for this question, but you need to provide a
good justification (e.g. the balance sheet because assets are the true driver of cash flow; or the
income statement because it shows the earning power and profitability of a company on a
smoothed out accrual Accrual In financial accounting or accrual accounting, accruals refer to the
recording of revenues that a company may earn, but has yet to receive, or the expenses that it may
incur on credit, but has yet to pay. In simple terms, it is the adjustment of accumulated debts and
credits. basis).

If it were up to you, what would our company’s budgeting process look like?

This is somewhat subjective. Types of Budgets

There are four common types of budgeting methods that companies use: (1) incremental, (2)
activity-based, (3) value proposition, and (4) zero-based. The is one that has buy-in from all
departments in the company, is realistic yet strives for achievement, has been risk-adjusted to allow
for a margin of error, and is tied to the company’s overall Strategic planning is the art of formulating
business strategies, implementing them, and evaluating their impact based on organizational
objectives. The. In order to achieve this, the budget needs to be an iterative process that includes all
departments. It can be Zero-Based Budgeting Zero-based budgeting (ZBB) is a budgeting technique
that allocates funding based on efficiency and necessity rather than on budget history. Management
starts from scratch and develops a budget that only includes operations and expenses essential to
running the business; there are no expenses that are automatically added to the budget. (starting
from scratch each time) or building off the previous year, but it depends on what type of business
you’re running as to which approach is better. It’s important to have a good budgeting/planning
calendar that everyone can follow.

When should a company consider issuing debt instead of equity?

A company should always optimize its Capital Structure refers to the amount of debt and/or equity
employed by a firm to fund its operations and finance its assets. The structure is typically expressed
as a debt-to-equity or debt-to-capital ratio. Debt and equity capital are used to fund a business’
operations, capital expenditures, acquisitions,. If it has taxable income, then it can benefit from the
tax shield Tax Shield A Tax Shield is an allowable deduction from taxable income that results in a
reduction of taxes owed. The value of these shields depends on the effective tax rate for the
corporation or individual. Common expenses that are deductible include depreciation, amortization,
mortgage payments and interest expense of issuing debt. If the firm has immediately steady cash
flows and is able to make the required interest payments Interest Expense Interest expense arises
out of a company that finances through debt or capital leases. Interest is found in the income
statement, but can also be calculated through the debt schedule. The schedule should outline all the
major pieces of debt a company has on its balance sheet, and calculate interest by multiplying the,
then it may make sense to issue debt if it lowers the company’s weighted average cost of capital
Cost of Capital Cost of capital is the minimum rate of return that a business must earn before
generating value. Before a business can turn a profit, it must generate sufficient income to cover the
cost of the capital it uses to fund its operations..
How do you calculate the WACC?

WACC (stands for Weighted Average Cost of Capital) is calculated by taking the percentage of debt
to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate,
plus the percentage of equity to capital, multiplied by the required return on equity. WACC is a
firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity
and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). This guide will provide an
overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC
calculator.

Which is cheaper, debt or equity?

Debt is cheaper because it is paid before equity and has collateral Collateral is an asset or property
that an individual offers to a lender whenever he wants to acquire a loan. It is used as a way to
obtain a loan which, at the same time, acts as a protection for the lender should the borrower
default in his payments. backing it. Debt ranks ahead of equity on liquidation Net Asset Liquidation
Net asset liquidation or net asset dissolution is the process by which a business sells off its assets
and ceases operations thereafter. Net assets are the excess value of a firm’s assets over its liabilities.
However, the revenue generated by the sale of the net assets in the market might be different from
their recorded book value. of the business. There are pros and cons to financing with debt vs equity
that a business needs to consider. It is not automatically better to use debt financing simply because
it’s cheaper. A good answer to the question may highlight the tradeoffs if there is any follow-up
required. Learn more about the cost of debt Cost of Debt. The cost of debt is the return that a
company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for
valuation analysis. Learn the formula and methods to calculate cost of debt for a company based on
yield to maturity, tax rates, credit ratings, interest rates, coupons, and cost of equity .Cost of Equity
is the rate of return a shareholder requires for investing in a business. The rate of return required is
based on the level of risk associated with the investment, which is measured as the historical
volatility of returns. Learn the cost of equity formula with examples and download the Excel
calculator.

