Finance Interview Questions


Want to keep your Finance Skills sharp?
We post new interview questions every weekday on LinkedIn.
Every other Friday, we post a Challenge Question with a video walkthrough.

Finance Interview Questions

Daily Finance Interview Question – 10.22.2021

Question: If one company with a P/E Ratio of 10x acquires another company with a P/E Ratio of 15x in an all Stock deal, will the deal be Accretive or Dilutive?

  • Accretive
  • Dilutive
  • No Way to Tell

The deal will be Dilutive for the acquiring company because the value of its stock per dollar of earning is lower than that of the target company. As a result, it will need to issue more proportional shares per dollar of earnings to buy out the Target company’s stock.

For a deeper dive check out our Accretion Dilution video which has already received over 2,000 views!

Aiming for a Career in Finance?

Ramp up faster with all of our (free) deep-dive articles in our Analyst Starter Kit:

Daily Finance Interview Question – 10.21.2021

Question: In the Free Cash Flow Formula, why do we start with EBIT * (1- T)…as opposed to EBITDA * (1- T)?

  • EBIT reflects Cash Flow
  • Interest is Tax-Deductible
  • You can actually both approaches
  • The Depreciation Tax Shield

EBIT takes into account Depreciation and Amortization (‘D&A’) which is a non-cash expense that lowers our taxes owed. This ‘shields’ us from tax liability and so the D&A expense impact is referred to as the ‘Depreciation Tax Shield’.

For a deeper dive (and a few Dragon Cartoons!), check out our highly rated Depreciation Tax Shield Article.

Want to master these concepts (and have a little fun in the process!), check out our brand new Valuation Fundamentals Mastery Course.

Daily Finance Interview Question – 10.20.2021

Question: If you could only have two of the three financial statements, which would you choose?

  • IS + CFS
  • CFS + BS
  • IS + BS

The Income Statement and Balance Sheet because you can derive a Cash Flow Statement from them. 

Want to master these concepts (and have a little fun in the process!), check out our brand new Accounting Fundamentals Mastery Course.

Daily Finance Interview Question – 10.19.2021

Question: What is the best valuation metric for a business that is losing money?

  • EV / EBITDA
  • P/E Ratio
  • EV / Revenue
  • Can’t value without earnings

The most commonly used metric to value a business that is losing money is EV / Revenue. Both EV / EBITDA and P/E Ratios require positive earnings to be meaningful.

Want to master these concepts (and have a little fun in the process!), check out our brand new Valuation Fundamentals Mastery Course.

Daily Finance Interview Question – 10.18.2021

Question: If I run a Pizza Shop, how does Gross Profit differ from Operating Profit? Note: GP = Gross Profit; OP = Operating Profit, OH = Overhead.

  • GP = Pizza Sales / OP = GP-OH
  • OP = Pizza Sales / GP = OP-OH
  • They Are The Same
  • It Depends

Gross Profit reflects the profit on the product sold (in this case Pizza). Operating Profit reflects Gross Profit – Overhead Costs (i.e. SG&A). 

If you’d like to learn more about these concepts (and have a little fun in the process!), check out our brand new Accounting Fundamentals Mastery Course.

Bi-Weekly Finance Interview Challenge Question – 10.07.2021

Question: A company has $20 of CFO, a change in NWC of ($10), D&A of $5, and $20 of Capital Expenditures. The Company has a $450 Equity Value. What’s the P/E Ratio?

  • Acquihire
  • Platform
  • Reverse Merger
  • Roll-Up

Check out the answer to our Weekly Finance Interview Challenge Question here:

Daily Finance Interview Question – 10.07.2021

Question: Which transaction structure does a SPAC employ?

  • 12x
  • 15x
  • 18x
  • 20x

A typical SPAC transaction is a Reverse Merger in which the acquired company goes Public as a result of being acquired by the SPAC entity.

Daily Finance Interview Question – 10.06.2021

Question: Which of the following are time-weighted return metrics?

  • Cash on Cash
  • Internal Rate of Return
  • Multiple of Invested Capital
  • Multiple of Money

First, Cash on Cash (CoC), Multiple of Invested Capital (MOIC), and Multiple of Money (MOM) are different names for the same calculation. They simply reflect Dollars Returned vs Dollars Invested. 

In contrast, the Internal Rate of Return looks at the underlying return of dollars Returns vs Dollars Invested on a time-weighted basis. 

For more on these two calculations, check out the ‘Walk Me Through an LBO Step #6: Investor Returns’ section of our LBO deep-dive article.

Daily Finance Interview Question – 10.05.2021

Question: What is Goodwill?

Note: PP = Purchase Price; BV = Book Value

  • Niceness of a Seller
  • Equity PP – BV of Equity
  • BV of Equity – Equity PP
  • Equity PP Only

Goodwill reflects excess Equity Purchase Price relative to the Book Value of Equity.

Daily Finance Interview Question – 10.04.2021

Question: Which of the following are ideal characteristics of an LBO candidate?

  • Low Capital Intensity
  • Strong Management 
  • Stable Revenues
  • All of the Above

On the whole, the ideal LBO Candidate has 1) Stable and Predictable Revenues, 2) Low Capital Intensity, 3) Attractive Price, 4) Strong Management Team, and 5) Strong Exit Strategy. So the answer to the questions is All of the Above. 

For more, check out our ‘Walk Me Through an LBO’ deep-dive article.

Daily Finance Interview Question – 10.01.2021

Question: A Private Equity fund sells a business and generates $100 of proceeds. Management has a 10% cut of the upside. How much does management receive?

  • Less than $10 
  • $10 Exactly
  • More than $10

Management’s stake in a Private Equity sale is typically a function of the upside relative to the original investment. 

Let’s say in the scenario above that the PE fund originally invested $100. Then the net gain would be $0 ($100 Proceeds – $100 Investment). In that case, management would receive $0. 

On the other hand, management’s maximum take would be $10 if the PE fund had invested $0 because the gain would be $100 ($100 Proceeds – $0 Investment).

Since a $0 investment is unlikely, the answer is that management would receive less than $10.

Daily Finance Interview Question – 09.30.2021

Question: What is Rollover Equity?

  • Seller Rolls Debt in NewCo
  • Seller Retains Equity in NewCo
  • Seller Manages NewCo

Rollover Equity comes about when the seller of a Company retains (or ‘rolls’) some of their existing Equity stake in the business into the new company (or ‘NewCo’) following the sale of the Company.

Daily Finance Interview Question – 09.29.2021

Question: All else equal, who can pay more: Financial Buyer or Strategic Buyer?

  • Financial Buyer
  • Strategic Buyer
  • They are the Same

Strategic (or ‘Corporate’) buyers can typically generate synergies (i.e. cost savings) with an acquisition, whereas Financial (or ‘Private Equity’) Buyers cannot. As such, the Strategic Buyer can typically pay more. 

Note that Financial Buyers can pursue a Platform Strategy in which they ‘roll-up’ multiple Assets. In that case, the Financial Buyer is on more equal footing with a Strategic Buyer.

Daily Finance Interview Question – 09.28.2021

Question: What is the formula used to Lever Beta? Note: Lev = Levered; Unlev = Unlevered.

