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Finance Interview Q&A

Valuation & Financial Modeling

Question: Explain the three main methods of valuing a company.

Answer: The three main methods are:

• Discounted Cash Flow (DCF): Projects future free cash flows and discounts them back to present value using the Weighted Average Cost of Capital (WACC). Relies heavily on assumptions about future growth and discount rates.
• Comparable Company Analysis (Comps): Uses multiples (e.g., P/E, EV/EBITDA) from similar publicly traded companies to derive a valuation. Requires finding truly comparable companies.
• Precedent Transactions: Analyzes multiples paid in past M&A deals involving similar companies. Can provide a realistic view of what acquirers are willing to pay, but data may be limited.

Question: What is WACC, and how is it calculated?

Answer: WACC (Weighted Average Cost of Capital) represents the average rate of return a company needs to earn on its investments to satisfy its investors (both debt and equity holders). It's calculated as: WACC = (E/V * Cost of Equity) + (D/V * Cost of Debt * (1 - Tax Rate)) Where:

• E = Market value of Equity
• D = Market value of Debt
• V = Total Value of Capital (E + D)
• Cost of Equity = The return required by equity investors
• Cost of Debt = The effective interest rate a company pays on its debt
• Tax Rate = The company's corporate tax rate

Accounting

Question: Walk me through the three financial statements.

Answer:

• Income Statement: Shows a company's financial performance over a period of time (e.g., quarterly, annually). Starts with revenue, subtracts expenses to arrive at net income (profit). Key line items include revenue, cost of goods sold (COGS), gross profit, operating expenses, operating income (EBIT), interest expense, and income tax expense.
• Balance Sheet: A "snapshot" of a company's assets, liabilities, and equity at a specific point in time. The fundamental accounting equation is Assets = Liabilities + Equity. Assets are what a company owns; liabilities are what it owes to others; equity represents the owners' stake in the company.
• Statement of Cash Flows: Tracks the movement of cash both into and out of a company during a period. Divided into three sections: operating activities (cash from core business), investing activities (cash from buying/selling long-term assets), and financing activities (cash from debt, equity, and dividends).

Question: How does depreciation affect the financial statements?

Answer: Depreciation is a non-cash expense, meaning it doesn't involve an actual outflow of cash.

• Income Statement: Reduces net income by the amount of the depreciation expense.
• Balance Sheet: Reduces the net book value of the related asset (e.g., property, plant, and equipment) through accumulated depreciation.
• Statement of Cash Flows: Depreciation is added back to net income in the cash flow from operations section because it's a non-cash expense that reduced net income. This increases cash flow from operations.

General Finance & Market Knowledge

Question: Tell me about a recent deal you've been following.

Answer: (Prepare in advance with a specific, well-researched answer. Include: Who are the parties involved? What's the strategic rationale? What are the key financial terms? What are the potential risks and rewards? Demonstrate your understanding of the deal's context and implications.)

Question: Where do you see the market going in the next year?

Answer: (Show awareness of current economic conditions, interest rate trends, inflation, and other relevant factors. Provide a thoughtful opinion, even if it's cautious or uncertain. Don't just give a generic "up" or "down" answer. Back up your prediction with reasoned arguments.)

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