A company has learned that due to a new accounting rule, it can start capitalizing R&D costs instead
of expensing them.

This question has four parts to it:

Part I) What is the impact on the company’s EBITDA or Earnings Before Interest, Tax, Depreciation,
Amortization is a company's profits before any of these net deductions are made. EBITDA focuses on
the operating decisions of a business because it looks at the business’ profitability from core
operations before the impact of capital structure. Formula, examples?
Part II) What is the impact on the company’s Net Income is a key line item, not only in the income
statement, but in all three core financial statements. While it is arrived at through the income
statement, the net profit is also used in both the balance sheet and the cash flow statement.?
Part III) What is the impact on the company’s cash flow (CF) is the increase or decrease in the
amount of money a business, institution, or individual has. In finance, the term is used to describe
the amount of cash (currency) that is generated or consumed in a given time period. There are many
types of CF?
Part IV) What is the impact on the company’s Valuation Methods When valuing a company as a
going concern there are three main valuation methods used: DCF analysis, comparable companies,
and precedent transactions. These methods of valuation are used in investment banking, equity
research, private equity, corporate development, mergers & acquisitions, leveraged buyouts and
finance?

Answer:

Part I) EBITDA or Earnings Before Interest, Tax, Depreciation, Amortization is a company's profits
before any of these net deductions are made. EBITDA focuses on the operating decisions of a
business because it looks at the business’ profitability from core operations before the impact of
capital structure. Formula, examples increases by the exact amount of R&D expense that is
capitalized.
Part II) Net Income is a key line item, not only in the income statement, but in all three core financial
statements. While it is arrived at through the income statement, the net profit is also used in both
the balance sheet and the cash flow statement. increases, and the amount depends on the
depreciation method The most common types of depreciation methods include straight-line, double
declining balance, units of production, and sum of years digits. There are various formulas for
calculating depreciation of an asset. Depreciation expense is used in accounting to allocate the cost
of a tangible asset over its useful life. and tax treatment.
Part III) Cash flow (CF) is the increase or decrease in the amount of money a business, institution, or
individual has. In finance, the term is used to describe the amount of cash (currency) that is
generated or consumed in a given time period. There are many types of CF is almost unimpacted –
however, cash taxes may be different due to changes in depreciation expense, and therefore cash
flow could be slightly different.
Part IV) Valuation When valuing a company as a going concern there are three main valuation
methods used: DCF analysis, comparable companies, and precedent transactions. These methods of
valuation are used in investment banking, equity research, private equity, corporate development,
mergers & acquisitions, leveraged buyouts and finance is essentially constant – except for the cash
taxes impact/timing impact on the net present value (NPV)Net Present Value (NPV)Net Present
Value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an
investment discounted to the present. NPV analysis is a form of intrinsic valuation and is used
extensively across finance and accounting for determining the value of a business, investment
security, of cash flows.

What, in your opinion, makes a good financial model?

It’s important to have strong financial modeling

What is Financial Modeling?

Financial modeling is performed in Excel to forecast a company's financial performance. Overview of

what is financial modeling, how & why to build a model. A 3 statement model links income
statement, balance sheet, and cash flow statement. More advanced types of financial models are
built for valuation, plannnig, and principles. Wherever possible, model assumptions (inputs) should
be in one place and distinctly colored (bank models typically use a blue font for model inputs). Good
Excel models also make it easy for users to understand how inputs are translated into outputs. Good
models also include error checks to ensure the model is working correctly (e.g., the balance sheet
balances, the cash flow calculations are correct, etc.). They contain enough detail, but not too much,
and they have a dashboard Financial Modeling Dashboard that clearly displays the key outputs with
charts and graphs Types of Graphs Top 10 types of graphs for data presentation you must use -
examples, tips, formatting, how to use these different graphs for effective communication and in
presentations. Download the Excel template with bar chart, line chart, pie chart, histogram,
waterfall, scatterplot, combo graph (bar and line), gauge chart. This financial modeling guide covers
Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF
analysis, Excel modeling and much more. Designed to be the best free modeling guide for analysts
by using examples and step by step instructions. Investment banking, FP&A, research.