  • Unlev Beta * [1 + D/E + (1-t)]
  • Lev Beta / [1 + D/E * (1-t)]
  • Unlev Beta * [1 + D/E * (1-t)]
  • Lev Beta / [1 + D/E + (1-t)]

The correct formula is Unlevered Beta * [1 + D/E * (1-t)]. This formula converts an Unlevered (‘Asset’) Beta into an Levered (or ‘Equity’) Beta. Beta is a core component of the Cost of Equity formula. 

For a deeper dive, check out our video on Cost of Equity Formula:

Daily Finance Interview Question – 09.27.2021

Question: Which of the following is a Leverage Ratio?

  • [EBITDA – CapEx] / Interest
  • EBITDA / Interest
  • Days Sales Outstanding
  • Net Debt / EBITDA

Net Debt / EBITDA is the only Leverage Ratio in the list above. It shows the number of Debt dollars (or ‘Leverage) per dollar of Debt for a company.

Bi-Weekly Finance Interview Challenge Question – 09.24.2021

Question: Company X is buying Company Y for $37.50 per share. Company Y is estimated to generate Earnings Per Share of $1.25 in the coming year

Company X funds the deal with 50% Debt (10% Rate) and 50% Cash (0.5% Rate). Assume both companies have a 20% tax rate. Is the deal Accretive or Dilutive?

  1. Accretive
  2. Dilutive
  3. No Way To Tell

Daily Finance Interview Question – 09.23.2021

Question: What does Beta (in the Cost of Equity Formula) capture?

Note: Cov = Covariance; Var = Variance, S = Stock, M = Market.

  • Cov (S,M) / Var (M)
  • Slope of a Regression
  • Riskiness of a Single Stock
  • All of the Above

The technical definition of Beta is the Covariance of a single stock (vs the market) divided by the Variance of the market. That same calculation represents the slope of the line of the Regression of the movements of a Single Stock and the Market as a whole. In the cost of Equity Formula, Beta reflects the riskiness of a single company. So the answer is All of the Above.

Daily Finance Interview Question – 09.22.2021

Question: What does OpEx refer to in Finance?

  • Operating Expenses
  • SG&A Expense
  • Both of the Above
  • None of the Above

In the Finance world, Selling General and Administrative (SG&A) expense and Operating Expense (OpEx) are synonymous. Both reflect the Sales & Marketing and Overhead cost of a Business. 

For a deeper dive, check out our video on COGS vs SG&A:

Daily Finance Interview Question – 09.21.2021

Question: What is an Earnout?

  • An Accounting Approach
  • Contingent Consideration
  • Traditional Debt

An Earnout is a form of ‘Contingent Consideration’ in which the Buyer of a Business agrees to make payments to the Seller following the purchase of a Business. These payments are typically based on achieving future Revenue or Profit milestones.

Daily Finance Interview Question – 09.20.2021

Question: Which of the following is a Coverage Ratio?

  • Debt / EBITDA
  • EBITDA / Interest
  • Net Debt / EBITDA
  • Days Sales Outstanding

EBITDA / Interest is the only Coverage Ratio in the list above. It shows how many EBITDA dollars are available to ‘cover’ each dollar of Interest payments that must be made.

Daily Finance Interview Question – 09.17.2021

Question: What is the Matching Principle?

  • Match Revenue to Sale Date
  • Match Costs to Revenue
  • Match Cost to Useful Life

The Matching Principle is a fundamental underpinning of accounting that says we have to record expenses in the same period the related revenue was earned.

Daily Finance Interview Question – 09.16.2021

Question: What is the Equity (or Market) Risk Premium?

  • Excess Return: Stocks v Bonds
  • The premium to Buy a Stock
  • The riskiness of the market

The Equity Risk Premium reflects the excess return (or reward) for investing in stocks vs bonds. It’s usually calculated by looking at the historical return of the S&P 500 vs 10 year Treasuries. This is a core component of the Cost of Equity formula. 

For a deeper dive, check out our video on Cost of Equity Formula:

Daily Finance Interview Question – 09.15.2021

Question: What is a Football Field in the context of Finance?

  • Where Bankers play Football
  • A chart with Valuation Ranges
  • A chart with Revenue Growth
  • None of the Above

A football field is a chart that shows a range of valuations (typically Enterprise Value or Equity Value) across different valuation methodologies. 

For a deeper dive on Enterprise vs Equity Value, check out our video:

Daily Finance Interview Question – 09.14.2021

Question: PIK Interest Increases by $10. What’s the net change in Total Assets?

  • ($8)
  • +$10
  • +$8
  • +$2

The $10 PIK Interest reduces Taxable Income by $10 which creates a tax credit of $2 ($10 PIK Interest * 20% Tax Rate). The net impact to Net Income is ($8) which carries to CFO where we add the $10 PIK Interest back which results in a net impact to CFO of +$2, which flows down to a Net Change in Cash of +$2. 

The +$2 Cash impact increases the Cash account by +$2. So the impact to Assets is +$2.

On the other side of the Balance Sheet, the Debt account increases by the +$10 PIK Interest expense and we deduct the ($8) Net Income impact in Retained earnings to balance the Balance Sheet.

Want to better understand this? check out our video on how to answer this question:

Daily Finance Interview Question – 09.13.2021

Question: EV is Equity + Net Debt. A business has a $100 EV, $40 of Debt and $10 of cash. It generates $10 of cash the next day, what’s the EV?

  • $100
  • $110
  • $90
  • $140

The answer is $100. The Equity (or Owner’s) Value would have increased due to the accumulation of $10 of new cash. But the Enterprise Value (purchase price of the entire Business) should remain the same. 

For a deeper dive, check out our article on Enterprise Value vs Equity Value:

Enterprise Value vs Equity Value

Daily Finance Interview Question – 09.09.2021

Question: What is Enterprise Value?
Note: PP – Purchase Price

  • Equity Value + Debt – Cash
  • PP of an Entire Business
  • PP of Equity
  • Both A and B

Enterprise Value reflects the purchase price of an entire Business. If we are starting with Equity Value, we would calculate Enterprise Value using the formula: Equity Value + Debt – Cash. So the answer is Both A and B are correct. 

For a deeper dive, check out our article on Enterprise Value:

Enterprise Value vs Equity Value

Daily Finance Interview Question – 09.08.2021

Question: What is the formula needed to Unlever Beta? Note: Lev = Levered; Unlev = Unlevered.

  • Unlev Beta / [1 + D/E * (1-t)]
  • Lev Beta / [1 + D/E * (1-t)]
  • Lev Beta * [1 + D/E * (1-t)]
  • Lev Beta / [1 + D/E + (1-t)]

The correct formula is Levered Beta / [1 + D/E * (1-t)]. This formula converts a Levered (or ‘Equity’) Beta into an Unlevered (or ‘Asset’) Beta. Beta is a core component of the Cost of Equity formula.

Daily Finance Interview Question – 09.07.2021

Question: What is the Revenue Recognition principle?

  • Record Rev when cash arrives
  • Record Rev when earned
  • Record Rev over useful life

The Revenue Recognition principle states that we must record revenues when they earned and the transaction is substantially complete. 

For a deeper dive, check out our video on Cost of Equity Formula:

Daily Finance Interview Question – 09.03.2021

Question: Which of the following is NOT a typical cost to take into consideration in an accretion/dilution analysis?

