Financial Valuation

Looking for Interview questions in Financial Valuation, here are the list of top interview questions to prepare for your next Finance interview.

Q.1 What is paydown?

Debt paydown is the process of decreasing the amount owed on a mortgage or other loan over time by making partial payments towards the debt.

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Q.2 How do we calculate paydown?

A paydown factor can be calculated as the principal portion of a monthly loan payment divided by the original principal of the loan.

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Q.3 What is a deferred tax?

A deferred tax is that tax which is assessed or is due for the current period but isn't paid yet, implying that it will eventually come due.

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Q.4 What are the different types of shares?

The two primary types of stock are common shares, that represent the majority of shares available across the market, and preferred stock, which guarantee a fixed dividend but don't have voting rights.

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Q.5 What is depreciation?

Depreciation is a method of accounting for allocating the cost of a tangible or physical asset over its useful life or life expectancy.

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Q.6 What is accelerated depreciation?

Accelerated depreciation is a method by which a company, for financial accounting or tax purposes, depreciates a fixed asset in a way that the amount of depreciation taken each year is higher during the early years of an asset's life.

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Q.7 What is Free Cash Flow to Firm (FCFF)?

Free cash flow to the firm (FCFF) is primarily used in DCF financial modelling. Such that a company generates cash flows from its operations by selling goods or services. Such that some amount of its cash goes back into the business to renew fixed assets and for working capital requirement. In layman term Free cash flow to firm is the excess cash generated over and above these expenses. Free cash flow to firm goes to the debt holders and the equity holders. Free Cash Flow to Firm or FCFF Calculation = EBIT x (1-tax rate) + Non Cash Charges + Changes in Working capital – Capital Expenditure

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Q.8 Name the most common multiples used in valuation.

Some of the few common valuation multiples which are frequently used in valuation are – 1. EV to EBIT 2. Price to Cash Flow 3. Enterprise Value to Sales 4. EV to EBITDA 5. PEG Ratio 6. Price to Book Value 7. PE Ratio

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Q.9 Name the three most used methodologies of valuation and how would you rank them?

This is one of the most common question asked. In which case following methods are used - 1. Discounted cash flow analysis (DCF) Valuation, 2. Comparable comp analysis 3. Precedent transactions Now to answer the question about ranking is little tricky. In general precedent transactions are higher than the comparable companies as control premium is built into it. In the case of DCF, it can be both ways (highest or lowest) based on the assumptions we make during the computation.

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Q.10 What do you understand by precedent transactional analysis?

The precedent transactional analysis is a valuation method which takes the past transactions of similar companies to value a company. We use the following steps, to conduct precedent transactional analysis – 1. Similar companies are chosen based on their features or work industry. 2. We compare the size of the transactions as it should be similar. 3. We compare the type of transaction and the features of buyers as it should be same. 4. Then the transactions that happened more recently have been considered more valuable. 53. We estimate on the basis of above factors.

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Q.11 When should we use the sum of the parts?

In general, sum of the parts is useful for companies that have several divisions unrelated to each other. For instance if a company has consumer finance division, technology division and media division and an energy division. Then sum of the parts would be very useful in this case.

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Q.12 What is the purpose of valuations?

Valuations are generally needed for various reasons like investment analysis, merger and acquisition transactions, capital budgeting, financial reporting, taxable events for determining the proper tax liability.

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Q.13 What do you mean by amortization and depreciation?

Amortization and depreciation are basically the non-cash expenses on the income statement of a company. Depreciation refers to the cost of capital assets on the balance sheet being used over time, and amortization represents the cost of using intangible assets like goodwill over time.

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Q.14 What is a debt schedule?

Debt schedule is basically the list of debts obtained by the organization and consists of debts such as debentures, bonds, term loans and leases.

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Q.15 Describe asset and liability management.

Asset and liability management refers to the management of financial risks arising due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting.

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Q.16 What is the outcome, if the strike price increases and assuming everything else remaining the same?

Value of the put option increases and that of the call option decreases.

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Q.17 What does the term budgeting mean?

Budgeting finds its use to set up, create, and view budgets. Budgeting includes budget control, which one can use so as to monitor the budget funds available for planned and actual purchases and expenditures. Additionally, one can generate budget register entries for the original budget, budget transfers, and revisions. One can also create budget register entries for encumbrances and pre-encumbrances for purchases and planned expenditures. Moreover, budget register entries are automatically generated when budgets are transferred to the general ledger from other modules, like Project management and accounting or Fixed assets.

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Q.18 What is strategic value driver?

Strategic value driver is an operational initiative that can be undertaken with the purpose of creating value.

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Q.19 Why would two companies merge?

There are many reasons for companies to merge. These include achieving synergies, entering new markets, gaining new technology, eliminating a competitor, and also as it’s “accretive” to financial metrics.

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Q.20 What is the proper discount rate to use when evaluating a potential acquisition by DCF method?

A rate that reflects the risk of the potential acquisition.

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Q.21 What do you mean by cash flow?

Cash flow is a type of financial statement that represents the flow of cash in the company for a particular time period.

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Q.22 How is EVA computed?

It is the firm's net operating profit after tax (NOPAT) less a dollar cost of capital charge.

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Q.23 What is debt financing?

