Dossier The Finance Club 2020-21 PDF

The Finance Club | Indian Institute of Management Kashipur
Technical Guide to Finance Interviews, 2020-21
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Disclaimer
The data contained herein has been collated from various sources including the internal research data of The Finance Club, IIM Kashipur.
The questions contained in this document are only indicative and is meant to provide the necessary information for placement interviews
in finance domain. The questions are non-exhaustive and the reader is advised to exercise caution on depending solely on this document.
All the sources have been cited in the reference page at the end of the document.
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disciplinary action as deemed fit by the Student Council and/or Placement Committee of IIM Kashipur.
For any clarification on contents of this document you may contact The Finance Club IIM Kashipur.
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Accounting & Financial Reporting
Financial Analysis
Corporate Finance
General Finance Questions
AGENDA Investments
Financial Glossary
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Accounting & Financial

Reporting
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What are the three main financial statements?

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows
The three main financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows.
The Income Statement shows a company’s revenues, costs, and expenses, which together yield net income. The
Balance Sheet shows a company’s assets, liabilities, and equity. The Cash Flow Statement starts with net income from
the Income Statement; then it shows adjustments for non-cash expenses, non-expense purchases such as capital
expenditures, changes in working capital, or debt repayment and issuance to calculate the company’s ending cash
balance.
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What are the three components of the Statement of Cash Flows?

The three components of the Cash Flows Statement are Cash from Operations, Cash from Investing, and Cash from
Financing.
Cash from Operations – Cash generated or lost through normal operations, sales, and changes in working capital
(more detail on working capital below).
Cash from Investing – Cash generated or spent on investing activities; may include, for example, capitalexpenditures
(use of cash) or asset sales (source of cash). This section will also show any investments in the financial markets and
operating subsidiaries. Note: This section can explain a large negative cash flow during the reporting period, which
isn’t necessarily a bad thing if it is due a large capital expenditure in preparation for future growth.
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Cash from Financing – Cash generated or spent on financing the business; may include proceeds from debt or equity
issuance (source of cash) or cost of debt or equity repurchase (use of cash).
Walk me through the major line items of an Income Statement.

The first line of the Income Statement represents revenues or sales. From that you subtract the cost of goods sold,
which leaves gross margin. Subtracting operating expenses from gross margin gives you operating income. From
operating income, you subtract interest expense and any other expenses (or add other income), such as tax payments
or interest earnings, and what’s left is net income.
Income statements: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative Expenses); Operating
Income; Income tax, interest.
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What is the difference between the Income Statement and the Statement of Cash Flows?
The Income Statement is a record of Revenues and Expenses while the Statement of Cash Flows records the actual
cash that has either come into or left the company.
The Statement of Cash Flows has the following categories: Operating Cash Flows, Investing Cash Flows, and Financing
Cash Flows.
Interestingly, a company can be profitable as shown in the Income Statement, but still go bankrupt if it doesn’t have
the cash flow to meet interest payments.
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What is the link between the Balance Sheet and the Income Statement?
The main link between the two statements is that profits generated in the Income Statement gets added to
shareholder’s equity on the Balance Sheet as Retained Earnings. Also, debt on the Balance Sheet is used to calculate
interest expense in the Income Statement.
What is the link between the Balance Sheet and the Statement of Cash Flows?
The Statement of Cash Flows starts with the beginning cash balance, which comes from the Balance Sheet. Also,
Cash from Operations is derived using the changes in Balance Sheet accounts (such as Accounts Payable, Accounts
Receivable, etc.). The net increase in cash flow for the prior year goes back onto the next year’s BalanceSheet.
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What is EBITDA?
A proxy for cash flow, EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. What is net debt?
Net debt is a company’s total debt minus the cash it has on the balance sheet. Net debt assumes that a company pays
off any debt it can with excess cash on the balance sheet.
How could a company have positive EBITDA and still go bankrupt?