What happens on the income statement if inventory goes up by $10?

Nothing. This is a trick question – only the Balance Sheet .The balance sheet is one of the three
fundamental financial statements. These statements are key to both financial modeling and
accounting. The balance sheet displays the company’s total assets, and how these assets are
financed, through either debt or equity. Assets = Liabilities + Equity and cash flow statements are
impacted by the purchasing of inventory. Inventory is a current asset account found on the balance
sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has
accumulated. It is often deemed the most illiquid of all current assets - thus, it is excluded from the
numerator in the quick ratio calculation..

What is working capital?

Net Working Capital (NWC) is the difference between a company's current assets (net of cash) and
current liabilities (net of debt) on its balance sheet. It is a measure of a company’s liquidity and its
ability to meet short-term obligations as well as fund operations of the business. The ideal position is
to is typically defined as current assets minus current liabilities. In banking, working capital is
normally defined more narrowly as current assets (excluding cash) less current liabilities (excluding
interest-bearing debt). Sometimes it’s even more narrowly defined as Accounts Receivable
(AR) represents the credit sales of a business, which are not yet fully paid by its customers, a current
asset on the balance sheet. Companies allow their clients to pay at a reasonable, extended period of
time, provided that the terms are agreed upon. plus inventory minus Accounts payable is a liability
incurred when an organization receives goods or services from its suppliers on credit. Accounts
payables are expected to be paid off within a year’s time, or within one operating cycle (whichever is
longer). AP is considered one of the most liquid forms of current liabilities. By knowing all three of
these definitions you can provide a very thorough answer.

What does negative working capital mean?

Negative working capital is common in some industries such as grocery retail and the restaurant
business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but
suppliers often give 30 days (or more) credit. This means that the company receives cash from
customers before it needs the cash to pay suppliers. Negative working capital is a sign of efficiency
in businesses with low inventory and accounts receivable. In other situations, negative working
capital may signal a company is facing financial trouble if it doesn’t have enough cash to pay its
current liabilities.

In the answer to this interview question, it’s important to consider the company’s normal working
capital cycle. Working Capital Cycle for a business is the length of time it takes to convert the total
net working capital (current assets less current liabilities) into cash. Businesses typically try to
manage this cycle by selling inventory quickly, collecting revenue quickly, and paying bills slowly, to
optimize cash flow..

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and depreciated.
Depreciation Expense is used to reduce the value of plant, property, and equipment to match its use,
and wear and tear, over time. Depreciation expense is used to better reflect the expense and value
of a long-term asset as it relates to the revenue it generates. according to the company’s accounting
policies.

How do you record PP&E and why is this important?

There are essentially four areas to consider when accounting for Property, Plant & Equipment PP&E
(Property, Plant, and Equipment) is one of the core non-current assets found on the balance sheet.
PP&E is impacted by Capex, Depreciation, and Acquisitions/Dispositions of fixed assets. These assets
play a key part in the financial planning and analysis of a company’s operations and future
expenditures (PP&E) on the balance sheet: (I) initial purchase, (II) depreciation, (III) additions Capital
expenditures refer to funds that are used by a company for the purchase, improvement, or
maintenance of long-term assets to improve the efficiency or capacity of the company. Long-term
assets are usually physical and have a useful life of more than one accounting period.), and (IV)
dispositions. In addition to these four, you may also have to consider revaluation. For many
businesses, PP&E is the main capital asset that generates revenue, profitability, and cash flow.
How does an inventory write-down affect the three financial statements?

