Finance Interview Questions (and Answers)

1. Walk me through the three financial statements.

• Balance Sheet: This statement shows a company’s assets, liabilities, and shareholders’ equity, essentially outlining what the company owns, what it owes, and its net worth.
• Income Statement: This statement details the company’s revenues, expenses, and net income, providing insight into its profitability.
• Cash Flow Statement: This statement highlights the cash inflows and outflows from three areas: operating activities, investing activities, and financing activities, giving a comprehensive view of the company’s cash generation and usage.

2. If I could use only one statement to review the overall health of a company, which statement would I use, and why?

"Cash is king." The statement of cash flows offers a true picture of the company’s cash generation, which is crucial for understanding its financial health. However, other answers can also be valid with good justification, such as:

Balance Sheet: Because assets are the true drivers of cash flow.

Income Statement: Because it shows the earning power and profitability of the company on an accrual basis.

3. If it were up to you, what would our company’s budgeting process look like?

A good budgeting process should:

• Have buy-in from all departments.
• Be realistic yet ambitious.
• Be risk-adjusted to allow for a margin of error.
• Align with the company’s overall strategic plan.

The process should be iterative, involving all departments and can be zero-based (starting from scratch) or based on the previous year’s budget, depending on the business type. Additionally, a well-defined budgeting/planning calendar is essential for everyone to follow.

4. When should a company consider issuing debt instead of equity?

A company should optimize its capital structure and consider issuing debt if:

• It has taxable income and can benefit from the tax shield of debt.
• It has steady cash flows and can meet interest payment obligations.
• Issuing debt lowers the company’s weighted average cost of capital (WACC).

5. How do you calculate the WACC?

WACC (Weighted Average Cost of Capital) is calculated as:

WACC=(D+ED​×rd​×(1−T))+(D+EE​×re​) Where:

• $D$ = Market value of debt
• $E$ = Market value of equity
• $r_d$ = Cost of debt
• $r_e$ = Cost of equity
• $T$ = Tax rate

6. Which is cheaper, debt or equity?

Debt is generally cheaper because:

• It is paid before equity.
• It has collateral backing.
• It ranks ahead of equity in liquidation scenarios.

However, financing decisions should consider the trade-offs between debt and equity. While debt might be cheaper due to tax benefits and lower risk to lenders, it also increases the company’s financial risk. Thus, the decision should balance cost with the company’s risk tolerance and financial strategy.