Bankruptcy occurs when a company can’t make its interest or debt payments. Since EBITDA is Earnings BEFORE
Interest, if a required interest payment exceeds a company’s EBITDA, then if they have insufficient cash on hand, they
would soon default on their debt and could eventually need bankruptcy protection.
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If you knew a company’s net income. How would you figure out its “free cash flow”?
Start with the company’s Net Income. Then add back Depreciation and Amortization. Subtract the company’s Capital
Expenditures (called “Capex” for short, this is how much money the company invests each year in plant and
equipment). The number you get is the company’s freecash flow:
Free Cash Flow (FCF) = Net Income + Depreciation and Amortization - Capital Expenditures - Increase (or +
decrease) in net working capital
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What are the major line items on a Cash Flow statement?

First the Beginning Cash Balance, then Cash from Operations, then Cash from Investing Activities, then Cash from
Financing Activities, and finally the Ending Cash Balance.
What happens to each of the three primary financial statements when you change a) gross margin b) capital
expenditures c) any other change?
Gross margin is gross profit/sales, or the extent to which sales of sold inventory exceeds costs. Hence, if
a. Gross margin was to decrease, then gross profit decreases relative to sales. Thus, for the Income Statement, you
would probably pay lower taxes, but if nothing else changed, you would likely have lower net income. The cash
flow statement would be affected in the top line with less cash likely coming in. Hence, if everything else
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remained the same, you would likely have less cash. Going to the Balance Sheet, you would not only have less
cash, but to balance that effect, you would have lower shareholder’s equity.
b. If capital expenditure were to say, decrease, then first, the level of capital expenditures would decrease on the
Statement of Cash Flows. This would increase the level of cash on the balance sheet, but decrease the level of
property, plant and equipment, so total assets stay the same. On the income statement, the depreciation
expense would be lower in subsequent years, so net income would be higher, which would increase cash and
shareholder’s equity in the future.
c. Just be sure you understand the interplay between the three sheets. Remember that changing one sheet has
ramifications on all the other statements both today and in the future.
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What is the difference between LIFO and FIFO?

LIFO and FIFO are different methods of dealing with inventory and COGSin a company’s accounting policy. With LIFO,
the last inventory produced or purchased will be the first to be recognized when goods are sold. With FIFO, the first
inventory produced or purchased will be the first recognized when goods are sold.
What’s the difference between cash-based accounting and accrual accounting?

With cash-based accounting, a company won’t recognize expenses or revenues until the cash is actually disbursed or
collected. With accrual accounting, a company will recognize expenses and revenues when it has entered into a
transaction or agreement that will require it to pay or be paid, even if cash won’t change hands until sometime in the
future. Most companies use accrual accounting since credit cards are so prevalent.
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If you could use only one financial statement to evaluate the financial state of a company, which would you
choose?
I would want to see the Cash Flow Statement so I could see the actual liquidity position of the business and how much
cash it is using and generating. The Income Statement can be misleading due to any number of non-cash expenses
that may not truly be affecting the overall business. And the Balance Sheet alone just shows a snapshot of the
Company at one point in time, without showing how operations are actually performing. But whether a company has
a healthy cash balance and generates significant cash flow indicates whether it is probably financially stable, and this
is what the CF Statement would show.
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When would a company collect cash from a customer and not show it as revenue? If it isn’t revenue, what is it?
This typically occurs when a company is paid in advance for future delivery of a good or service, such as a magazine
subscription. If a customer pays for delivery of 12 months of magazines in advance, cash from that purchase goes
onto the Balance Sheet as cash, but also increases deferred revenue, a liability. As each issue is delivered to the
customer over the course of the year, the deferred revenue line item will go down, reducing the company’s liability,
while a portion of the subscription payment will be recorded as revenue.
How would a $10 increase in depreciation expense affect the each of the three financial statements?
Let’s start with the Income Statement. The$10 increase in depreciation will be an expense and will reduce net income
by $10 times (1–the tax rate). Assuming a 40% tax rate, this will mean a reduction in net income of 60% or $6. So $6
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flows to cash from operations, where net income will be reduced by $6 but depreciation will increase by $10,
resulting in an increase of ending cash by $4. Cash then flows onto the Balance Sheet where it increases by $4, PP&E
decreases by $10, and retained earnings decreases by $6, keeping everything in balance.
What could a company do with excess cash on its Balance Sheet?

