Corporate Finance Interview Questions And Answers

Corporate finance describes the financial decisions of corporations. Its main objective is to maximize corporate value while reducing financial risk. The financial manager has responsibility for corporate finance decisions.

financial manager is responsible for financing the firm and acts as an intermediary between the financial system's institutions and markets, on the one hand, and the enterprise, on the other.

Finance is a term used to describe both the money resources available to governments, firms, or individuals, and the management of these funds.

★ Money and capital markets, which deals with securities markets and financial institutions
★ Investments, which focuses on the decisions made by both individual and institutional investors as they choose securities for their investment portfolios
★ Financial management, or "business finance," which involves decisions within firms.

Financial Management is the acquisition, management and financing of resources for firms by means of money, with due regard for process in the external economic markets.

Another objective of Financial Managers is Profit Maximization which entreats Financial Managers to put in place measures and policies that will increase the financial position of the firm. Shareholders need to receive periodic amounts to solidify their interest in the organization. A firm that does not make and declare profits continuously will not attract investors to put their money in it.

★ How much money should the firm invest, and what specific assets should the firm invest in? This is the firm's investment, or capital budgeting decision.
★ How should the cash required for an investment be raised? This is the financing decision.

Businesses and individuals who have Current accounts with banks, subject to the bank's regulations, may be allowed to from time to time withdraw amounts in excess of the balance standing in such accounts. The believe that the account may be credited with some funds later after which the bank would recover the overdraft and some service charges. Overdrafts are more likely to be made available to businesses that need short-term funds for a seasonal trade or for a specific contract.

Balance Sheet is a position statement as it refers to a particular date. It is also referred to as Statement of Sources and Application of Funds. It informs about the various sources used by the organization which are technically known as liabilities to raise the funds which are referred as assets.

Profitability Statement also known as Profit and Loss Account. It is a period statement as it refers to a particular period.

Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.
E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.

Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

Share Capital is that portion of a company's equity that has been obtained by issuing share to a shareholder. The amount of share capital increases as new shares are sold to public in exchange for cash.

Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only. This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business. The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature.

Reserves and Surpluses indicate that portion of the earnings, receipt or other surplus of the company appropriated by the management for a general or specific purpose other than provisions for depreciation or for a known liability. Reserves are classified as: Capital Reserve and Capital Redemption Reserve.

Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an accounting year but the benefit of which may be extended to a number of years. And these are charged to profit and loss account. E.g. Development expenditure, Advertisement etc.

Proprietary firm is easiest and economic form to create and operate as it can be started by any person without any legal formalities. Also there is no set limit of minimum or maximum number of persons to start the business as it can be started by a single person.

As the owner is the single person so he has full control over his business. His total authority over his business gives him the power to plan, organize, co-ordinate the various activities. The sizes of such firm are generally small which also makes it better to control.

Being the only owner of the business the sole trader takes all the decisions himself. He evaluates all the opportunities available and finds the solution to problems which makes decision making quick.

Proprietor firm facilitates self employment and also employment for many others. It promotes entrepreneurial skill among the individuals.

Due to the small geographical area it becomes easy for the sole proprietor deal with all its customers personally and knows their needs. Thus it makes easy for him to pay special attention to consumer needs.

Proprietary firm is generally a small scale business. Hence there are many opportunities for individuals to start their own business enabling widespread dispersion of economic wealth.

Proprietary firm is not required to comply with all the legal and procedural formality.

Disadvantages of Proprietary Firms:
★ Unlimited Liability
★ Limited Financial Resources
★ No Legal Status
★ Limited Capacity of Individual
★ Higher Taxes