Project Finance

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

Q.1 What is the most common ratio used in project finance and how should you calculate it?

The most common ratio used in project finance is Debt Service Coverage Ratio. It is calculated as, Debt service coverage ratio = (Cash flow available for debt service + interest income) / Debt service CFADS = EBITDA - Tax - Capex + drawdowns Debt service = Principal repayments + Interest expense + lease commitments.

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Q.2 Why is the DSCR used and what range do you expect it to be in project finance?

DSCR is primarily an interest coverage ratio that signifies the amount of cash available to cover debt obligations, therefore it drives debt sizing in a project. It is usually 1.2x and upwards, and 1.2x-1.5x for regulated, up to 2.0x for unregulated.

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Q.3 Why use a project finance structure as opposed to corporate finance?

We should use a project finance structure as opposed to corporate finance because it involves limited/non-recourse nature, asset as direct claim of cash flows, off balance sheet structure (Interviewer added: longer tenor, direct claim of assets).

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Q.4 What are key factors financial analysts should consider when evaluating prospective investments?

The questions has been designed to assesses the candidate's skills as a financial analysis skills. This is vital since financial analysts must be able to assess the value of investments. Therefore the answer must include Return on Investment, Experience of achievement and Desire to grow. Sample Answer - It is essential to calculate an asset's return on investment, so we must consider the company's current portfolio and how the investment fits before recommending a new investment to a client.

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Q.5 What is the general profile of a financial analysis reporting process?

One of the most essential part of financial analysts' jobs is to produce reports since financial analysts offer clients with recommendations based on data from these reports. This question primarily illustrates the candidate's critical thinking and organizational skills. Your answer shows your financial analysis reporting methods, including techniques and tools they use. Look for answers that include information about: Your answer must include - the reporting platforms and tools, financial analysis report components and analysis techniques. Sample Answer - You can start by saying that - "I like working on SAS to produce and thoroughly assess financial reports quickly. The platform ensures to include significant parts of the report, including key risks and the valuation."

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Q.6 How would define project finance?

Project finance is nothing but the financing of industrial projects, long-term infrastructure, and public services that use a non-recourse or limited recourse financial structure.

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Q.7 What do you understand by the term project?

A project basically has a predefined beginning and ending time along with defined scope and resources. Besides, it is not just a routine operation, but a particular set of operations framed in order to fulfill a single goal.

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Q.8 What do you mean by project cycle management?

Project management life cycle is basically a framework that consists of a set of distinct high-level levels for transform an idea of concept into reality in an efficient manner.

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Q.9 What are the types of audits?

The three types of audits are: internal, external and internal revenue service audits.

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Q.10 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.11 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.12 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.13 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.14 What does risk management refer to?

In project management, risk management is the process of identifying, evaluating, and preventing risks to a project that have the power to alter the desired outcomes. Moreover, project managers are typically responsible for overseeing the risk management process during the duration of a given project.

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Q.15 What is reserve analysis?

Well, reserve analysis is among the most common techniques used to determine the budget of a project. During reserve analysis, a project is analyzed from a cost overrun point of view, and buffers are placed in the relevant place. Hence, these buffers are known as contingency and management reserves.

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Q.16 What is NPV?

NPV is the acronym for Net Present Value. As the name suggests, it is used for calculating the present value of all cash flows that are generated from a project, cash flows could be negative or positive. So, it is the difference between the present value of cash inflow and cash outflow for a project.

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Q.17 What Is The difference between NPV and XNPV?

The basic difference between NPV and XNPV is that NPV assumes that the cash flows come in equal time intervals whereas XNPV considers that the cash flows don’t come in equal time intervals.

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Q.18 Explain financial auditing.

Financial auditing is the process of examining the financial records of an organization so as to determine if they are correct and in accordance with any applicable rules, regulations, and laws.

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Q.19 Describe the planning phase of project management.

Well, during the planning phase of the project management life cycle, one breaks down the bigger project into smaller tasks, builds their team, and prepares a schedule for the completion of assignments.

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Q.20 What does regular risk monitoring do?

Regular risk monitoring helps provide the management and the board with assurance that established controls are functioning well. The comprehensive MIS reports are essential tools for justifying that the IT operations are performing within the parameters that are established.

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Q.21 How is working capital calculated?

Working capital is calculated using the differences between current assets and current liabilities, containing the following accounts: (+) Cash (+) Accounts Receivable (+) Inventory (-) Accounts Payable

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Q.22 Define expense models.

An expense model explains what expense categories are allowed on a specific type of work order.