Although it seems like having a lot of cash on hand might be a good thing, especially in a recession, it really isn’t,
because there is an opportunity cost to holding cash. A company should have enough cash to protect itself from
bankruptcy in a downturn, but any excess cash should be put to work. The company could pay a dividend to its equity
holders or bonuses to employees, although a growing company will tend to reinvest rather than pay out cash. It can
reinvest its cash in plants, equipment, personnel, or marketing; it can pay off debt, repurchase equity, or buy out a
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competitor, supplier, or distributor. If nothing else, that cash can earn a little something invested in CDs until it can
be put to better use.
What is goodwill and how does it affect net income?

Goodwill is an intangible asset included on a company’s Balance Sheet. Goodwill may include things like intellectual
property rights, brand name, or customer relations. Goodwill is acquired when purchasing a firm if the acquirer pays
more than the book value of its assets. When something occurs to diminish the value of the intangible assets, goodwill
must be “written down” in a process much like that for depreciation. Goodwill is subtracted as a non-cash expense
and therefore reduces net income.
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Financial Analysis
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How do you calculate a company’s Days Sales Outstanding?

Average Accounts Receivable/ Sales x 365 days
Note: The average accounts receivable for any period can be approximated by: (Ending accounts receivable +
beginning accounts receivable) ÷ 2
How do you calculate a company’s Current Ratio?

Current assets (cash, accounts receivable, etc) / Current liabilities (accounts payable and other shortterm liabilities)
A high current ratio indicates that a company has enough cash (and assets they can quickly turn into cash, like
accounts receivable) to cover its immediate payment requirements on liabilities.
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Gotham Energy just released second quarter financial results. Looking at its balance sheet you calculate that it’s
Current Ratio went from 1.5 to 1.2. Does this make you more or less likely to buy the stock?
Less likely. This means that the company is less able to cover its immediate liabilities with cash on hand and other
current assets than it was last quarter.
What is Inventory Turnover?

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a period.
The company can then divide the days in the period by the inventory turnover formula to calculate the days it takes
to sell the inventory on hand. It is calculated as sales divided by average inventory.
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Could a company have a negative book Equity Value?

Yes, a company could have a negative book Equity Value if the owners are taking out large cash dividends or if the
company has been operating for a long time at a net loss, both of which reduce shareholders’ equity.
What is the difference between public Equity Value and book value of equity?
Public Equity Value is the market value of a company’s equity; while the book value is just an accounting number. A
company can have a negative book value of equity if it has been taking large cash dividends, or running at a net loss;
but it can never have a negative public Equity Value, because it cannot have negative shares or a negative stock price.
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What is operating leverage?

Operating leverage is the percentage of costs that are fixed versus variable. A company whose costs are mostly fixed
has a high level of operating leverage.
If a company has a high level of operating leverage, it means that much of any increase in revenue will fall straight to
the bottom line in the form of profit, because the incremental cost of producing another unit is so low.
Operating leverage is the relationship between a company’s fixed and variable costs. A companywith more fixed
costs has a higher level of operating leverage.
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What is Return on Equity (ROE)?

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on
equity measures a corporation's profitability by revealing how much profit a company generates with the money
shareholders have invested.
ROE is expressed as a percentage and calculated as:

Return on Equity (ROE) = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stockholders but after dividends to preferred
stock.) Shareholder's equity does not include preferred shares.
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What is Earnings Per Share (EPS)?

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock.
Earnings per share serves as an indicator of a company's profitability.
EPS is calculated as:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares
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Corporate Finance
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What is the formula for the Capital Asset Pricing Model (CAPM)?
The Capital Asset Pricing Model is used to calculate the expected return on an investment. Beta for a company is a
measure of the relative volatility of the given investment with respect to the market, i.e., if Beta is 1, the returns on
the investment (stock/bond/portfolio) vary identically with the market’s returns. Here “the market” refers to a well-
diversified index such as the S&P 500.
The formula for CAPM is as follows:

reL = rf + ßL(rm - rf )
Here: rf = Risk-free rate = the Treasury bond rate for the period for which the projections are being considered;
L
rm = Market return; rm - rf = Excess market return; ßL = Leveraged Beta; re = Discount rate for (leveraged) equity
(calculated using the CAPM)
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Describe a typical company's capital structure.

