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A-1 A)

BASIS ASSETS LIABILITIES

Meaning Assets are the property or Liabilities refers to the debts, which
estate, which a company a company owes to a person or
owns, having monetary value entity.

What is it? These are financial resources These are the financial obligations,
which provide future which has to be paid off in future.
economic benefit.

Calculation Assets = Liabilities + Owner's Liabilities = Assets - Owner's


Equity Equity

Types Current Assets, Non-Current Current Liabilities, Non-Current


Assets. Liabilities.

Example:
B)
Definition of 'Balance Sheet'
Balance Sheet is the financial statement of a company which includes assets, liabilities, equity
capital, total debt, etc. at a point in time. Balance sheet includes assets on one side,and
liabilities on the other.

Balance sheet is more like a snapshot of the financial position of a company at a specified time,
usually calculated after every quarter, six months or one year. Balance Sheet has two main
heads –assets and liabilities.

Another important head in the balance sheet is shareholder or owner’s equity. Assets are equal
to total liabilities and owners’ equity. Owner’s equity is used when the company is a sole
proprietorship and shareholders’ equity is used when the company is a corporation. It is also
known as book value of the company.

Let’s understand reporting of a transaction on a balance sheet. If a company XYZ takes a five-
year loan from public sector banks for an amount of Rs 7,00,000, it means that the bank will pay
the money to XYZ Ltd.

The accounts department will increase the cash component by 7,00,000 on the assets front,
and at the same time increase the long term debt account with the same amount, thus
balancing both the sides.
If company raises Rs 10,00,000 from investors, then its assets will increase by that amount, as
will its shareholder’s equity.

How balance sheet is different from income statement ?


 Timing. The balance sheet reveals the status of an organization's financial situation as of a
specific point in time, while an income statement reveals the results of the firm for a
period of time.
 Items reported. The balance sheet reports assets, liabilities, and equity, while the income
statement reports revenues and expenses that net to a profit or loss.
 Uses - management. The balance sheet is used by management to determine whether a
business has sufficient liquidity to meet its obligations, while the income statement is used
to examine results, and find any operational or finance issues that are in need of
correction.
 Uses - creditors and lenders. Creditors and lenders use the balance sheet to see if a business
is over-leveraged, which tells them if they should extend additional credit to the entity.
They use the income statement to decide whether a business is generating a sufficient
profit to pay off its liabilities.

Q-2

Four types of Accounting ratios


QUICK
RATIO

LIQUIDITY
RATIO

ABSOLUTE
CURRENT
LIQUID
RATIO
RATIO

DEFINITION AND ROLE OF STAKEHOLDERS

What is the 'Current Ratio'


The current ratio is LIQUIDITY RATIO that measures a company's ability to pay short-
term and long-term obligations. To gauge this ability, the current ratio considers the
current total assets of a company (both liquid and illiquid) relative to that company’s
current total liabilities. The formula for calculating a company’s current ratio is:

What are 'Liquidity Ratios'


Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay
off current debt obligations without raising external capital.

WHAT IS QUICK RATIO?

The quick ratio is an indicator of a company’s short-term liquidity, and measures a


company’s ability to meet its short-term obligations with its most liquid assets. Because
we're only concerned with the most liquid assets, the ratio excludes inventories from
current assets
CAPITAL
DEBT TURNOVER
COLLECTION RATIO INVENTORY
RATIO RATIO

FIXED ASSEST
TURNOVER DEBTORS
RATIO TURNOVER
RATIO

AVERAGE
DEBT SERVICE
PAYMENT
RATIO
PERIOD

CREDITORS
WORKING WORKING
CAPITAL TURN
TURNOVER CAPITAL OVER RATIO
RATIO RATIO

Inventory Turnover Ratio: Definition


Inventory turnover ratio, defined as how many times the entire inventory of
a company has been sold during an accounting period, is a major factor to
success in any business that holds inventory. It shows how well a company
manages its inventory levels and how frequently a company replenishes its
inventory. In general, a higher inventory turnover is better because
inventories are the least liquid form of asset. A Flash Report is a useful tool
in measuring and managing inventory turns.

