Corporate finance is the logic behind every investment and financing decision a company makes. These questions cover capital budgeting, capital structure and the return measures that decide whether value is actually being created.
Try to answer each one aloud before reading the solution, the way an interviewer would ask it.
Net present value is the sum of a project's cash flows discounted at the required rate of return, less the initial investment. If NPV is positive the project earns more than the cost of the capital funding it and should increase firm value. It is preferred because it is expressed in absolute currency terms, it correctly accounts for the scale of a project, and it assumes intermediate cash flows are reinvested at the cost of capital, which is realistic. The decision rule is simply to accept every positive NPV project.
They can conflict when projects differ in scale, when cash flow timing differs sharply, or when cash flows change sign more than once, which can produce multiple IRRs or none. IRR also implicitly assumes reinvestment at the IRR itself, which is unrealistic for a high IRR project. When they conflict, trust NPV, because it measures the absolute value added. A 200% IRR on a small outlay can create far less value than a 15% IRR on a large one.
A dollar today is worth more than a dollar tomorrow, because today's dollar can be invested to earn a return, and because future dollars carry uncertainty and are eroded by inflation. Formally, present value equals future value divided by (1 plus r) to the power n. Every valuation technique in finance is an application of this single idea, from bond pricing to a DCF. The discount rate r is where risk enters: riskier cash flows are discounted more heavily and are therefore worth less today.
Under Modigliani and Miller with no taxes, capital structure is irrelevant, because value comes from assets rather than from how they are financed. Introduce taxes and debt becomes valuable, since interest is deductible and creates a tax shield worth roughly the tax rate times the debt. Introduce financial distress and the benefit reverses beyond a point, as bankruptcy costs, lost customers and constrained investment mount. The result is a trade-off theory: an optimal structure exists where the marginal tax shield equals the marginal expected distress cost.
Return on invested capital is net operating profit after tax divided by invested capital, being debt plus equity less excess cash. It measures how efficiently the business converts capital into operating profit. The comparison to WACC is the entire question of value creation: if ROIC exceeds WACC the company earns more than the cost of its capital and growth creates value, so growing faster is good. If ROIC is below WACC, growth actively destroys value, and the company would serve shareholders better by returning capital than by reinvesting it.
The cash conversion cycle measures how many days cash is tied up in operations: days inventory outstanding plus days sales outstanding less days payables outstanding. A shorter cycle means cash returns faster and less external funding is needed to support growth. It can be negative, as at large retailers and subscription businesses that collect from customers before paying suppliers, which means growth actually generates cash rather than consuming it. That is a structurally powerful position.
Operating leverage comes from the cost structure: a high proportion of fixed costs means a given change in revenue produces a larger change in operating profit, in both directions. Financial leverage comes from the capital structure: fixed interest obligations mean a given change in operating profit produces a larger change in net income and EPS. They compound. A company with high fixed costs that is also heavily indebted is extremely sensitive to a revenue decline, which is why lenders are cautious about lending heavily into cyclical, fixed cost businesses.
Both return capital, but they differ in flexibility, signal and tax treatment. Dividends imply a durable commitment, since cutting one is punished severely, and they suit stable, mature cash generators. Buybacks are discretionary and can be paused quietly, they reduce share count so they mechanically raise EPS, and in many jurisdictions they defer shareholder tax until sale. The decisive question for a buyback is price: repurchasing shares only creates value when they trade below intrinsic value, and buying back overvalued stock destroys it.
The payback period is how long a project takes to return its initial investment in nominal cash terms. It is intuitive and gives a crude read on liquidity risk, which is why it survives in practice. The flaws are serious: it ignores the time value of money by treating a dollar in year four as equal to a dollar today, and it ignores every cash flow after payback, so a project that pays back slowly but generates value for decades is penalised. It is acceptable as a secondary screen but never as the primary decision rule.
A bond pays a fixed coupon. If market yields rise, newly issued bonds offer a higher coupon, so the existing bond's fixed payments are comparatively less attractive and its price must fall until its yield matches the market. Mechanically, price is the present value of fixed cash flows, and raising the discount rate lowers that present value. The magnitude is measured by duration: a bond with a duration of 6 falls roughly 6% in price for a 100 basis point rise in yield. Longer maturity and lower coupon bonds have higher duration and are more rate sensitive.
The Rule of 72 estimates how long an investment takes to double: divide 72 by the annual percentage return. At 8%, doubling takes roughly nine years, since 72 divided by 8 is 9. It works because it approximates the logarithmic compounding relationship, and it is accurate to within a few percent for rates between about 6% and 12%. It is worth knowing cold because interviewers use it to test whether you can reason about compounding without a calculator.
Dilution occurs when new shares are issued, reducing each existing shareholder's proportional claim on earnings and ownership. It arises through equity raises, option and RSU vesting, and convertible conversion. It is not automatically bad: raising equity to fund a project earning above the cost of capital leaves existing holders better off despite owning a smaller percentage. It is harmful when proceeds are invested below the cost of capital, or when shares are issued cheaply, since the value transferred to new holders is permanent.
Every concept above maps to a module you can practise, with the numbers regenerating on each attempt.
Reading an answer once is recognition. Interviews test recall under pressure, so the questions regenerate with fresh numbers every run.
Start practising freeCorporate finance is the discipline of how companies raise, allocate and return capital. Investment banking is one industry that advises on those decisions. The technical foundation is shared, which is why the questions above appear in banking, corporate development and equity research interviews alike.
Very little advanced maths, but a great deal of quick arithmetic. Discounting, percentage changes, weighted averages and compounding all need to be automatic without a calculator, because interviewers frequently ask you to reason aloud in round numbers.
That value is created only when returns exceed the cost of capital. NPV, ROIC versus WACC and the trade-off theory of capital structure are all expressions of the same underlying idea, and interviewers probe whether you understand the principle or have only memorised formulas.