A company's capital structure is just what it sounds like: the structure of the capital that makes up the firm, or its
debts and equity.
Capital structure includes permanent, long-term financing of a company, including long-term debt, preferred stock
and common stock, and retained earnings.
The statement of a company's capital structure reflects the order in which contributors to the capital structure are
paid back, and the order in which they have claims on company's assets should it liquidate.
Debt has first priority, then preferred stockholders, then common stockholders. Anything left over is put into the
retained earnings account.
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What is Beta?
Beta is the value that represents a stock’s volatility with respect to overall marketvolatility.
What is an Initial Public Offering (IPO)?

IPO is the acronym for Initial Public Offering. It is the first time a privately-held company sells shares of stock to the
public market. Usually a company goes public to raise capital for growing the business or to allow the original owners
and investors to cash out some of their investment.
What is a primary market and what is a secondary market?

The primary market is the market where a new stock or bond is sold the first time it comes to market. The secondary
market is where the security will trade after its initial public offering (BSE, NSE, Nasdaq).
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What is the market risk premium?

The market risk premium is the excess return that investors require for choosing to purchase stocks over “riskfree”
securities. It is calculated as the average return on the market (normally the S&P 500, typically around 1012%) minus
the risk free rate (current yield on a 10-year Treasury).
How can a company raise its stock price?

Any positive news about the company can potentially raise the stock price. If the company repurchases stock, it
lowers the shares outstanding and raises the EPS, which would raise the stock price. A repurchase is also seen as a
positive signal in the market. A company could announce operational efficiencies or other cost-cuts, or a change to
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its organizational structure such as consolidations. It could announce an accretive merger or acquisition that would
increase earnings per share. Any of these occurrences would most likely raise the company’s stockprice.
What is correlation?
Correlation is the way that two investments move in relation to one another. If two investments have a strong positive
correlation, they will have a correlation near 1 and when one goes up or down, the other will do the same. When you
have two with a strong negative correlation, they will have a correlation near -1 and when one investment moves up
in value, the other should move down.
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What is diversification?
Diversification is creating a portfolio of different types of investments. It means investing in stocks, bonds, alternative
investments, etc. It also means investing across different industries. If investors are properly diversified, they can
essentially eliminate all unsystematic risk from their portfolios, meaning that they can limit the risk associated with
individual stocks so that their portfolios will be affected only by factors affecting the entire market.
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General Finance
Questions
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If you worked in the finance division of a company, how would you decide whether or not to invest in a project?
In order to decide, you determine the IRR of the project. The IRR is the discount rate, which will return an NPV of 0
of all cash flows. If the IRR of the project is higher than the current cost of capital for the project, then you would
want to invest in the project.
What is an institutional investor?

An institutional investor is an entity which pools money to purchase securities, real property, and other investment
assets or originate loans. There are generally six types of institutional investors: endowment funds, commercial
banks, mutual funds, hedge funds, pension funds and insurance companies.
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They are the largest force behind supply and demand in securities markets and perform the majority of trades on
major exchanges thus greatly influencing the prices of securities.
What is a 'Mutual Fund’?

A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose
of investing in securities such as stocks, bonds, money market instruments and other assets. A mutual fund's portfolio
is structured and maintained to match the investment objectives stated in its prospectus.
What is a 'Hedge Fund'?

Hedge funds are alternative investments using pooled funds that employ numerous different strategies to earn active
return, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and
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leverage in both domestic and international markets with the goal of generating high returns (either in an absolute
sense or over a specified market benchmark). Hedge funds are generally only accessible to accredited investors as
they require less SEC regulations than other funds.
What is Private Equity?

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private
equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of
public companies, resulting in the delisting of public equity. Private equity investment comes primarily from
institutional investors and accredited investors, who can dedicate substantial sums of money for extended time
periods.
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What is ‘Venture Capital’?