  • Foregone Interest Income
  • Interest Expense
  • Synergies
  • Cultural Mismatch

Accretion/Dilution simply measures the quantitative impact of a merger on Earnings Per Share. A limitation of this analysis is that it doesn’t incorporate qualitative factors like company culture.

For a deeper dive, check out our video on on Accretion/Dilution analysis:

Daily Finance Interview Question – 09.02.2021

Question: All else equal, which should be higher the Cost of Debt or Cost of Equity?

  • Cost of Debt
  • Cost of Equity
  • They are the Same

The Cost of Debt (i.e. the returns expected by Lenders) is typically lower than the Cost of Equity because lenders are paid first in a Bankruptcy scenario and thus take less risk than Investors. 

For a deeper dive, check out our video on the Cost of Equity:

Daily Finance Interview Question – 09.01.2021

Question: How do you calculate the Depreciation Tax Shield?
Note: T = Tax Rate

  • Depreciation * (1 – T)
  • Depreciation +T
  • Depreciation * T

The Depreciation Tax Shield is calculated by multiplying Depreciation Expense * Tax Rate. The output of this calculation is the dollars saved (or ‘Shielded) due to Depreciation.

For a deeper dive, check out our recent article on the Depreciation Tax Shield


Daily Finance Interview Question – 08.31.2021

Question: All else equal, which type of valuation will result in a higher multiple: Trading or Transaction Comparables?

  • Trading Comparables
  • Transaction Comparables
  • Trick Question! They’re equal

Answer: All else equal, Transaction Comparables will result in a higher multiple because you typically have to pay more (a ‘Control Premium’) to buy an entire business (as opposed to buying just a partial stake)


Daily Finance Interview Question – 08.30.2021

Question: Which of the following would result in Negative Net Working Capital?

  • CA (Excl Cash) >CL
  • CL >CA (Excl Cash)
  • CA (Excl Cash) = CL
  • No Way To Tel

Answer:   If a company has negative NWC, that means that Current Liabilities are greater than Current Assets (Excl Cash)

For a deeper dive, check out our video on Negative Working Capital:


Daily Finance Interview Question – 08.27.2021

Question: A company buys Equipment (10-Year Life) for $100 (50% Cash / 50% Debt) at the beginning of Year 1. At the beginning of the next year, we write-off the entire piece of Equipment. Assume a 20% Tax Rate. What’s the Total Asset balance at the end of Year 2?

  • 32
  • +30
  • ($30)
  • ($32)

Answer:   Check out the answer in the video below.


Daily Finance Interview Question – 08.26.2021

Question: If I buy a $100 piece of Equipment with cash, what’s the net impact to Assets? Assume a 20% Tax Rate.

  • Assets: ($100) Impact
  • Assets: +$0
  • Assets: +$100
  • No Way To Tell

Answer:   Zero impact to the Income Statement. ($100) Capital Expenditures in Cash Flows from Investing which results in a ($100) Change in Cash. The ($100) decrease in Cash lowers the cash account by ($100). The offsetting entry to balance the Balance Sheet is to increase PP&E by +$100. So the net change to Assets is $0. 

Want to better understand this? check out our video on how to answer this question:


Daily Finance Interview Question – 08.25.2021

Question: What are the two most common methods for calculating Terminal Value?

  • Explicit Projs / Exit Multiple
  • Perpetuity Exit Multiple
  • Explicit Projs / Perpetuity
  • None of the Above

Answer:  The two most common approaches to calculate the value beyond Stage 1 of a DCF (i.e. the Terminal Value) are the Perpetuity Growth Method and the Exit Multiple Method.


Daily Finance Interview Question – 08.24.2021

Question: Which of the following is not part of Net Working Capital?

  • Accounts Receivable
  • Deferred Revenue
  • Property, Plant and Equipment
  • Accrued Liabilities

Answer:  Net Working Capital is calculated as Current Assets (excluding Cash) – Current Liabilities. Property, Plant and Equipment is a non-current Asset so it wouldn’t be included in Net Working Capital. 

For a deeper dive, check out our video on Net Working Capital:


Daily Finance Interview Question – 08.23.2021

Question: What is another name for Stage 2 in a typical DCF?

  • Explicit Cash Flow Projections
  • Terminal Value
  • EBITDA
  • All of the Above

Answer: In a typical DCF, Stage 1 reflects explicit Cash Flow Projections until the Business reaches maturity. The period after that is Stage 2, which is where we capture/calculate the Terminal Value.

For a deeper dive, check out our video on Stage 1 and Stage 2 of a DCF:


Daily Finance Interview Question – 08.20.2021

Question: Depreciation increases by $10. What’s the net impact to Assets (Cash + PP&E) on the Balance Sheet? Assume a 20% Tax Rate.

  • Assets: +$10
  • Assets: ($8)
  • Assets: +$8

Answer:  The $10 Depreciation Expense reduces Taxable Income by $10 which creates a tax credit of $2 ($10 Depreciation * 20% Tax Rate). 

The net impact to Net Income is ($8) which carries to CFO where we add the $10 Depreciation back which results in a net impact to CFO of +$2. The +$2 of CFO flows down to a Net Change in cash of +$2. The +$2 Cash impact increases the Cash account by +$2 and PP&E decreases by the ($10) Depreciation expense, leading to a net impact to Assets of ($8). 

The offsetting entry is adding the ($8) Net Income impact to Retained earnings to balance the Balance Sheet. 

Want to better understand this? check out our video on how to answer this question:


Daily Finance Interview Question – 08.19.2021

Question: Which of the following is a difference between EBITDA and Unlevered Free Cash flow?

Note: UFCF = Unlevered Free Cash Flow.

  • UFCF excludes reinvestment
  • EBITDA includes taxes
  • UFCF includes reinvestment
  • UFCF excludes taxes

Answer:  The correct answer is Unlevered Free Cash Flow incorporates reinvestments (Capital Expenditures + NWC), whereas EBITDA does not. 

For a deeper dive, check out our video on EBITDA vs Free Cash Flow:


Daily Finance Interview Question – 08.18.2021

Question: What impact does a $10 increase in Deferred Tax Liabilities have on cash flow?

  • $10 Use of Cash
  • $10 Source of Cash
  • No Impact on Cash

Answer:  The correct answer is $10 Source of Cash. This seems like a trick question because we’re now dealing with Taxes instead of the usual Inventory, Accounts Payable, etc, but the same rules apply. The rule of thumb to remember here is that Increases / (Decreases) in Liabilities result in a Source / (Use) of cash…and vice versa for Assets. 

For a deeper dive on Sources and Uses of Cash, check out our video on Net Working Capital:


Daily Finance Interview Question – 08.17.2021

Question: Define Cash Flow from Financing Activities in Plain English? Note: CF = Cash Flow.

  • CF for Dividends and Buybacks
  • CF to/from Lenders & Investors
  • CF to/from Lenders only
  • CF to/from Investors only

Answer:  Cash Flows from Financing reflect cash in and out from Lenders (Borrowing + Repayment) and Investors (Equity Issuances + Dividends and Buybacks). 

For a deeper dive, check out our video Cash Flow Statement:


Daily Finance Interview Question – 08.16.2021

Question: How would you characterize a company with ‘High Operating Leverage?’

  1. High Variable Cost
  2. High Fixed Costs
  3. No Fixed or Variable Costs

Answer:  Operating Leverage is a function of the degree to which costs are Fixed. If a Company has high Fixed costs it is said to have high Operating Leverage. 

