Finance Technical Interview Questions & Answers

Finance technical interviews often delve into your understanding of financial concepts, modeling skills, and analytical abilities. Here are some common question types and example answers:

Valuation

Question: Explain the different valuation methods. Which is most reliable and why?

Answer: Common methods include Discounted Cash Flow (DCF), precedent transactions, and comparable companies (comps). DCF values a company based on its projected future cash flows, discounted back to present value. Precedent transactions analyzes similar companies that have been acquired, while comps look at the multiples of similar publicly traded companies. The most *reliable* depends on the context. DCF is theoretically sound but relies heavily on accurate projections, which can be challenging. Precedent transactions and comps reflect actual market conditions but are sensitive to market fluctuations and the availability of comparable data. Often, a combination of methods is used to provide a more comprehensive valuation.

Financial Modeling

Question: How would you build a three-statement financial model (Income Statement, Balance Sheet, and Cash Flow Statement)?

Answer: I’d start with historical financial statements. Then, I’d project revenue growth based on market analysis and company-specific factors. I’d project the Income Statement, linking cost of goods sold (COGS) and operating expenses to revenue. For the Balance Sheet, I’d project assets like accounts receivable and inventory as a percentage of revenue or COGS. Liabilities like accounts payable would be projected similarly. Property, Plant, and Equipment (PP&E) would be projected based on capital expenditures and depreciation. The Cash Flow Statement is then built by reconciling the changes in the Balance Sheet and the Income Statement. It starts with net income, adjusts for non-cash expenses like depreciation, and includes changes in working capital and capital expenditures. A crucial aspect is ensuring the model balances – assets equal liabilities plus equity. I’d use circular references for debt and interest calculations, ensuring the model solves correctly.

Accounting

Question: What is the difference between LIFO and FIFO? Which accounting method would result in higher net income in a period of rising prices?

Answer: LIFO (Last-In, First-Out) assumes the most recently purchased inventory is sold first, while FIFO (First-In, First-Out) assumes the oldest inventory is sold first. In a period of rising prices, FIFO would result in higher net income because the cost of goods sold would be lower (reflecting older, cheaper inventory), leading to a higher gross profit and ultimately, higher net income. LIFO is not permitted under IFRS.

Mergers & Acquisitions (M&A)

Question: Walk me through a basic merger model.

Answer: A merger model analyzes the financial effects of a company acquiring another. The basic steps are: 1) Project the financial statements of both the acquirer and the target. 2) Value the target company. 3) Determine the purchase price and the form of consideration (cash, stock, or a combination). 4) Project the combined company’s financial statements, incorporating synergies (cost savings and revenue enhancements) and increased debt if applicable. 5) Calculate key metrics like accretion/dilution of earnings per share (EPS). Accretion occurs when the combined EPS is higher than the acquirer’s standalone EPS, while dilution occurs when it’s lower. The analysis helps determine if the deal is financially attractive for the acquirer.

Brain Teasers

Question: How many ping pong balls fit in a 747 airplane?

Answer: This tests your problem-solving approach, not precise knowledge. Explain your thought process. For example: “First, I’d estimate the volume of a 747. I’d consider it roughly a cylinder. I’d estimate the length and diameter. Then, I’d calculate the volume of a ping pong ball using its radius. Finally, I’d divide the 747’s volume by the ping pong ball’s volume. I’d also adjust for empty space, assuming ping pong balls can’t perfectly fill the entire volume. I’d reduce my final estimate by, say, 30% to account for that.” The key is to demonstrate a logical and structured approach.