Venture capital (VC) is a type of private equity, a form of financing that is provided by firms or funds to small, early-
stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in
terms of number of employees, annual revenue, or both).
Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake,
in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some
of the firms they support will become successful. Because start-ups face high uncertainty, VC investments do have
high rates of failure. The start-ups are usually based on an innovative technology or business model and they are
usually from the high technology industries, such as information technology (IT), clean technology or biotechnology.
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What is securitization?
Securitization is when an issuer bundles together a group of assets and creates a new financial instrument by
combining those assets and reselling them in different tiers called tranches. One of the reasons for the recession has
been the mortgage-backed securities market, which is made up of securitized pools of mortgages.
What is arbitrage?
Arbitrage occurs when an investor buys and sells related assets simultaneously in order to take advantage of
temporary price differences. Because of the technology now employed in the markets, the only people who can truly
take advantage of arbitrage opportunities are traders with sophisticated software since price inefficiencies often
close in a matter of seconds.
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What is a Mortgage-Backed Security (MBS)?

A mortgage-backed security is a security that pays its holder a periodic payment based on cash flows from the
underlying mortgages that fund the security.
It will pay periodic payments that are very similar to coupon payments from bonds. These cash flows come from
packaged mortgages that have been bought up by a bank. The MBS market allowed the investment community to
lend money to homeowners with banks acting as the middlemen. An investor paid for an MBS and was paid back over
time with homeowners’ mortgagepayments.
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What is a Credit Default Swap (CDS)?

A credit default swap is essentially insurance on a company’s debt. It is a way to insure that an investor will not be
hurt if the company defaults. Credit Default Swaps are sold over the counter in an unregulated market.
What is a bulge bracket firm?

“Bulge bracket” is a term that loosely translates into the largest full-service brokerages/investment banks as
measured by various league table standings. Today, Goldman Sachs, Morgan Stanley, Credit Suisse,
J.P. Morgan, Citigroup, UBS, Deutsche Bank, Barclays Capital, and Merrill Lynch (part of BofA) are considered part of
the bulge bracket.
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Why are companies like Facebook, Twitter, and Instagram receiving multi-billion-dollar valuations?
With the social media giant Facebook, investors are expecting the company to find a better way to monetize their
massive user base. With over 800 million members, if Facebook can figure out how to charge more for advertising,
their earnings could be astronomical! Another reason a company like Facebook may be valued in the billions is
because companies like Microsoft are willing to pay astronomical premiums for a small equity stake in order to catch
the wave of the future. For example, when Microsoft invested in 2007, Facebook was valued at $15 billion; at its IPO
in 2012, Facebook’s value was around $100billion.
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What is “junk?”
Called “high-yield” bonds by the investment banks (never call it junk yourself), these bonds are below investment
grade, and are generally unsecured debt. Below investment grade means at or below BB (by Standard & Poor’s) or
Ba(by Moody’s).
What is the difference between senior and junior bondholders?

Senior bondholders get paid first (and as a result their bonds pay a lower rate of interest if all else is equal). The order
in which debtors get paid in the case of bankruptcy is generally: commercial debts (vendors), mortgage lenders, other
bank lenders, senior secured bondholders, subordinated (junior) secured bondholders, debentures (unsecured)
holders, preferred stock holders, and finally straight equity (stockholders).
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Investments
Stocks & Portfolio Management
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When should a company issue stock rather than debt to fund its operations?
There are several reasons for a company to issue stock rather than debt. If the company believes its stock price is
inflated it can raise money (on very good terms) by issuing stock. Second, if the projects for which the money is being
raised may not generate predictable cash flows in the immediate future, it may issue stock.
A simple example of this is a start-up company. The owners of start-ups generally will issue stock rather than take on
debt because their ventures will probably not generate predictable cash flows, which is needed to make regular debt
payments, and also so that the risk of the venture is diffused among the company’s shareholders.
A third reason for a company to raise money by selling equity is if it wants to change its debt-to-equity ratio. This
ratio in part determines a company’s bond rating. If a company’s bond rating is poor because it is struggling with large
debts, the company may decide to issue equity to pay down the debt.
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What kind of stocks would you issue for a start-up?

