Finance is the foundation of every business existing globally. If a company has a strong base in finance, the chances of them succeeding also increase. It is a broad field dealing with multiple activities often linked with credit & debt, money, investment, banking, capital markets, etc. Hence, starting a career in this field is quite challenging. And what’s more challenging is how you represent yourself in an interview. Finance interview questions inspect the candidate’s in-depth knowledge of financial concepts. Moreover, the interview examines how concisely you can solve real-world problems.
If you are preparing to crack the interview in the finance field discussed above and looking for the finance interview questions, then you are in the right place. Finance offers different job roles, whether a top position of Financial Advisor and Credit Analyst or an intern starting in the same domain. Further, in the blog, we have put together the Top 20 Finance Interview Questions and Answers which will assist in building up confidence. Further, you will get an idea of what an actual finance interview question would look like.
Top 20 Finance Interview Questions and Answers:
1. Explain the term Finance.
Finance is a broad term that primarily deals with money-related activities such as investing, lending, borrowing, budgeting, saving, capital markets, stocks etc. However, if we talk about finance in simpler terms, it is the study and management of a large amount of money. Furthermore, it has three types: public, corporate, and personal.
2. Can you explain the financial statements?
Financial statements are documents written to verify the financial performance of a business. In particular, investors and creditors analyse financial statements to estimate a company’s financial position, which forms the basis of their financial decisions. Also, the four major financial statement reports are the balance sheet, cash flow statement, income statement, and statement of shareholder’s equity.
3. Can you simply define the cash flow statement?
A cash flow statement is a report that assists in managing the sources of cash and how the cash has been used in a particular period in an organisation (the inflows and outflows of cash). This statement also demonstrates the sources of incoming and outgoing funds. Similarly helps in assessing a company’s performance.
4. Define capital budgeting. List its most commonly used techniques.
The process of assessing which projects to prioritize over others is known as capital budgeting. The capital budget also determines the projects the company will finance.
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1. Traditional techniques include the payback method and Average Rate of Return Method.
2. Modern techniques include the Net Present Value (NPV) Method, Internal Rate of Return (IRR) Method and Profitability Index (PI) Method.
5. What do you understand by the term Economic Value Added? How to calculate it?
Economic added value (EVA) is a financial measure that shows the profitability of a company’s projects after deducting capital costs. Also called the Economic Profit of a business.
EVA expressed in the formula –
EVA = NOPAT – ( capital which is invested * WACC)
Where NOPAT is net operating profit after tax, WACC is the weighted average cost of capital, and similarly invested capital is debt + lease + equity.
6. Define liquidity ratio, mention its types and explain what is a good liquidity ratio?
A liquidity ratio is one of the financial ratios that indicates a company’s ability to pay off its short-term liabilities.
The three types of commonly used liquidity ratios are:
1. Current Ratio
2. Quick ratio
3. Cash ratio
Statistics show a good liquidity ratio is greater than 1. It determines that a company is doing good financially.
7. What do you understand by the term Net Present Value (NPV)?
The difference between the cash inflows (present value) and cash outflows ( present value) in a given period is known as NPV. In finance, NPV valuation has a broad use. It helps financial analysts determine the return on investment. NPV analyze the profitability of a project, or it could be any investment. Furthermore, if the NPV of a project or investment is positive, its rate of return will be higher than the discount rate.
8. Define the dividend growth model.
A dividend growth model is a valuation model that indicates a stock’s fair value for a company’s stock, usually based on current dividends and expected future dividend growth. The dividend growth model assesses whether a company is overvalued or undervalued. It is calculated by subtracting the expected dividend from the required rate of return.
9. Define the term payback period.
In capital budgeting, the payback period indicates the time it takes to regain the money spent on an investment. In other words, the faster an investment pays itself back, the more attractive it becomes. Calculating the payback period is simple and can be done by dividing the initial investment by the average cash flow.
10. Explain NIFTY and SENSEX.
Both Nifty and Sensex are stock market indexes. However, the calculation method is different. A stock market index typically demonstrates the performance of a stock market. A stock index is built by combining stocks of the same type. Bombay Stock Exchange’s stock index, known as Sensex, stands for Stock Exchange Sensitivity Index. Nifty is the National Stock Exchange Index. It stands for National Stock Exchange Fifty.
Before we dive into another set of finance interview questions and answers, here is a YouTube video that describes the scope of AI in finance.
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