1. What statement would you use to review the overall health of a company, if you could use only one statement?
To review the overall financial health of a company, I would use the cash flow statement.
A cash flow statement measures the overall cash inflow or outflow of a company, which
can help a financial analyst to get an estimate of the amount of working capital needed
in a company. It can also set long term or short term financial goals for the company.
The cash flow statement also provides insights as to where money has been spent by
the company.
2. Is debt cheaper than equity?
Yes, for a company, debt is cheaper as well as safer than equity for a couple of reasons-
● Tax benefits- The company effectively pays a lesser rate of interest in
comparison to the actual rate, since there is a reduction in taxable profit and tax
expense.
● Improvement in financial discipline- Debt sets a bar for each spending, each
transaction in the company. Each financial decision taken for and by the
company needs to be justifiable, hence spending in debt is limited as compared
to equity.
3. What would you mean when talking about negative capital?
Negative working capital is when the company’s current assets are less than its current
liabilities. This is a result of the company having incurred an immense cash outlay. A
company’s working capital can also negative when there is quite a bit of increase in its
payable accounts as a result of a substantial purchase of services from the vendors.
4. What are the major factors that drive mergers and acquisitions of a company?
While there are a number of factors that drive mergers and acquisitions, the main driving
force behind two companies merging is profitability in operations and they work better
than when they are pitted against one another. Sometimes a merger or an acquisition
brings more tax benefits for both. Other reasons could include cross-selling to each
other, manage the entire target market themselves taking control of a larger percentage
in the market, and lesser competition while they are hiring resources for similar roles
.
5. If you were to lend 100 million dollars to a company, what would be your deciding
factors?
As a moneylender, you would have a couple of deciding factors-
● Credit report- some of the most useful indicators on a credit report can be, the
number of times a company has defaulted in credit payments or if it has a history
of bankruptcy
● Business credit report- to decide what the credit utilization ratio is, how fast
credits lent by previous money-lenders have been cleared
● Debt to income ratio- the lower the debt to income ratio of a company, the better.
Higher income to debt ratio might mean a higher payment forfeiting risk.
6. What is the difference between expense models and quarterly forecasting?
An expense model represents a budget plan. It identifies a company’s variable and fixed
costs and presents the information in an easy to understand, readable and editable
format. A company’s expense model accurately forecasts its profit or loss.
Quarterly forecasting, on the other hand, is the accumulation and study of data for a
period of 3 months or 90 days, to create financial statements that predict future
information for a company in monetary, performance or business terms.
7. What are the three major sources of short-term finance that a company can use?
The three important sources of short term finance for a company include-
● Bank loans- Commercial banks are a good option for short term financing for a
company. A company can either opt for single, lines of credit or end-of-period
payment loan options while choosing from bank loans.
● Commercial papers- Commercial papers are not-so-secure but cheaper short-
term debt options. These are either dealer papers (dealers charging service fee)
or direct papers (investors buying security directly from the company).
● Secured financing- This is often a risky form of short-term finance. The company
has to pledge an asset as a form of collateral for the loan, which acts as a
secured debt to the creditor or bank that lends the money.
8. How does a cash flow statement work?
A cash flow statement essentially works in the order of explaining to the investors where
the company’s money is coming from, what is the amount of money spent by the
company and how well or poor its operations are running. It is a financial statement that
sums up the cash inflow and outflow of a company and has the following main elements
determining its factors-
● Cash from operations
● Cash from investments
● Cash from finances
● Non-cash activity disclosure
9. What would you mean when talking about discount cash flow management?
Discount cash flow or DCM is the model or management method to estimate the
valuation of an investment. This evaluation is completely made on the basis of an
estimate of the company’s future cash flows which are then discounted back to a more
current value using the time-value of money.
10. If you were to issue stocks for a start-up, what is the kind you would go for?
In case of a start-up, issuing stocks, there would be two kinds-
● Common stock- type of corporate equity where dividend vary from one
shareholder to another. This is generally issued to employees and founders.
● Preferred stock- type of stock that allows the stockholder to be entitled to a fixed
dividend. This is generally issued to investors.
11. Explain the difference between investment management and asset management?
Investment management is the managing and handling of financial assets along with
other investments. This does not only include buying and selling of assets but also
building plans for banking, setting budgets or devising tax duties and responsibilities.
Asset management is the managing of investments on behalf of clients. It includes
statistical analysis of what kind of investments would help the client’s portfolio grow and
what investments a client needs to avoid.
12. Explain the concept of secondary market.
A secondary market is where investors trade second hand listed securities like stocks
and bonds. Unlike primary market, where sales contribute to the company’s capital,
sales from the secondary market go to the investor.