A start-up typically has more risk than a well-established firm. The kind of stocks that one would issue for a start-up
would be those that protect the downside of equity holders while giving them upside. Hence the stock issued may be
a combination of common stock, preferred stock and debt notes with warrants (options to buy stock).
Is the dividend paid on common stock taxable to shareholders? Preferred stock? Is it tax deductible for the
company?
The dividend paid on common stock is taxable on two levels in the U.S. First, it is taxed at the firm level, as a dividend
comes out from the net income after taxes (i.e., the money has been taxed once already). The shareholders are then
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taxed for the dividend as ordinary income (O.I.) on their personal income tax. Dividend for preferred stock is treated
as an interest expense and is tax-free at the corporate level.
When should a company buy back stock?

When it believes the stock is undervalued, has extra cash, and believes it can make money by investing in itself. This
can happen in a variety of situations.
For example, if a company has suffered some decreased earnings because of an inherently cyclical industry (such as
the semiconductor industry), and believes its stock price is unjustifiably low, it will buy back its own stock.
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On other occasions, a company will buy back its stock if investors are driving down the price precipitously. In this
situation, the company is attempting to send a signal to the market that it is optimistic that its falling stock price is
not justified.
Why would an investor buy preferred stock?

1. An investor that wants the upside potential of equity but wants to minimize risk would buy preferred stock. The
investor would receive steady interest-like payments (dividends) from the preferred stock that are more assured
than the dividends from common stock.
2. The preferred stock owner gets a superior right to the company’s assets should the company go bankrupt.
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3. A corporation would invest in preferred stock because the dividends on preferred stock are taxed at a lower rate
than the interest rates on bonds.
Why would a company distribute its earnings through dividends to common stockholders?
Regular dividend payments are signals that a company is healthy and profitable. Also, issuing dividends can attract
investors (shareholders). Finally, a company may distribute earnings to shareholders if it lacks profitable investment
opportunities.
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You are on the board of directors of a company and own a significant chunk of the company. The CEO, in his annual
presentation, states that the company’s stock is doing well, as it has gone up 20 percent in the last 12 months. Is
the company’s stock in fact doing well?
Another trick stock question that you should not answer too quickly. First, ask what the Beta of the company is.
(Remember, the Beta represents the volatility of the stock with respect to the market.) If the Beta is 1 and the market
(i.e. the Dow Jones Industrial Average) has gone up 35 percent, the company actually has not done too well compared
to the broader market.
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What is insider trading and why is it illegal?

Undergraduates may get this question as feelers of their general knowledge of the finance industry. Insider trading
describes the illegal activity of buying or selling stock based on information that is not public information. The law
against insider trading exists to prevent those with privileged information (company execs, I-bankers and lawyers)
from using this information to make a tremendous amount of money unfairly.
Who is a more senior creditor, a bondholder or stockholder?

The bondholder is always more senior. Stockholders (including those who own preferred stock) must wait until
bondholders are paid during a bankruptcy before claiming company assets.
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What is the difference between technical analysis and fundamental analysis?

Technical analysis is the process of picking stocks based on historical trends and stock movements. Fundamental
analysis is examining a company’s fundamentals, financial statements, industry, etc., and then picking stocks that are
“undervalued.”
When should a company buy back stock?