This is a classic finance interview question. On the balance sheet, the asset account of inventory is
reduced by the amount of the write-down, and so is shareholders’ equity. Stockholders Equity (also
known as Shareholders Equity) is an account on a company's balance sheet that consists of share
capital plus retained earnings. It also represents the residual value of assets minus liabilities. By
rearranging the original accounting equation, we get Stockholders Equity = Assets – Liabilities The
income statement is hit with an expense in either cost of goods sold (COGS) or a separate line item
for the amount of the write-down, reducing net income. On the cash flow statement, the write-
down is added back to cash from operating activities Operating Cash Flow (OCF) is the amount of
cash generated by the regular operating activities of a business in a specific time period. The
operating cash flow formula is net income (form the bottom of the income statement), plus any non-
cash items, plus adjustments for changes in working capital, as it’s a non-cash expense Non cash
expenses appear on an income statement because accounting principles require them to be
recorded despite not actually being paid for with cash. The most common example of a non cash
expense is depreciation, where the cost of an asset is spread out over time (but must not be double
counted in the changes of non-cash working capital .Inventory write down is a process that is used to
show the reduction of an inventory’s value, when the inventory’s market value drops below its book
value. Inventory write-down should be treated as an expense, which will reduce net income. The
write-down also reduces the owner’s equity..

Why would two companies merge? What major factors drive mergers and acquisitions?

There are many reasons companies go through the M&A process.M&A Synergies occur when the
value of a merged company is higher than the sum of the two individual companies. 10 ways to
estimate operational synergies in M&A deals are: 1) analyze headcount, 2) look at ways to
consolidate vendors, 3) evaluate any head office or rent savings 4) estimate the value saved by
sharing (cost savings), enter new markets, gain new technology, eliminate a competitor, and
because it’s “accretive” to financial metrics. Dilution Analysis is a simple test used to determine
whether the proposed merger or acquisition will increase or decrease post-transaction EPS.

[Note: Social reasons are important too, but you have to be careful about mentioning them,
depending on who you’re interviewing with. These include: ego, empire building, and to justify
higher executive compensation.]

If you were CFO of our company, what would keep you up at night?

This is one of the great finance interview questions. Step back and give a high-level overview of the
company’s current financial position, or the position of companies in that industry in
general. Highlight something on each of the three financial statements.

 Income statement: growth rates, margins, and profitability Profitability ratios are financial
metrics used by analysts and investors to measure and evaluate the ability of a company to
generate income (profit) relative to revenue, balance sheet assets, operating costs, and
shareholders' equity during a specific period of time. They show how well a company utilizes
its assets.
  Balance sheet: liquidity, capital assets, credit metrics, liquidity ratios, leverage Leverage In
finance, leverage is a strategy that companies use to increase assets, cash flows, and returns,
though it can also magnify losses. There are two main types of leverage: financial and
operating. To increase financial leverage, a firm may borrow capital through issuing fixed-
income securities or by borrowing money directly from a lender. Operating leverage can,
return on asset (ROA Return on Assets & ROA Formula Return on assets (ROA), a form of
return on investment, measures the profitability of a business in relation to its total assets.
The ROA formula is used to indicate how well a company is performing by comparing the
profit it's generating to the capital it's invested in assets. The higher the return, the more),
and return on equity (ROE Return on Equity (ROE)Return on Equity (ROE) is a measure of a
company’s profitability that takes a company’s annual return (net income) divided by the
value of its total shareholders' equity (i.e. 12%). ROE combines the income statement and
the balance sheet as the net income or profit is compared to the shareholders’ equity.).

 Cash flow statement: short-term and long-term cash flow profile, any need to raise money
or return capital to shareholders.

 Non-financial statement: company culture, government regulation, conditions in the Capital

Markets In capital markets, equity-backed securities and long-term debt are both bought
and sold. Major financial regulators, such as the U.S. Securities and Exchange Commission
(SEC) are responsible for overseeing the capital markets. The regulators ensure that the
investments made by savers are directed toward major.

Analyst/Associate Investment Banking Interview Questions

This is based on a real form used at bulge bracket banks for their investment banking
interview questions in the hiring process.

Total Interview time: approx. 45 minutes.

Checklist for Interviewer:

 Welcome, introduce yourself & your position and thank the interviewee for their time
& interest.
 Clarify the time for the interview and explain that you may interrupt if necessary, etc.
 Provide an outline of what they should expect during the interview. Highlight areas to
be covered.
 Mention you may take notes & give candidate permission for “thinking time”.

Bank/Industry Overview (0-5 minutes):

Warm up by talking with the candidate about how great our bank is and brag about all our big
transactions.

Employment History / Resume (5 minutes):

Opportunity for the interviewer to question candidate about the work experience that is noted
on their resume.

e.g., “Please walk me through your resume in 5 minutes or less.”