What is the 'Receivables Turnover Ratio'


The receivables turnover ratio is an accounting measure used to quantify a firm's
effectiveness in extending credit and in collecting debts on that credit. The receivables
turnover ratio is an activity ratio measuring how efficiently a firm uses its assets.

the term Debtor Collection Period indicates the average time taken to collect trade debts. In other
words, a reducing period of time is an indicator of increasing efficiency. It enables the enterprise to
compare the real collection period with the granted/theoretical credit period.

Definition and Explanation:


It is a ratio of net credit purchases to average trade creditors. Creditors turnover ratio is also know as
payables turnover ratio.

It is on the pattern of debtors turnover ratio. It indicates the speed with which the payments are made to
the trade creditors. It establishes relationship between net credit annual purchases and average accounts
payables. Accounts payables include trade creditors and bills payables. Average means opening plus
closing balance divided by two. In this case also accounts payables' figure should be considered at gross
value i.e. before deducting provision for discount on creditors (if any).

Average Payment Period


Home » Financial Ratio Analysis » Average Payment Period
Average payment period (APP) is a solvency ratio that measures the average
number of days it takes a business to pay its vendors for purchases made on
credit.
Average payment period is the average amount of time it takes a company to
pay off credit accounts payable. Many times, when a business makes a
purchase at wholesale or for basic materials, credit arrangements are used for
payment. These are simple payment arrangements that give the buyer a
certain number of days to pay for the purchase.

Working capital turnover ratio


November 26, 2017
The working capital turnover ratio measures how well a company is utilizing its working
capital to support a given level of sales. Working capital is current assets minus current
liabilities. A high turnover ratio indicates that management is being extremely efficient in
using a firm's short-term assets and liabilities to support sales. Conversely, a low ratio
indicates that a business is investing in too many accounts receivable and inventory assets
to support its sales, which could eventually lead to an excessive amount of bad debts and
obsolete inventory.

What is the 'Fixed-Asset Turnover Ratio'


The fixed-asset turnover ratio is, in general, used by analysts to measure
operating performance. It is a ratio of net sales to fixed assets. This ratio
specifically measures a company's ability to generate net sales from fixed-asset
investments, namely property, plant and equipment (PP&E), net of depreciation.
In general, a higher fixed-asset turnover ratio indicates that a company has more
effectively utilized investment in fixed assets to generate revenue.

What is the working capital turnover


ratio?
The working capital turnover ratio is also referred to as net sales to working capital. It indicates a
company's effectiveness in using its working capital.

The working capital turnover ratio is calculated as follows: net annual sales divided by the
average amount of working capital during the same 12 month period.
The gross profit margin ratio, also known as gross margin, is the ratio of
gross margin expressed as a percentage of sales. Gross margin, alone,
indicates how much profit a company makes after paying off its Cost of
Goods sold. It is a measure of the efficiency of a company using its raw
materials and labor during the production process. The value of gross profit
margin varies from company and industry. The higher the profit margin, the
more efficient a company is. This can be assigned to single products or an
entire company.

What is the 'Operating Expense Ratio - OER'


The operating expense ratio (OER) is a measure of what it costs to operate a
piece of property compared to the income that the property brings in. The
operating expense ratio is calculated by dividing a property's operating expense
by its gross operating income and used for comparing the expenses of similar
properties. An investor should look for red flags such as higher maintenance
expenses, operating income or utilities that may deter him from purchasing a
specific property.

Operating Profit Ratio:

Operating net profit ratio is calculated by dividing the operating net profit by sales. This ratio helps in
determining the ability of the management in running the business.