For a deeper dive on Operating Leverage, check out this video:


Bi-Weekly Finance Interview Question – 08.13.2021

A company has $20 of D&A, a 20% Tax Rate, $35 in Cash Flow From Operations, Debt of $500 (5% Cost of Debt), $0 Cash and Total Equity Value of $250. The Company trades at 10x EV/EBITDA. What is the implied change in Net Working Capital?

  1. $8 Use of Cash
  2. ($9) Use of Cash
  3. $8 Source of Cash
  4. $10 Use of Cash

Check out the answer to our Weekly Finance Interview Challenge Question here:


Daily Finance Interview Question – 08.12.2021

Question: Which of the following is the unlevered Free Cash Flow formula. Note: CX below is ‘Capital Expenditures’.

  1. EBITDA + D&A – CX +/- NWC
  2. EBIT – Tax – D&A – CX +/- NWC
  3. EBIT – Tax + D&A – CX +/- NWC
  4. EBIT + Tax + D&A – CX +/- NWC

Answer:  The formula for Unlevered Free Cash flow is: EBIT – Tax + D&A – CapEx +/- Changes in Net Working Capital. This calculation gets us to the underlying cash generated by the business irrespective of its capital structure (i.e. Debt/Equity mix).

For more, check out our EBITDA vs Free Cash flow video for a deeper dive into the differences between EBITDA and Free Cash flow:


Daily Finance Interview Question – 08.11.2021

Question: A start-up just became profitable in the current year and has a 5% profit margin. More mature peer companies in the same industry have 20% profit margins. What’s the more appropriate multiple to use here?

  1. EV/Revenue
  2. EV/EBITDA
  3. Price/Book Value
  4. None of the Above

Answer:  Because this company is still in the early stages of its development, an EV/Revenue multiple would likely be more appropriate until the company achieves a normalized (or ‘mature’) level of profitability. 

For a deeper dive on EV/Revenue Multiples, check out this video:


Daily Finance Interview Question – 08.10.2021

Question: What is ‘Capital Intensity’ in the context of the Free Cash Flow formula….in Plain English?

  1. NWC Only
  2. CapEx + NWC
  3. D&A
  4. All of the Above

Answer:  Capital Intensity is the combination of Capital Expenditures and Net Working Capital, but in Plain English, these two items simply represent the reinvestments we have to make to maintain (and grow) the business.  

For a deeper dive, check out our Impact of Capital Intensity on Valuation video:


Daily Finance Interview Question – 08.09.2021

Question:  A Company has negative Net Working Capital (NWC). NWC is proportional to Sales. If the business doubles, what’s the impact on Cash from NWC?

  1. Negative Cash Impact
  2. Positive Cash Impact
  3. Both
  4. None of the Above

Answer: There will be a positive impact on Cash. If a company has negative NWC, that means that Current Liabilities are greater than Current Assets. If both grow proportional to sales, the absolute dollar growth in Current Liabilities will exceed the growth in Current Assets, resulting in an increase in Liability on a net basis, which is a Source of Cash.


Daily Finance Interview Question – 08.05.2021

Question: What gives rise to Deferred Tax Assets/Liabilities?

  1. Permanent Differences
  2. Temporary Differences
  3. An IRS Audit
  4. None of the Above

Answer: Temporary differences between book and GAAP accounting create Deferred Tax Assets/Liabilities.

GAAP and IRS Tax accounting rules are often quite different from each other. When there are disconnects between the two that will revert over time, those disconnects result in temporary differences which create deferred tax Assets and Liabilities.


Daily Finance Interview Question – 08.04.2021

Question: What is the CAPM Formula? Note: RF = Risk Free Rate & ERP = Equity Risk Premium)

  1. Beta * RF+ ERP
  2. RF + Beta * ERP
  3. RF + Beta + ERP
  4. None of the Above

Answer:  The formula for CAPM is RF + Beta * ERP.  The formula begins with the Risk-Free Rate (usually the 10 Yr US Treasury). This gives us a baseline for the Minimum Return we should expect if we’re taking zero risks. We then add a reward for taking incremental Risk in the form of Beta (which characterizes the volatility/riskiness of an individual stock) and multiply Beta by the Equity Risk Premium (which reflects the historical Reward for investing in Stocks vs Bonds over time). 

For a deeper dive, check out our Cost of Equity Formula video:


Daily Finance Interview Question – 08.03.2021

Question: Which of the following is NOT a characteristic of an Ideal LBO Candidate?

  1. Strong Management Team
  2. High Capital Intensity
  3. Stable Revenue
  4. Low Purchase Price

‘High Capital Intensity’ means high reinvestment needs, which limits the cash available for Debt Paydown and/or reinvestment. The ideal LBO candidate has LOW reinvestment needs (or low ‘Capital Intensity’).

On the whole, the ideal LBO Candidate has: 1) Stable and Predictable Revenues, 2) Low Capital Intensity, 3) Attractive Price, 4) Strong Management Team, and 5) Strong Exit Strategy.

For more, check out our Walk Me Through an LBO deep-dive article.


Daily Finance Interview Question – 08.02.2021

Question: If a company with a P/E Ratio of 15x acquires another company with a P/E Ratio of 10x (all Stock Deal) is the deal Accretive or Dilutive?

  1. Accretive
  2. Dilutive
  3. No Way to Tell

The deal will be Accretive for the Acquiring Company because the value of its stock per dollar of earnings is greater than that of the Target Company. As a result, it will need to issue fewer proportional shares per dollar of earnings to buy out the Target company’s stock. 

For a deeper dive, check out our Accretion/Dilution in Plain English in video:


Daily Finance Interview Question – 07.30.2021

Finance Interview Question Challenge: A company has $100 in Debt, but is able to pay it off at a 20% Discount to Face Value. Assume a 25% Tax Rate. What is the Net Change in Total Assets?

  1. ($100)
  2. ($85)
  3. ($60)
  4. $60

Check out the video below for a full walkthrough of our weekly challenge question:


Daily Finance Interview Question – 07.29.2021

Question: What is Unlevered Free Cash Flow in Plain English?

  1. Pre-Tax Cash Flow incl debt
  2. Pre-Tax Cash Flow excl debt
  3. After-tax Cash Flow incl debt
  4. After-tax Cash Flow excl debt

Unlevered Free Cash Flow reflects after-tax Cash Flow (including reinvestments) without the impact of Debt.

For a deeper dive, check out our Walk Me Through a DCF article.


Daily Finance Interview Question – 07.28.2021

Question: What does it mean to ‘Capitalize’ an item to the Balance Sheet?

  1. Expense Immediately
  2. Record to B/S; Expense later
  3. Expense all next year
  4. None of the Above

Capitalization is the process of recording an expense on a Company’s Balance Sheet as an Asset and expensing it over time (typically in proportion to its useful life). An example of this would be the Depreciation of Property, Plant, and Equipment over its useful life.

For a deeper dive, check out our $10 Depreciation Impact video:


Daily Finance Interview Question – 07.27.2021

Question: I buy Inventory at the beginning of the month for $100 and at the end of the month, the inventory remains unsold. What is the Income Statement (I/S) impact?