Problem Solving Questions (5 minutes):

This section of the investment banking interview questions provides insight into the candidate’s
critical thinking skills.

Question #1
“How many hairstylists or barbers do you estimate there are there in this city? Explain your
logic/assumptions.”

Answer: Explain the logic based on the population of the city, average number of cuts people
have per year, number of cuts one barber can do per year, and thus how many that implies
there must be. (e.g., 2 million people, each get an average of 4 cuts per year, which results in
8 million cuts per year. Each barber works an average of 8 hours per day, times five days per
week, times fifty weeks per year equals 2,000 hours of cutting time per year. Each haircut
takes 1 hour. Thus, 8 million haircuts, equal 8 million hours, divided by 2,000 hours per
barber requires 4,000 barbers in the city.)

Question #2
“In the middle of a pond is a single lily pad; the lily pad doubles in size every day and the
pond is completely covered on the last day of the month (30 days). How long does it take for
the pond to be half covered?”

Answer: 29 days, because if it doubles in size each day it also halves each day. Thus at 29
days is half full in order to be completely full in 30 days.

Question #3
“A windowless room contains three identical light bulbs. Each light is connected to one of
three switches outside of the room. Each bulb is switched off at present. You are outside the
room, and the door is closed. You have one, and only one, opportunity to flip any of the
external switches. After this, you can go into the room and look at the lights, but you may
not touch the switches again. How can you tell which switch goes to which light?”
Answer: Switch on switches 1 & 2, wait a moment and switch off number 2. Enter the room.
Whichever bulb is on is wired to switch 1, whichever is off and hot is wired to switch number
2, and the third is wired to switch 3.

Technical Knowledge Questions (15 – 20 minutes):

This section of the investment banking interview questions provides insight into the candidate’s
technical knowledge of finance, accounting, valuation, and financial modeling.

Question #1
“Please walk me through the three financial statements.”

Answer:
The balance sheet is a snapshot at a point in time. On the top half you have the company’s
Assets and on the bottom half its Liabilities and Shareholders’ Equity (or Net Worth). The
assets and liabilities are typically listed in order of liquidity and separated between current
and non-current.
The income statement covers a period of time, such as a quarter or year. It illustrates the
profitability of the company from an accounting (accrual and matching) perspective. It starts
with the revenue line and after deducting expenses derives net income.
The cash flow statement has three sections: cash from operations, cash used in investing, and
cash from financing. It can be calculated using the direct approach or the reconciliation
approach. It “undoes” all of the accounting principles and shows the cash flows of the
business.

More info: CFI courses on financial statements

Question #2
“How would you value a company?”

Answer:
There are three common valuation methods used in IB:
1) The multiples approach (also called “comps”), in which you multiply the earnings of a
company by the P/E ratio of the industry in which it competes (and other ratios).
2) Transactions approach (also called “precedents”), where you compare the company to
other companies that have recently sold/been acquired in that industry.
3) The Discounted Cash Flow approach, in which you discount the values of future cash flows
back to the present.

Question #3
“You have the opportunity to purchase a series of future cash flows that are $200 in
perpetuity. The total cost of capital is 10%, how much are you prepared to pay today?”

Answer: [Note: Value = Cash Flow / WACC].

$2,000, because: $200 / 10% = $2,000 (i.e. 10x)
Question #4
“When should a company consider issuing debt instead of equity?”

Answer: There are many reasons to issue debt instead of equity: (1) It is a less risky and
cheaper source of financing compared to issuing equity; (2) If the company has taxable
income, issuing debt provides the benefit of tax shields; (3) If the firm has immediately
steady cash flows and is able to make their interest payments; (4) higher financial leverage
helps maximize the return on invested capital; (5) when issuing debt yields a lower weighted
cost of capital (WACC) than issuing equity.

Question #5
“List the main components of WACC (i.e. Weighted Average Cost of Capital).”

Answer: Debt, Equity, Tax, Beta. See more on WACC here.

Question #6
“How do you calculate the WACC?”

Answer: This is calculated by taking the proportion of debt to total capital, times the debt
rate, times one minus the effective tax rate, plus the proportion of equity to capital, times the
required return on equity.

