Core Finance Interview Questions

Finance interviews, whether for investment banking, asset management, or corporate finance roles, require a strong understanding of fundamental concepts. Expect questions that test both your technical knowledge and your ability to apply it practically. Here’s a breakdown of core question areas:

Accounting Fundamentals

You’ll likely be asked to demonstrate your grasp of accounting principles. Be prepared to define and explain the relationships between key financial statements:

• “Walk me through the three financial statements.” This is a classic. Briefly describe the income statement (revenue, expenses, profit), balance sheet (assets, liabilities, equity), and cash flow statement (cash inflows and outflows). Emphasize their interconnectivity.
• “How are the financial statements linked?” Highlight how net income from the income statement flows into retained earnings on the balance sheet and impacts cash flow from operations on the cash flow statement. Also, explain how items on the balance sheet are used to calculate key ratios and are inputs into the income statement.
• “What is depreciation, and how does it affect the financial statements?” Define depreciation as the systematic allocation of the cost of an asset over its useful life. Explain that it reduces net income on the income statement, accumulates as accumulated depreciation on the balance sheet (reducing the asset’s net book value), and is added back to net income on the cash flow statement (since it’s a non-cash expense).

Valuation and Financial Modeling

Valuation techniques are crucial. You should understand the basics of discounted cash flow (DCF) analysis and relative valuation:

• “What are the different valuation methods?” Discuss intrinsic valuation (DCF, dividend discount model) and relative valuation (comparing ratios like P/E, EV/EBITDA to comparable companies). Mention precedent transactions as another relative valuation method.
• “Walk me through a DCF.” Briefly outline the steps: project free cash flows (FCF), determine the discount rate (WACC), calculate the terminal value, and discount everything back to present value. Be prepared to discuss how you would project revenue, expenses, and capital expenditures to arrive at FCF.
• “What is WACC, and how do you calculate it?” Explain that WACC is the weighted average cost of capital, representing the average return a company expects to pay its investors. Detail the components: cost of equity, cost of debt (after-tax), and the proportions of debt and equity in the company’s capital structure.
• “What is Beta?” Define Beta as a measure of a stock’s volatility relative to the overall market. Explain how it is used in calculating the cost of equity using the Capital Asset Pricing Model (CAPM).

Corporate Finance Concepts

Understand how companies make financial decisions regarding capital structure and investments:

• “What is capital budgeting?” Describe the process of evaluating potential investments or projects. Explain techniques like net present value (NPV), internal rate of return (IRR), and payback period.
• “Why would a company issue debt instead of equity?” Discuss the benefits of debt, such as tax deductibility of interest expense and lower cost of capital compared to equity (up to a certain point). Also, mention that debt doesn’t dilute ownership.
• “What are some reasons why a company might want to merge with or acquire another company?” Strategic acquisitions can offer synergies, market share expansion, access to new technologies or talent, and diversification. Financial acquisitions can also create value.

Behavioral Questions

Beyond technical knowledge, interviewers want to assess your fit for the role and the team. Prepare answers to common behavioral questions:

• “Tell me about a time you failed.” Choose a situation where you learned a valuable lesson and demonstrate how you have grown from the experience.
• “Why are you interested in finance?” Provide a genuine and compelling reason, highlighting your passion for the field and your career aspirations.
• “Why this company?” Research the company thoroughly and explain why you are specifically drawn to their culture, business model, and opportunities.

Remember to practice articulating your answers clearly and concisely. Be prepared to discuss your resume in detail and connect your experiences to the requirements of the role. Good luck!