In this method, a company raises funds in the form of a loan which comes with an interest portion with it. So, the company would have a monthly obligation to repay it. The benefit of debt financing is that in this form there is no control of the lender in the business and at the time of full repayment, the company and lender’s relationship ends.

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Q.24 What can be inferred if the liquidation value of a company is negative?

It indicates that the firm's debt exceeds the market value of assets.

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Q.25 Define an Income Statement.

An income statement is also known as a profit and loss account. This is one of the major types of financial statements of the company which shows the revenue, expenses, and net profit or loss of the company at a specific period of time.

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Q.26 What should be subtracted from EBITDA to compute net cash flow to invested capital?

Capital expenditures and additions to working capital, but neither depreciation nor interest.

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Q.27 What is the composite cost of capital?

The weighted average cost of capital shows the composite cost of capital. Parameters such as the debt, preferred stock and common stock are reflected in the eventualities of the composite cost of capital.

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Q.28 if the expected rate of growth is constant in perpetuity, what will be the relationship between the discounting and capitalizing models?

The discounting model would be expected to produce the same value as the capitalizing model.

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Q.29 What is free cash flow?

Free cash flow is equal to the cash from operations minus capital expenditures. Moreover, in financial modelling, unlevered free cash flow is used.

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Q.30 What is a Balance Sheet?

A balance sheet is basically the summary of the financial situation of a business which represents the actual position of assets, cash, liabilities or bank balance at a specific period of time.

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Q.31 What do you understand by the term working capital?

Working capital is basically the money available with any business for day-to-day operations. Working capital can be calculated by using the following formula: Working capital = Current Assets – Current Liabilities

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Q.32 What does negative working capital mean?

Negative working capital is common in industries like grocery retail and the restaurant business. For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers usually gives 30 days credit. Hence, the company receives cash from customers before it needs the cash to pay suppliers.

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Q.33 Can you highlight the purpose of a deferred tax liability?

A deferred tax liability comes into the view when the concerned amount of tax is shelled at a future date to the IRS. It can be summed up as the opposite of the deferred tax asset.

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Q.34 What do you understand by the term debentures?

A debenture is a certificate of loan agreement furnished under the stamp of a company. The debenture holder is mandated to receive a fixed return as well as the principal amount at the time of the maturity of the debenture.

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Q.35 What are the main characteristics that define a good model?

The main characteristics that define a good model are: • Structured • Flexible • Transparent • Logical

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Q.36 What are the basic concepts of finance?

The three main concepts are: Financial Management, Financial Markets and Institutions and Investment

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Q.37 What are the different kinds of Financial Statements?

1.Balance Sheet 2.Income Statement 3.Cash Flow

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Q.38 What is an investment?

Well, investment is the study of methods that are used by individuals in order to manage portfolios and provide financial planning.

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Q.39 Mention some ways to design a revenue schedule?

Some of the common ways are: 1. Sales growth 2. Unit volume, change in volume, average price and change in price 3. Inflationary and volume/ mix effects 4. Dollar market size and growth 5. Volume capacity, capacity utilization and average price 6. Unit market size and growth 7. Product availability and pricing

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Q.40 What is book value?

Book value is the accounting value of the assets of a company less all claims senior to common equity.

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Q.41 Mention the methods of valuation.

Market capitalization Discounted cash flow method Earnings multiplier Times revenue method Liquidation value Book value

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Q.42 Define Equity financing.

In this method, the company can raise comparatively more amount of funding as than debt financing. The financier would get some of the ownership of the company and offer funds as per the working capital requirement. Moreover, there is no monthly obligation of repayment of funds and no interest portion is to be added to the principal amount.

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Q.43 What is DCF?

DCF stands for Discounted Cash Flow. This is the best valuation technique of calculating the value of the firm at the time of acquisition or financing. In DCF, the net present value is calculated for future cash flows.

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Q.44 What is the market value?

Market value is the cost that an asset fetches in the market and is used to refer to market capitalization generally.

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Q.45 What does EV stand for?

EV stands for enterprise value. This is a measure of the total value of a company, often used as a more comprehensive alternative to equity market capitalization.

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Q.46 What do you understand by the term beta?

Beta measures the volatility or systematic risk of a security or portfolio compared to the market as a whole.

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Q.47 What do you mean by WACC?

WACC that is the weighted average cost of capital is the calculation of a firm's cost of capital wherein each category of capital is proportionately weighted.

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Q.48 What is calendarization?

Calendarization is inclusive of spreading the recognition of a transaction over more than one reporting period.

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Q.49 What do you mean by precedent transaction analysis?

Precedent transaction analysis is a type of valuation method in which the price paid for similar companies in the past is considered to be an indicator of an organization's value. This analysis creates an estimate of what a share of stock would be worth in the case of an acquisition.

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Q.50 Define terminal value.

Well, terminal value is the value of an asset, a business, or a project beyond the forecasted period when the future cash flows can be estimated.

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Q.51 What is UFCF?

UFCF stands for unlevered free cash flow that is the amount of available cash that a firm has before accounting for its financial obligations.

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Q.52 What is the importance of financial valuation?

The higher is the financial valuation, the easier it becomes to borrow money, the higher the per-share price, and the higher is the price in the case of an acquisition.

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