Question #7
“Which is cheaper debt or equity? Why?”

Answer: Debt because: It is paid before equity / may have security. Ranks ahead on
liquidation

Question #8
“What is the average Price/Earnings PE ratio for the S&P 500 Index?”

Answer: About 15-20 times, the PE ratio varies by industry and period in the cycle.

Question #9
“A company has learned that due to a new accounting rule, it can start capitalizing R&D
costs instead of expensing them.“

Part a) What is the impact on EBITDA?

Part b) What is the impact on Net Income?
Part c) What is the impact on cash flow?
Part d) What is the impact on valuation?

Answer:
Part a) EBITDA increases by amount capitalized;
Part b) Net Income increases, the amount depends on depreciation and tax treatment;
Part c) Cash flow is almost constant – however, cash taxes may be different due to
depreciation rate
Part d) Valuation is constant – except for cash taxes impact/timing on NPV
Question #10
“What happens to Earnings Per Share (EPS) if a company decides to issue debt to buy back
shares?”

Answer:

 Issuance of debt increases after-tax interest expense which lowers EPS.

 Repurchase of shares reduces the number of shares outstanding which increases EPS.
 Whether it increases or decreases EPS depends on the net impact of the above two
points.

Question #11
“What makes a good financial model?”

Answer:
Building a financial model takes a lot of practice to be really good at it. The best financial
models are clearly laid out, identify all the key drivers of the business, are accurate and
precise yet not overly complicated, can handle dynamic scenarios, and have built-in
sensitivity analysis and error checking.

Behavioral Questions (10 minutes):

This section of the investment banking interview questions focuses on the candidate’s soft skills
and personality fit in the firm.

Pick three or four of the following questions:

“Why do you want to work in investment banking? Or at this bank?” [this question is so
common we made a separate page with a full answer to it here].

“How do you deal with risk in your personal life?”

“Give a time where you had multiple options and explain how you arrived at your decision.”

“If you could live in any city in the world, and money was not an issue, where would you live
and why?”

“What is one of your biggest weaknesses and how do you deal with it?”

“What is one thing you believe to be true, but that most people would disagree with you
on?”
“Which is more important in business – IQ or EQ?”

“What does leadership mean to you? Can you provide some examples of good and bad
leadership?”

“Are you smart?”

Answers: Grade the interviewee based on how well they expand on their ideas. There are no
right or wrong answers. The key is to determine the following: do they demonstrate
maturity, are they comfortable with ambiguity, can they work as a team, do they have
emotional intelligence, would they fit well in our culture, etc.

Accounting interview questions guide

If cash collected from customers is not yet recorded as revenue, what happens to it?

It usually goes into “Deferred Revenue” on the balance sheet as a liability if the revenue has
not been earned yet.

What’s the difference between deferred revenue and accounts receivable?

Deferred revenue represents cash received from customers for services or goods not yet
provided. Accounts receivable represents cash owing from customers for goods/services
already provided.

When do you capitalize rather than expense a purchase?

If the purchase will be used in the business for more than one year, it is capitalized and
depreciated.

Under what circumstances does goodwill increase?

When a company buys another business for more than the fair value of its tangible and
intangible assets, goodwill is created.

How do you record PPE and why is this important?

There are essentially four areas to consider when accounting for PP&E on the balance sheet:
initial purchase, depreciation, additions (capital expenditures), and dispositions. In addition
to these four, you may also have to consider revaluation. For many businesses, PP&E is the
main capital asset that generates revenue, profitability, and cash flow.
How does an inventory write-down affect the three statements?

On the balance sheet, the asset account of inventory is reduced by the amount of the write-
down, and so is shareholders’ equity. The income statement is hit with an expense in either
COGS or a separate line item for the amount of the write-down, reducing net income. On
the cash flow statement, the write-down is added back to CFO as it’s a non-cash expense but
must not be double-counted in the changes of non-cash working capital.

What are three examples of common budgeting methods?

Examples of common budgeting methods include zero-based budgeting, incremental

budgeting, and value-based budgeting. Learn more about the various types, in CFI’s
budgeting and forecasting course.