  1. ($100) Expense on I/S
  2. ($100) Cash on the I/S
  3. No impact on the I/S
  4. All of the Above

There is no Income Statement impact because the Inventory won’t hit the Income Statement until it is sold to a customer.

For a deeper dive, check out our 3 Statement Impact (Inventory + PP&E) video:


Daily Finance Interview Question – 07.22.2021

Question: Describe Cash Flows From Operations in Plain English. Note: CF is Cash Flow in answers below.

  1. CF after investment in CapEx
  2. CF generated by Business
  3. CF Including Debt & Equity
  4. All of the above

Cash Flows From Operations reflects the Cash generated by the Business during the period.

By contrast, Cash Flows from Investing reflects reinvestments in the business as well as the purchase/sale of investments. Cash Flows from Financing reflects cash in and out from lenders and investors.

For a deeper dive, check out our Describe the Cash Flow Statement video:


Daily Finance Interview Question – 07.21.2021

Question: What is EBITDA?

  1. A ‘proxy’ for Free Cash Flow
  2. An unlevered profit metric
  3. Both #1 and #2
  4. #1 Only

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

EBITDA (by definition) excludes the impact of Interest from Debt and is thus an Unlevered (i.e. excluding Debt) metric.

In addition, EBITDA is often called a ‘Cash Flow Proxy’ because it excludes all non-cash charges. That said, it’s not actual Cash Flow which we dive into in the video below.

For more, check out our EBITDA vs Free Cash flow video for a deeper dive into the differences between EBITDA and Free Cash flow:


Daily Finance Interview Question – 07.20.2021

Question: Which multiple is most commonly used to value a business that has negative EBITDA?

  1. EV/EBITDA
  2. P/E Ratio
  3. EV/Revenue
  4. All of the Above

You would need to use an EV/Revenue multiple for a Business with Negative EBITDA because the denominator in EV/EBITDA and Price / Earnings (P/E) ratios require positive earnings. 

In other words, if you applied a valuation multiple to negative EBITDA or Net Income, you’d get a negative number which wouldn’t be useful. 

For a deeper dive,  check out our EV/Revenue Multiple video:


Daily Finance Interview Question – 07.19.2021

Question: Will a decrease in an Asset result in a Source or Use of Cash?

  1. Source
  2. Use
  3. Both
  4. None of the Above

Answer: A decrease in an Asset would be a Source of Cash. The rule of thumb to remember here is that Increases / (Decreases) in Assets result in a (Use) / Source of Cash…and vice versa for Liabilities. Interviewers ask this to test whether you understand the fundamental nature of Assets (and Liabilities).

For a deeper dive on this topic, check out this video:


Daily Finance Interview Question – 07.15.2021

Question: When would you use EV/Revenue as opposed to EV/EBITDA?

Answer: EV/Revenue is used for businesses that are currently unprofitable and often for any business that has yet to reach a mature cost structure/profit margin. After that point, is when it’s ideal to use EV/EBITDA.

Want to better understand this?

Check out our video on how to answer this question:


Daily Finance Interview Question – 07.14.2021

Question: Walk me through a DCF at a very high level.

Answer: 1) Project future Cash Flow until the business reaches maturity (usually 5-10 years). 2) Calculate Terminal Value. 3) Discount the Projected Cash Flows and Terminal Value using WACC. 4) Work from Enterprise Value to Equity Value by subtracting Debt and adding Cash. 5) Calculate Price per Share by dividing Equity Value by the Number of Shares. 

Want to better understand this? Check out our top-ranked Definitive Guide on how to answer ‘Walk Me Through a DCF’.


Daily Finance Interview Question – 07.13.2021

Question: What is the appropriate period of time to project out the Stage 1 phase of your Discounted Cash Flow analysis?

Answer: For a standard (DCF) analysis, we would typically project out for 5-10 years. The underlying goal is to project the business out until it reaches maturity. 

Want to better understand this? Check out our video on how to answer this question:


Weekly Finance Challenge Question – 07.12.2021

Q: Company X is buying Company Y for $35.00 per share. Company Y is estimated to generate Earnings Per Share of $1.75 in the coming year. Company X funds the deal with 30% Debt (5% Rate), 50% Cash (2% Rate), and 20% Equity (25x PE Ratio). Assume both companies have a 30% tax rate. Is the deal Accretive or Dilutive?

  1. Accretive
  2. Dilutive
  3. No Way to Tell

Check out the answer to our Weekly Finance Challenge Question here:


Daily Finance Interview Question – 07.08.2021

Question: What is a “Football Field” in the context of valuation?

Answer: A Football Field is a common chart in Investment Banking that lays out the range of valuations for a particular company across multiple valuation methods (DCF, Comps, LBO, etc.).


Daily Finance Interview Question – 07.07.2021

Question: When we say we “triangulate” to a value, what does that mean?

Answer: When valuing a business, we typically look at multiple valuation approaches (DCF, Comps, LBO, etc.) and make a judgment call about the most appropriate valuation range.


Daily Finance Interview Question – 07.06.2021

Question: If a business will grow forever and you have a choice between Negative or Positive Working Capital, which would you prefer. Assume Working Capital is proportional to Revenue.

Answer: You would choose the business with Negative Working Capital because it will generate extra cash from the Negative Working Capital as it grows into perpetuity. 

Want to better understand this? Check out our video on how to answer this question:


Daily Finance Interview Question – 07.01.2021

Question: What are the two most common methods for projecting Terminal Value?

Answer: The two most common approaches are the Perpetuity Growth Method and the Exit Multiple Method. 

Want to better understand this? Check out our top-ranked Definitive Guide on how to answer ‘Walk Me Through a DCF’.


Daily Finance Interview Question – 06.30.2021

Question: What is capital intensity and how does it impact valuation?

Answer: Capital Intensity describes the reinvestment requirements of a business (Capital Expenditures + Working Capital). All else equal, the higher the degree of capital intensity, the lower Cash Flow will be and thus the lower Valuation will be as well. The reverse is also true. 

Want to better understand this? Check out our video on how to answer this question:


Daily Finance Interview Question – 06.29.2021

Question: We use cash to pay off $100 of Debt at face value. How does that affect the 3 financial statements? (20% tax rate)

Answer: Zero impact to the Income Statement. ($100) Debt Paydown in Cash Flows from Financing which results in a ($100) Change in Cash. The ($100) decrease in Cash lowers the cash account by ($100). The offsetting entry to balance the Balance Sheet is to reduce Debt by ($100). 

Want to better understand this? Check out our video for more on this question:


Weekly Finance Interview Challenge Question – 06.28.2021

Question: Company X is buying (i.e. Acquiring all of the Stock) of Company Y for $35.00 per share. Company Y is estimated to generate Earnings Per Share of $1.75 in the coming year. Company X funds the deal entirely with Debt that costs 10% per year. Assume both companies have a 30% tax rate. Is the deal Accretive or Dilutive?

  1. Accretive
  2. Dilutive
  3. No Way To Tell

Check out the answer to our Weekly Finance Interview Challenge Question here:


Daily Finance Interview Question – 06.24.2021

Question: Walk me through the impact of a $10 increase in PIK Interest across the 3 financial statements? (20% tax rate)

Answer: The $10 PIK Interest reduces Taxable Income by $10 which creates a tax credit of $2 ($10 PIK Interest * 20% Tax Rate). The net impact to Net Income is ($8) which carries to CFO where we add the $10 PIK Interest back which results in a net impact to CFO of +$2, which flows down to a Net Change in Cash of +$2. The +$2 Cash impact increases the Cash account by +$2. On the other side of the Balance Sheet, the Debt account increases by the +$10 PIK Interest expense and we deduct the ($8) Net Income impact in Retained earnings to balance the Balance Sheet.