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Q.23 What is an internal audit?

An internal audit is usually done in-house, laying emphasis on the process assessments, the safety of assets, control assessments, and legal compliance. It has been designed in a way that enhances an organization’s operations and also adds value to the company. The business leader begins the exercise, which is performed further by an audit team. However, the scope of the audit is determined by directors with equivalence authorization or the audit committee.

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Q.24 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.25 Define risk mitigation.

Risk mitigation enables the generation of a sound control environment that decreases the internal and external threats to the tolerance level of institutions and builds a structured environment for IT operations.

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Q.26 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.27 What is risk analysis?

Risk analysis is the examination of how project outcomes and objectives may change because of the impact of a risk event. Once these risks are found, they are analyzed to identify the qualitative and quantitative consequences of the risk on the project so that relevant steps can be followed to mitigate them.

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Q.28 What do the credit rating agencies do?

Rating agencies help in providing trust and confidence in financial markets by rating borrowers on their creditworthiness of outstanding debt obligations.

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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 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.31 Mention the sources of finance.

The main sources of finance are: 1. Commercial Banks 2. Trade Credit 3. Indigenous Bankers 4. Advances 5. Installment Credit

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Q.32 Can you define hedging?

Well, hedging is defined as an instrument to alleviate risks. Hedging corresponds to the essential purpose of insurance. However, what marks the difference between the two is that hedging is not concerned with augmenting profits but alleviating risks.

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Q.33 What are the areas of finance?

The three areas of finance are finance management, financial markets and investments.

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Q.34 What is preference capital?

Preference capital is defined as the capital that carries preference over equity capital at the time of the payment of dividend and the winding up of the company.

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Q.35 Define investment.

Investment is the study of the methods that individuals use to manage portfolios and provide financial planning as well.

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Q.36 What are the types of project financing?

The three methods in project financing are: 1.Cost Share Financing/Low interest loan financing 2.Equity Financing 3.Debts Financing

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Q.37 What does non-recourse financing mean?

Non-recourse financing implies that the borrowers and shareholders of the borrower don't have any personal liability in the event of monetary default.

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Q.38 Mention the types of projects.

1.Manufacturing Projects 2.Construction Projects 3.Management Projects 4.Research Projects

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Q.39 What are the objectives of a project?

Firstly, function or performance Secondly, containment of expenditure within budget Thirdly, time scale

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Q.40 Name the quality tools of project management.

There are around seven basic quality tools for use in both the quality management plan and control quality processes. They are: histograms, cause-and-effect diagrams, flowcharts, Pareto diagrams, check sheets, control charts, and scatter diagrams.

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Q.41 What is Project identification related to?

Project identification is the first step of any project cycle. The primary purpose of project identification is to develop a preliminary proposal for the most appropriate set of interventions and course of action, within specific time and budget frames, to address a specific development goal in a particular region or setting.

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Q.42 What does PMO stand for?

PMO stands for a Project Management Office. This is an office or department within a company that defines and maintains standards for project management. Additionally, the Project Management Office gives guidance and standards in the execution of projects.

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Q.43 Which ratios should we calculate for Financial Modeling?

The ratios that we should calculate for Financial Modelling are: 1. Liquidity ratios 2. Return on Equity 3. Turnover Ratios 4. Return on Assets 5. Debt to Equity Ratio

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Q.44 What is the interest coverage ratio?

Interest coverage ratio is generally calculated as EBIT divided by interest expense. It is called the “times interest earned” ratio. The interest coverage ratio shows how easily a company can cover it’s interest expense with operating earnings before the subtraction of interest and taxes.

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Q.45 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.46 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.47 What are the different kinds of Financial Statements?

. Balance Sheet . Income Statement . Cash Flow

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Q.48 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.49 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.50 What is IRR?

IRR stands for Internal Rate of Return. It is one of the best techniques and broadly used in investing projects. IRR is the rate of return at which the NPV of all cash inflow or cash outflow of any project becomes zero.

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Q.51 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.52 What is a project category?

A project category is a broad subject under which we can classify projects.

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Q.53 What do you mean by project analysis?

Project analysis refers to the examination of the aspects of a project in details. This is done to see that the project runs as expected and is within the predefined budget.

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Q.54 What are the different types of project analysis?

1.Process Analysis 2.Personnel Analysis 3.Client Requirements Analysis 4.Client Requirements Analysis 5.Risk Analysis

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Q.55 What are the basis of classification of project?

The different basis of classifying a project are by size, by type and by application.

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