Please explain the Revenue Recognition and Matching principles

The revenue recognition principle dictates the process and timing by which revenue is
recorded and recognized as an item in the financial statements based on certain criteria (e.g.,
transfer of ownership). The matching principle dictates that the timing of expenses be
matched to the period in which they are incurred, as opposed to when they are actually paid.

If you were CFO of our company, what would keep you up at night?

Step back and give a high-level overview of the company’s current financial position, or
companies in that industry in general. Highlight something on each of the three
statements. Income statement: growth, margins, profitability. Balance sheet: liquidity, capital
assets, credit metrics, liquidity ratios. Cash flow statement: short-term and long-term cash
flow profile, any need to raise money or return capital to shareholders.

What are the Most Common Credit Analyst Interview Questions?

What is a reasonable Debt/Capital ratio?

It completely depends on the industry. Some industries can sustain very low debt to capital
ratios, typically cyclical industries like commodities or early-stage companies like startups.
These might have a 0-20% debt to capital ratio. Other industries such as banking and
insurance can have up to 90% debt to capital ratios.

Many analysts also use the debt to equity ratio.

How would you decide if you can lend $100 million to a company?

Review all three financial statements for the past five years and perform a financial
analysis. Determine what assets can be used as collateral, how much cash flow there is, and
what the trends of the business are. Then look at metrics such as debt to capital, debt to
EBITDA, and interest coverage. If all of these metrics are within the bank’s parameters, then
it may be possible to lend the money, but the decision will depend on qualitative factors as
well.

What do the credit rating agencies do?

Rating agencies are supposed to help provide trust and confidence in financial markets by
rating borrowers on their creditworthiness of outstanding debt obligations. They can,
however, run into conflicts of interest and should not be blindly relied on for assessing a
borrower’s risk profile.

What is the current LIBOR rate?

Quote the current LIBOR rate and talk about the importance of LIBOR as it relates to spreads
and pricing of other credit instruments.

What is Free Cash Flow?

Free cash flow is simply equal to cash from operations minus capital expenditures (levered
free cash flow). Unlevered free cash flow is used in financial modeling.

What methods do you use to compare the liquidity, profitability, and credit history of a
company?

The Current Ratio, Return on Equity (ROE), Return on Assets (ROA), Debt/Capital,
Debt/Equity, and Interest Coverage ratios.

What is the interest coverage ratio?

This is commonly calculated as EBIT divided by interest expense. It is also referred to as the
“times interest earned” ratio. The interest coverage ratio indicates how easily a company can
“cover” it’s interest expense with operating earnings before interest and taxes are subtracted.
What are the most common credit metrics banks look at?

The most common credit metrics include debt/equity, debt/capital, debt/EBITDA, interest
coverage, fixed charge coverage, and tangible net worth.

How do you value a company?

The most common methods are DCF valuation / financial modeling and relative valuation
methods using comparable public companies (“Comps”) and precedent transactions
(“Precedents”).

What do you use for the discount rate in a DCF valuation?

If you are forecasting free cash flows to the firm, you normally use the Weighted Average
Cost of Capital (WACC) as the discount rate. If you are forecasting free cash flows to equity,
you use the cost of equity.

How do you calculate the terminal value in a DCF valuation?

Terminal value is calculated either using an exit multiple or the Gordon Growth (growing
perpetuity) method.

What type of person makes a good credit analyst?

Someone who’s detail-oriented, good with numbers, enjoys research and analysis, likes
working independently, and is good at financial modeling and financial analysis, with strong
Excel skills.

How do you manage risk in your personal life?

This is where you get to show some personality and demonstrate your ability to think about
risk, plus be a good communicator. There is no right or wrong answer to this question, but
you could say something about how you evaluate tradeoffs (upside vs downside), how you
put hedges in place to reduce losses, purchase insurance, or you can use a wide range of
other examples.
common economics interview questions