A company should buy back its own stock if it believes the stock is undervalued, when it has extra cash, if it believes
it can make money by investing in itself, or if it wants to increase its stock price by increasing ts EPS by reducing shares
outstanding or sending a positive signal to the market.
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Financial Glossary
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Balance Sheet: One of the four basic financial statements, the Balance Sheet presents the financial position
of a company at a given point in time, including Assets, Liabilities, and Equity.
Beta: A value that represents the relative volatility of a given investment with respect to the market.
Buy-side: The clients of investment banks (mutual funds, pension funds and other entities often called
“institutional investors”) that buy the stocks, bonds and securities sold by the investment banks. (The
investment banks that sell these products to investors are known as the “sell-side.”)
Call option: An option that gives the holder the right to purchase an asset for a specified price on or before a
specified expiration date.
Capital Asset Pricing Model (CAPM): A model used to calculate the discount rate of a company’s cashflows.
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Commercial bank: A bank that lends, rather than raises money. For example, if a company wants $30 million
to open a new production plant, it can approach a commercial bank like Bank of America or Citibank for a
loan.
(Increasingly, commercial banks are also providing investment banking services to clients.)
Commodities: Assets (usually agricultural products or metals) that are generally interchangeable with one
another and therefore share a common price. For example, corn, wheat, and rubber generally trade at one
price on commodity markets worldwide.
Common stock: Also called common equity, common stock represents an ownership interest in a company
(as opposed to preferred stock, see below). The vast majority of stock traded in the markets today is common,
as common stock enables investors to vote on company matters. An individual with 51 percent or more of
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shares owned controls a company and can appoint anyone he/she wishes to the board of directors or to the
management team.
Comparable transactions (comps): A method of valuing a company for a merger or acquisition that involves
studying similar transactions.
Convertible preferred stock: A type of equity issued by a company, convertible preferred stock is often issued
when it cannot successfully sell either straight common stock or straight debt. Preferred stock pays a
dividend, similar to how a bond pays coupon payments, but ultimately converts to common stock after a
period of time. It is essentially a mix of debt and equity, and most often used as a means for a risky company
to obtain capital when neither debt nor equity works.
Cost of Goods Sold: The direct costs of producing merchandise. Includes costs of labor, equipment, and
materials to create the finished product, for example.
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Credit ratings: The ratings given to bonds by credit agencies. These ratings indicate the risk of default.
Discount rate: A rate that measures the risk of an investment. It can be understood as the expected return
from a project of a certain amount of risk.
Discounted Cash Flow analysis (DCF): A method of valuation that takes the net present value of the free cash
flows of a company.
Dividend: A payment by a company to shareholders of its stock, usually as a way to distribute some or all of
the profits to shareholders.
EBIAT: Earnings Before Interest After Taxes. Used to approximate earnings for the purposes of creating free
cash flow for a discounted cash flow.
EBIT: Earnings Before Interest and Taxes.
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.
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Enterprise Value: Levered value of the company, the Equity Value plus the market value of debt.
Equity: In short, stock. Equity means ownership in a company that is usually represented by stock
Holding Period Return: The income earned over a period as a percentage of the bond price at the start of
the period.
Income Statement: One of the four basic financial statements, the Income Statement presents the results of
operations of a business over a specified period of time, and is composed of Revenues, Expenses, and Net
Income.
Initial Public Offering (IPO): The dream of every entrepreneur, the IPO is the first time a company issues stock
to the public. “Going public” means more than raising money for the company: By agreeing to take on public
shareholders, a company enters a whole world of required SEC filings and quarterly revenue and earnings
reports, not to mention possible shareholder lawsuits.
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Leveraged Buyout (LBO): The buyout of a company with borrowed money, often using that company’s own
assets as collateral. LBOs were the order of the day in the heady 1980s, when successful LBO firms such as
Kohlberg Kravis Roberts made a practice of buying companies, restructuring them, and reselling them or
taking them public at a significant profit.
Liquidity: The amount of a particular stock or bond available for trading in the market. For commonly traded
securities, such as large cap stocks and U.S. government bonds, they are said to be highly liquid instruments.
Small cap stocks and smaller fixed income issues often are called illiquid (as they are not actively traded) and
suffer a liquidity discount, i.e., they trade at lower valuations to similar, but more liquid, securities.
Market Cap (Capitalization): The total value of a company in the stock market (total shares outstanding x
price per share).
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Money market securities: This term is generally used to represent the market for securities maturing within
one year. These include short-term CDs, Repurchase Agreements, Commercial Paper (low-risk corporate
issues), among others. These are low risk, short-term securities that have yields similar to Treasuries.
Mortgage-backed bonds: Bonds collateralized by a pool of mortgages. Interest and principal payments are
based on the individual homeowners making their mortgage payments. The more diverse the pool of
mortgages backing the bond, the less risky they are.
Multiples method: A method of valuing a company that involves taking a multiple of an indicator such as
price-to-earnings, EBITDA, or revenues.
Net present value (NPV): The present value of a series of cash flows generated by an investment, minus the
initial investment. NPV is calculated because of the important concept that money today is worth more than
the same money tomorrow.
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Non-convertible preferred stock: Sometimes companies issue nonconvertible preferred stock, which
remains outstanding in perpetuity and trades like stocks. Utilities are the most common issuers of non-
convertible preferred stock.
P/E ratio: The price to earnings ratio. This is the ratio of a company’s stock price to its earnings-per-share.
The higher the P/E ratio, the faster investors believe the company will grow.
Securitize: To convert an asset into a security that can then be sold to investors. Nearly any income-
generating asset can be turned into a security. For example, a 20-year mortgage on a home can be packaged
with other mortgages just like it, and shares in this pool of mortgages can then be sold to investors.
Selling, General & Administrative Expense (SG&A): Costs not directly involved in the production of revenues.
SG&A is subtracted as part of expenses from Gross Profit to get EBIT.
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Statement of Cash Flows: One of the four basic financial statements, the Statement of Cash Flows presents
a detailed summary of all of the cash inflows and outflows during a specified period.
Statement of Retained Earnings: One of the four basic financial statements, the Statement of Retained
Earnings is a reconciliation of the Retained Earnings account. Information such as dividends or announced
income is provided in the statement. The Statement of Retained Earnings provides information about what a
company’s management is doing with the company’s earnings.
Stock: Ownership in a company.
10K: An annual report filed by a public company with the Securities and Exchange Commission (SEC). Includes
financial information, company information, risk factors, etc.
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References
1. Jacobson, D. (2016). Vault Career Guide to Finance Interviews. Retrieved from http://www.vault.com
2. Beat The Streets 2- Investment Banking Interviews (2017). Retrieved from http://www.wetfeet.com
3. Oasis, W.(2013). WallStreetOasis Guide to Finance Interviews
4. Investopedia
5. Internal Questionnaire - The Finance Club IIM Kashipur
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/The Finance Club KSP financeclub@iimkashipur.ac.in
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The Finance Club | Indian Institute of Management Kashipur