Want to better understand this? check out our video on how to answer this question:


Daily Finance Interview Question – 06.23.2021

Question: If I buy a piece of equipment in cash for $100, how does it impact the three financial statements? (20% tax rate)

Answer: Zero impact to the Income Statement. ($100) Capital Expenditures in Cash Flows from Investing which results in a ($100) Change in Cash. The ($100) decrease in Cash lowers the cash account by ($100). The offsetting entry to balance the Balance Sheet is to increase PP&E by +$100. 

Want to better understand this? check out our video on how to answer this question:


Daily Finance Interview Question – 06.22.2021

Question: Walk me through the impact of a $10 increase in depreciation on the 3 financial statements? (20% tax rate)

Answer: The $10 Depreciation Expense reduces Taxable Income by $10 which creates a tax credit of $2 ($10 Depreciation * 20% Tax Rate). The net impact to Net Income is ($8) which carries to CFO where we add the $10 Depreciation back which results in a net impact to CFO of +$2. The +$2 of CFO flows down to a Net Change in cash of +$2. The +$2 Cash impact increases the Cash account by +$2 and PP&E decreases by the ($10) Depreciation expense, leading to a net impact to Assets of ($8). The offsetting entry is adding the ($8) Net Income impact to Retained earnings to balance the Balance Sheet. 

Want to better understand this? check out our video on how to answer this question:


Daily Finance Interview Question – 06.17.2021

Question: What is the difference between an ‘Unlevered’ and a ‘Levered’ return?

Answer: The Unlevered return on any asset reflects the pure profit (ideally Cash Flow), excluding the impact of Debt, generated by the Asset relative to the Purchase Price/Value of that asset. Conversely, the Levered return on any Asset takes into account the impact of Interest payments on Debt on Cash Flow relative to Equity Purchase Price/Value. 
Explanation: This goes deeper than the typical returns questions to test whether you understand the fundamental nature of return generation and, in particular, the difference between a return generated by a standalone Asset versus the return that is earned by investors, which is simply a function of the level of Debt funding (i.e. the Capital Structure).


Daily Finance Interview Question – 06.16.2021

Question: What makes an ideal LBO candidate?

Answer: The ideal LBO Candidate has: 1) Steady/Recurring Cash Flows, 2) Low Reinvestment Needs, 3) Strong Management, and 4) Strong Exit Options.

Explanation: This question tests whether you understand what types of factors are necessary to filter for when executing a deal with a large amount of Debt. In short, the reason you need these items is that there’s little margin for error (Items #1 and #3), Cash Flow increases returns via Debt Paydown (Item #2), and you want to sell at an attractive price (Item #4)


Daily Finance Interview Question – 06.15.2021

Question: If one company with a P/E Ratio of 15x acquires another company with a P/E Ratio of 10x in an all Stock deal, will the deal be Accretive or Dilutive?

Answer: The deal will be Accretive for the acquiring company because the value of its stock per dollar of earning is greater than that of the target company. As a result, it will need to issue fewer proportional shares per dollar of earnings to buy out the Target company’s stock. 
Explanation: This is a question that many people simply memorize the answer to, but can’t explain the ‘why’ behind the question. The short story here is that the combined share counts of the company shrink in this type of deal (because the Acquirer’s stock is more valuable), but Net Income remains the same, so as a result, Earnings Per Share increases.


Weekly Challenge Question – 06.14.2021

Question: A company sells a PP&E for $100 that was on the books at $50 and buys new PP&E for $75 and funds the purchase with a Loan. Assume a 30% Tax Rate. What is the Net Change in Assets?

  1. $100
  2. $110
  3. ($100)
  4. $50

Check out the answer to our Weekly Finance Challenge Question here: 


Daily Finance Interview Question – 06.10.2021

Question: How do you calculate Net Working Capital?

Answer: Working Capital is calculated as Current Assets (excluding Cash) minus Current Liabilities.
Explanation: This is simply a test of your basic Accounting knowledge. The interviewer is looking to see if you’ve got the fundamentals of Accounting pinned down.


Daily Finance Interview Question – 06.09.2021

Question: What does it mean to ‘Capitalize’ an item to the Balance Sheet?

Answer: Capitalization is the process of recording an expense on a Company’s Balance Sheet as an Asset and expensing it in proportion to its useful life over time. An example of this would be the Depreciation of Property, Plant, and Equipment over its useful life.
Explanation: This is simply a test to see how deep you’ve gone in your Accounting studies. Many people learn about D&A, but understanding what Capitalization means in a more abstract sense typically requires a bit more studying.


Daily Finance Interview Question – 06.09.2021

Question: What does it mean to ‘Capitalize’ an item to the Balance Sheet?

Answer: Capitalization is the process of recording an expense on a Company’s Balance Sheet as an Asset and expensing it in proportion to its useful life over time. An example of this would be the Depreciation of Property, Plant, and Equipment over its useful life.
Explanation: This is simply a test to see how deep you’ve gone in your Accounting studies. Many people learn about D&A, but understanding what Capitalization means in a more abstract sense typically requires a bit more studying.


Daily Finance Interview Question – 06.08.2021

Question: I buy Inventory at the beginning of the month for $100 and at the end of the month the Inventory remains unsold. What is the Income Statement impact?

Answer: There is no Income Statement impact because the Inventory won’t hit the Income Statement until it is sold to a customer.
Explanation: This question simply tests your fundamental understanding of how certain transactions impact the three financial statements. In this situation, Inventory doesn’t have any impact until it’s sold.


Weekly Challenge Question – 06.07.2021

Question: A company has $100 of Revenue, $5 of D&A and a 20% EBIT Margin. The Company generates $5 of Interest Expense (5% Rate) and $1 of Interest Income (2% Rate). What is Net Debt / EBITDA?

  1. 3.0x
  2. 5.0x
  3. 2.5x
  4. 2.0x
  5. No Way To Tell

Check out the answer to our Weekly Finance Challenge Question here: 


Daily Finance Interview Question – 06.04.2021

Question: Walk me through the CAPM formula in Plain English.

Answer: The formula starts with the Risk-Free Rate (usually the 10 Yr US Treasury). This gives us a baseline for the Minimum Return we should expect if we’re taking zero risk. We then add a reward for taking incremental Risk in the form of Beta (which characterizes the volatility/riskiness of an individual stock) and multiply Beta by the Equity Risk Premium (which reflects the historical Reward for investing in Stocks vs Bonds over time).
Explanation: Memorizing the formula for the Capital Asset Pricing Model (CAPM) is relatively easy, but the underpinnings are a bit harder to express if you aren’t prepared. The trick here is to understand that we are trying to capture investor expected returns for a particular company and that we use the formula to start at a Baseline with zero risk and add increments of Reward based on the Risk investors are taking on.


Daily Finance Interview Question – 06.03.2021

Question: On some occasions, Preferred Stock is included in the WACC formula. Why is that the case?