List of economics interview questions

1. What are the correlations among these four asset classes: gold, oil, U.S. 10-year
treasuries, and the S&P?
2. Explain quantitative easing.
3. Tell me about the shape of the yield curve.
4. If the U.S. defaults on it’s debt, explain to me what will happen in all the major
markets (stocks, bonds, commodities, FX, etc.) and why.
5. Explain the Yield Curve and its significance.
6. Explain the difference between a regular good and a Veblen good?
7. What economic indicators are considered by the Federal Reserve when making
interest rate decisions?
8. What is your outlook on the US dollar?
9. Please explain your take on the current macroeconomic situation in
China/BRIIC/USA?
10. How do you value a currency?
11. How would you calculate Value at Risk (VaR)?
12. What’s wrong with VaR as a measurement of risk?
13. What does it mean for risk when the yield curve is inverted?
14. How would you hedge against a particular equity/bond under current market
conditions?
15. When can hedging an options position mean that you take on more risk?
16. What are the risks inherent in an interest rate swap?
17. How is inflation adjusted for in trend analysis to make different years comparable?
18. Explain income demand elasticity to me.
19. What is the multiplier effect and how is it related to the GDP of a country?
20. Please explain the difference between causation and correlation.
21. What is an example of a perfectly inelastic good, and why is it such?
22. Explain the difference between liquidity risk and maturity risk.
23. Explain the difference between the nominal risk-free rate and the real risk-free rate.
24. What is a reasonable Debt/Capital ratio?

It completely depends on the industry. Some industries can sustain very low debt to
capital ratios, typically cyclical industries like commodities or early-stage companies
like startups. These might have a 0-20% debt to capital ratio. Other industries such
as banking and insurance can have up to 90% debt to capital ratios.

25. How would you decide if you can lend $100 million to a company?

Review all three financial statements for the past five years and perform a financial
analysis. Determine what assets can be used as collateral, how much cash flow there
is, and what the trends of the business are. Then look at metrics such as debt to
capital, debt to EBITDA, and interest coverage. If all of these metrics are within the
 bank’s parameters, then it may be possible to lend the money, but the decision will
depend on qualitative factors as well.

26. What do the credit rating agencies do?

Rating agencies are supposed to help provide trust and confidence in financial
markets by rating borrowers on their creditworthiness of outstanding debt
obligations. They can, however, run into conflicts of interest and should not be
blindly relied on for assessing a borrower’s risk profile.

27. What is the current LIBOR rate?

Quote the current LIBOR rate and talk about the importance of LIBOR as it relates to
spreads and pricing of other credit instruments.

28. What is Free Cash Flow?

Free cash flow is simply equal to cash from operations minus capital expenditures
(levered free cash flow). Unlevered free cash flow is used in financial modeling.

29. What methods do you use to compare the liquidity, profitability, and credit history of
a company?

The Current Ratio, Return on Equity (ROE), Return on Assets (ROA), Debt/Capital,
Debt/Equity, and Interest Coverage ratios.

30. What is the interest coverage ratio?

This is commonly calculated as EBIT divided by interest expense. It is also referred to

as the “times interest earned” ratio. The interest coverage ratio indicates how easily a
company can “cover” it’s interest expense with operating earnings before interest and
taxes are subtracted.

31. What are the most common credit metrics banks look at?

The most common credit metrics include debt/equity, debt/capital, debt/EBITDA, interest
coverage, fixed charge coverage, and tangible net worth.

32. How do you value a company?

The most common methods are DCF valuation / financial modeling and relative
valuation methods using comparable public companies (“Comps”) and precedent
transactions (“Precedents”).
33. What do you use for the discount rate in a DCF valuation?

If you are forecasting free cash flows to the firm, you normally use the Weighted
Average Cost of Capital (WACC) as the discount rate. If you are forecasting free
cash flows to equity, you use the cost of equity.

34. How do you calculate the terminal value in a DCF valuation?

Terminal value is calculated either using an exit multiple or the Gordon Growth (growing
perpetuity) method.

35. What type of person makes a good credit analyst?

Someone who’s detail-oriented, good with numbers, enjoys research and analysis,
likes working independently, and is good at financial modeling and financial analysis,
with strong Excel skills.

36. How do you manage risk in your personal life?

This is where you get to show some personality and demonstrate your ability to
think about risk, plus be a good communicator. There is no right or wrong
answer to this question, but you could say something about how you evaluate
tradeoffs (upside vs downside), how you put hedges in place to reduce losses,
purchase insurance, or you can use a wide range of other examples.