Technical Guide to Finance Interviews, 2020-21

Accounting & Financial Reporting

Accounting & Financial

What are the three main financial statements?

What are the three components of the Statement of Cash Flows?

Walk me through the major line items of an Income Statement.

How could a company have positive EBITDA and still go bankrupt?

What are the major line items on a Cash Flow statement?

What is the difference between LIFO and FIFO?

What’s the difference between cash-based accounting and accrual accounting?

What could a company do with excess cash on its Balance Sheet?

What is goodwill and how does it affect net income?

How do you calculate a company’s Days Sales Outstanding?

How do you calculate a company’s Current Ratio?

What is Inventory Turnover?

Could a company have a negative book Equity Value?

What is operating leverage?

What is Return on Equity (ROE)?

ROE is expressed as a percentage and calculated as:

What is Earnings Per Share (EPS)?

EPS is calculated as:

The formula for CAPM is as follows:

Describe a typical company's capital structure.

What is an Initial Public Offering (IPO)?

What is a primary market and what is a secondary market?

What is the market risk premium?

How can a company raise its stock price?

What is an institutional investor?

What is a 'Mutual Fund’?

What is a 'Hedge Fund'?

What is Private Equity?

What is ‘Venture Capital’?

What is a Mortgage-Backed Security (MBS)?

What is a Credit Default Swap (CDS)?

What is a bulge bracket firm?

What is the difference between senior and junior bondholders?

What kind of stocks would you issue for a start-up?

When should a company buy back stock?

Why would an investor buy preferred stock?

What is insider trading and why is it illegal?

Who is a more senior creditor, a bondholder or stockholder?

What is the difference between technical analysis and fundamental analysis?

When should a company buy back stock?

/The Finance Club KSP financeclub@iimkashipur.ac.in

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