Answer: The goal of WACC is to blend the cost of capital (i.e. the expected returns) of all of our capital providers. So if a company has Preferred Stock, we have to include the proportional costs of the Preferred Stock as well as regular Debt and Equity.
Explanation: This question tests whether you can go beyond the basic WACC formula to understand the underlying idea behind WACC, which is to capture the blended cost of capital for all of a company’s capital providers.


Daily Finance Interview Question – 05.27.2021

Question: How could we make significant net income but have zero cash flow?

Answer: The most likely reason for this would be that we recorded revenue in the Income Statement, but hadn’t collected cash yet. This is because accounting reflects the underlying economic substance of transactions and not cash flows.
Explanation: This question tests whether or not you understand the difference between cash and accrual accounting. In accrual accounting, we reflect when transactions are substantially complete, even if cash hasn’t been collected yet.


Daily Finance Interview Question – 05.26.2021

Question: Describe the three sections of the cash flow statement in plain English.

Answer: Cash Flows From Operations reflect the cash generated by the business during the period. Cash Flows from Investing reflect reinvestments in the business as well as the purchase/sale of investments. Cash Flows from Financing reflect cash in and out from lenders and investors.
Explanation: While anyone can memorize the components of the Cash Flow Statement, understanding the underlying substance is not nearly as easy. Check out the video we just released on this very question:


Daily Finance Interview Question – 05.25.2021

Question: Will a decrease in Deferred Revenue results in a Source or Use of Cash?

Answer: Deferred Revenue is a liability and a decrease in liability reflects an outflow (or the foregoing of) cash so it would result in a Use of cash.
Explanation: The rule of thumb to remember here is that Increases / (Decreases) in Liabilities result in a Source / (Use) of cash…and vice versa for Assets. Interviewers ask this to test whether you understand the fundamental cash impact of Assets (and Liabilities).


Daily Finance Interview Question – 05.20.2021

Question: What gives rise to Deferred Tax Assets/Liabilities?

Answer: GAAP and IRS Tax accounting rules are often quite different from each other. When there are disconnects between the two that will revert over time, those disconnects result in temporary differences which create deferred tax Assets and Liabilities. If you owe more IRS tax now (relative to GAAP tax) it creates a deferred tax asset. If you owe less IRS tax now (relative to GAAP tax) it creates a deferred tax liability.
Explanation: Deferred taxes are a difficult concept to understand and as a result can be used to confuse interview candidates. This tests not only whether you understand the underlying drivers of deferred taxes, but whether you can navigate a complex finance/accounting concept. The key is to have a simplified framework (the last two sentences of our ‘Answer’ post so you can easily answer these questions.


Daily Finance Interview Question – 05.19.2021

Question: A start-up just became profitable in the current year and has a 5% profit margin. More mature peer companies in the same industry have 20% profit margins. What’s the more appropriate multiple to use here?

Answer: Because this company is still in the early stages of its development, an EV/Revenue multiple would likely be more appropriate until the company achieves a normalized (or ‘mature’) level of profitability. For more details, check out our video on the topic below.
Explanation: The typical delineation between when to use EV/Revenue multiples as opposed to EV/EBITDA multiples is that you use EV/Revenue when a company is losing money. But there’s a bit of a grey area between initial profitability and full/mature margins in which judgment is required, which is what this question is testing.


Daily Finance Interview Question – 05.13.2021

Question: As the owner of a business, how would you explain: EBIT – Tax + D&A – CapEx +/- Changes in Net Working Capital…in Plain English?

Answer: This is my after-tax profit (in cash) after taking into account reinvestment back into the business.
Explanation: This is a variation of, “What is the Free Cash Flow Formula?”, but it tests whether you can grasp the underlying substance of the formula as opposed to just memorizing its components.


Daily Finance Interview Question – 05.12.2021

Question: What is ‘Capital Intensity’ in the context of the Free Cash Flow formula….in plain English?

Answer: Capital Intensity is the combination of Capital Expenditures and Net Working Capital, but in Plain English, these two items simply represent the reinvestments we have to make to maintain (and grow) the business.
Explanation: This tests whether you understand the underlying concept of Capital Intensity (as opposed to just memorizing the components). Note that some people think of only Capital Expenditures when they say ‘Capital Intensity’, but it really does include Capital Expenditures and Changes in Net Working Capital since both are required reinvestments in the business. Still, confused? Check out our Youtube video where we walk through this step-by-step.


Daily Finance Interview Question – 05.11.2021

Question: In the Free Cash Flow Formula, why do we start with EBIT – Tax…as opposed to EBITDA – Income Tax?

Answer: EBIT takes into account Depreciation and Amortization (‘D&A’) which is a non-cash expense that lowers our taxes owed. This ‘shields’ us from tax liability and so the D&A expense impact is referred to as the ‘Depreciation Tax Shield’.
Explanation: This is just a variant of the standard, “What is the Depreciation Tax Shield” question and it tests whether you understand the concepts that underlie this part of the Free Cash Flow formula calculation.


Daily Finance Interview Question – 05.06.2021

Question: Walk me through the Free Cash Flow formula.

Answer: The formula for Unlevered Free Cash flow is: EBIT – Tax + D&A – CapEx +/- Changes in Net Working Capital. This calculation gets us to the underlying cash generated by the business irrespective of its capital structure (i.e. Debt/Equity mix)
Explanation: This question typically starts with the definition and ends with the interviewer digging through each item to make sure you grasp the conceptual underpinnings. Next week we’ll walk through the conceptual drivers of this formula step by step.


Daily Finance Interview Question – 05.05.2021

Question: Describe Cash Flows From Financing in plain English.

Answer: Cash Flows from Financing (or CFF) reflect cash in and out from Lenders and Investors. With respect to our Lenders, this section reflects the cash inflows from raising debt and cash outflows from paying off debt (note: this section does not include interest expense under US GAAP). With respect to Investors, this section reflects cash inflows from raising Investor (or Equity) capital and cash outflows from Dividends and Share Buybacks.
Explanation: It’s one thing to memorize the definition from an accounting perspective, but this question tests whether you understand the core business activities that this section reflects.


Daily Finance Interview Question – 05.04.2021

Question: What is the difference between a current and non-current asset?

Answer: A current asset is expected to be converted into cash within 12 months or one operating cycle. A non-current will be converted into cash beyond one year.
Explanation: This is just a simple test of your accounting knowledge. To analyze a Balance Sheet, we need to understand the key distinctions between the different categorizations of assets (and liabilities).


Daily Finance Interview Question – 04.29.2021

Question: If I run a Pizza shop, what is the difference between Gross Profit and Operating Profit?

Answer: Gross profit is the money received for all Pizzas sold less the cost of dough, sauce, etc. Operating Profit goes a step further and subtracts the cost of marketing and sales as well as overhead items like rent and employee salaries.
Explanation: This is a twist on the traditional question about what is the difference between Gross Profit and Operating Profit. In short, it tests whether you understand that Gross Profit reflects just the Revenue and Costs of the goods/services sold, whereas Operating Profit also incorporates the Overhead Costs (Selling, Marketing, Rent, Wages, etc.) that are needed to run the business.


Daily Finance Interview Question – 04.28.2021

Question: What’s the difference between Accounts Receivable and Deferred Revenue?

Answer: If I am paid before a sale is earned/completed, then I create Deferred Revenue. If I am paid after the sale is earned/completed, then I create Accounts Receivable.
Explanation: This question tests your understanding of Accounting. In particular, whether you understand that if payment is received before a sale is completed, it results in a Liability because you ‘owe’ the service in the future. On the other hand, if payment is received after the sale is completed, it results in an Asset because you are owed a future benefit from the sale.


Daily Finance Interview Question – 04.27.2021

Question: One business outsources manufacturing and another doesn’t, which business has lower Capital Intensity?

Answer: The business that outsources has lower Capital Intensity.
Explanation: This question tests whether you understand the underlying drivers of cash flow…in particular the concept of Capital Intensity, which is a function of Capital Expenditures and Net Working Capital. In the case of this question, a business that outsources has lower Capital Expenditures and thus lower Capital Intensity.


Daily Finance Interview Question – 04.26.2021

Question: What is EBITDA?

Answer: Earnings Before Interest, Taxes, Depreciation, and Amortization. This is a profit metric that is often called a ‘Cash Flow Proxy’ because it excludes all non-cash charges.
Explanation: This question can range from a simple definition question to further questions on the underlying concept. While the definition is important, it’s more important to understand what this metric is used for. In particular, it’s a quick way to assess cash flow generation without doing the full Unlevered Free Cash Flow formula. Because it’s so much easier to calculate, it’s commonly used across Investment Banking and Private Equity.


Daily Finance Interview Question – 04.22.2021

Question: What is the Matching Principle?

Answer: The Matching principle states that we have to recognize (i.e. ‘Match’) expenses in the same period in which the revenues (arising from those expenses) are earned.
Explanation: This is a test of both your general accounting knowledge as well as a test of your understanding of one of the core underpinnings of accounting which is that the substance (not the cash) of revenues and expenses is what we are recording.


Daily Finance Interview Question – 04.21.2021

Question: Describe Cash Flows from Operations (CFO) in plain English

Answer: This is the cash generated by the operations (sales of goods and services) over a period of time. Another way to look at this is that it reflects cash Net Income.
Explanation: Many candidates memorize the answers to interview questions but don’t truly understand the meaning behind the numbers or concepts and this tests whether you can explain the underlying substance of the first section of the cash flow statement in plain English.


Daily Finance Interview Question – 04.20.2021

Question: Is an increase in a Deferred Tax Liability at Source or Use of Cash?

Answer: An increase in a Deferred Tax liability is a Source of cash.
Explanation: This seems like a trick question because we’re now dealing with Taxes instead of the usual Inventory, Accounts Payable, etc, but the same rules apply. The rule of thumb to remember here is that Increases / (Decreases) in Assets result in a Use / (Source) of cash…and vice versa for liabilities. Interviewers ask this to test whether you understand the fundamental nature of Assets (and Liabilities).


Daily Finance Interview Question – 04.19.2021

Question: If you could only have two of the three financial statements, which would you choose and why?

Answer: The Income Statement and Balance Sheet because you can derive a Cash Flow Statement from them.
Explanation: This is a test of your understanding of the fundamental connections between the three statements and in particular, how a Cash Flow Statement is created from an Income Statement and Balance Sheet.


Daily Finance Interview Question – 04.15.2021

Question: When people say that M&A is an ‘art’ and a ‘science’, what does that mean?

Answer: The science refers to the mechanical valuation methods (Comps, DCF, etc.), but the art is in making a judgment call on valuation based on the outputs of the various valuation methodologies.
Explanation: This question tests whether you understand the fundamental nature of M&A/Valuation. In short, the analytical work provides a foundation for all valuations, but ultimately the valuation is based on judgment around which valuation makes the most sense, which is not a mechanical process.


Daily Finance Interview Question – 04.14.2021

Question: How do you value a business that is losing money?

Answer: For comparables analysis, you could use EV/Revenue multiples. For a Discounted Cash Flow analysis, you’d have to project out until the business makes money and ultimately hits a steady-state level of growth.
Explanation: This test is a flip of, what multiple would you use to value a money-losing/early-stage business. It also tests whether you understand the overarching goal/process of building out a DCF analysis.


Daily Finance Interview Question – 04.13.2021

Question: Which comparable valuation method (trading or transaction) will result in a higher valuation? Why?

Answer: Precedent transactions typically result in a higher valuation because you have to pay a ‘Control Premium’ to acquire an entire business vs buying a smaller stake.
Explanation: This question tests whether you understand that buying an entire business requires paying extra (vs buying a smaller, non-controlling stake) and you pay more because you now gain control of the trajectory of the entire business.


Daily Finance Interview Question – 04.12.2021

Question: How would you value a Pizza Shop?

Answer: You could use one of the three primary valuation methods: Discounted Cash Flow Analysis, Trading Comparables or Transaction Comparables and you’d triangulate to a range of values based on the outputs of those three methods.
Explanation: This is just a spin on the common question “What are the three valuation methods?”. Many candidates memorize the answer to this question, so interviewers often ask this question to see if you understand how the three methods would be applied in a real-life setting.


Daily Finance Interview Question – 04.08.2021

Question: Assume a company has negative Net Working Capital (NWC) and is proportional to sales. If the business doubles overnight, what’s the impact on cash from NWC?

Answer: There will be a positive impact on cash. If a company has negative NWC, that means that current liabilities are greater than current assets. If both grow proportional to sales, the growth in current liabilities will exceed the growth in current assets, resulting in an increase in liability on a net basis, which is a Source of Cash.
Explanation: The rule of thumb is that if a company has negative NWC (and all the underlying components) are proportional to revenue…and revenue grows…it will result in a cash inflow from NWC…and if the revenue declines, there will be a cash outflow from NWC. Negative NWC is a tricky concept, but if you can remember this rule of thumb, then you’re in good shape.


Daily Finance Interview Question – 04.07.2021

Question: Will a decrease in an Asset result in a Source or Use of Cash?

Answer: An increase in an Asset reflects an outflow (or the foregoing of) Cash so it would result in a Use of cash.
Explanation: The rule of thumb to remember here is that Increases / (Decreases) in Assets result in a (Use) / Source of cash…and vice versa for liabilities. Interviewers ask this to test whether you understand the fundamental nature of Assets (and Liabilities).


Daily Finance Interview Question – 04.06.2021

Question: Why isn’t cash part of working capital?

Answer: In technical terms, Cash is a ‘Non-Operating Asset’ as opposed to items like Inventory, Accounts Receivable, etc. which are ‘Operating Assets’. In plain English terms, Cash is an output of the business and is not employed in the business’ operations. In contrast, an item like Accounts Receivable is directly employed in the business.
Explanation: This is tricky for people who are new to Finance/Accounting because the Accounting definition for Working Capital is Current Assets – Current Liabilities. And according to Accounting, Cash is a Current Asset. But the entire goal with analyzing Working Capital is to understand how much money is tied up in the business (aside from cash) in short-term assets/liabilities and so Cash is excluded.


Daily Finance Interview Question – 04.05.2021

Question: What differentiates Cost of Goods Sold (COGS) and Selling, General & Administrative (SG&A) expense?

Answer: COGS includes any costs directly related to the production of the goods or services a business sells.
Explanation: This question helps an interviewer understand whether or not you understand the key differences between the two main categories of ‘Above The Line’ costs for a business.