Net profit ratio

The net profit percentage is the ratio of after-tax profits to net sales. It reveals the
remaining profit after all costs of production, administration, and financing have been
deducted from sales, and income taxes recognized. As such, it is one of the best measures
of the overall results of a firm, especially when combined with an evaluation of how well it
is using its working capital. The measure is commonly reported on a trend line, to judge
performance over time. It is also used to compare the results of a business with its
competitors.

Net profit is not an indicator of cash flows, since net profit incorporates a number of non-
cash expenses, such as accrued expenses, amortization, and depreciation.

Return on investment, or ROI, is the most common profitability ratio. There


are several ways to determine ROI, but the most frequently used method is to
divide net profit by total assets. So if your net profit is $100,000 and your total
assets are $300,000, your ROI would be .33 or 33 percent.

Return on Investment (ROI)


Definition: A profitability measure that evaluates the performance of a business by dividing
net profit by net worth

Earnings per share (EPS) ratio


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Earnings per share (EPS) ratio measures how many dollars of net income have been
earned by each share of common stock. It is computed by dividing net income less
preferred dividend by the number of shares of common stock outstanding during the
period. It is a popular measure of overall profitability of the company and is usually
expressed in dollars.

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What is 'Dividend Payout Ratio'


The dividend payout ratio is the ratio of the total amount of dividends paid out to
shareholders relative to the net income of the company. It is the percentage of
earnings paid to shareholders in dividends. The amount that is not paid to
shareholders is retained by the company to pay off debt or to reinvest in core
operations.

GROSS
PROFIT
RATIO
RETURN ON
CAPITAL EARNING
EMPLOYED PER SHARE
RATIO

RETURN ON EARNING
INVESTMENT PER EQUITY
RATIO SHARE

PROFITIBILATY

NET PROFIT DIVIDEND


RATIO YIELD RATIO

OPERATING
PROFIT PRICE
RATIO EARNING
RATIO

NET PROFIT
OPERATING TO NET
COST RATIO WORTH
RATIO
DEBT EQUITY
RATIO

CAPITAL
DEBT SERVICE PROPRIETERY
RATIO STRUCTURE RATIO
RATIO

CAPITAL
GEARING
RATIO

Debt service ratio


From Wikipedia, the free encyclopedia

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In economics and government finance, debt service ratio is the ratio of debt service payments
(principal + interest) of a country to that country’s export earnings.[1] A country's international finances
are healthier when this ratio is low. The ratio is between 0 and 20% for most countries.
In contrast to the debt service coverage ratio, which is calculated as income divided by debt, this
ratio is inverse and is calculated as debt service divided by country's income from international trade,
i.e. export.

Gearing Ratio
 Levels: AS, A Level
 Exam boards: AQA, Edexcel, OCR, IB

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Gearing focuses on the capital structure of the business – that means the proportion of
finance that is provided by debt relative to the finance provided by equity (or
shareholders).

The gearing ratio is also concerned with liquidity. However, it focuses on the long-term
financial stability of a business.
Gearing (otherwise known as "leverage") measures the proportion of assets invested
in a business that are financed by long-term borrowing.

In theory, the higher the level of borrowing (gearing) the higher are the risks to a
business, since the payment of interest and repayment of debts are not "optional" in the
same way as dividends. However, gearing can be a financially sound part of a
business's capital structure particularly if the business has strong, predictable cash
flows.

Debt to Equity Ratio


Home » Financial Ratio Analysis » Debt to Equity Ratio
The debt to equity ratio is a financial, liquidity ratio that compares a company’s
total debt to total equity. The debt to equity ratio shows the percentage of
company financing that comes from creditors and investors. A higher debt to
equity ratio indicates that more creditor financing (bank loans) is used than
investor financing (shareholders).

Proprietary ratio | Equity ratio


June 10, 2018
The proprietary ratio (also known as the equity ratio) is the proportion of shareholders'
equity to total assets, and as such provides a rough estimate of the amount of
capitalization currently used to support a business. If the ratio is high, this indicates that a
company has a sufficient amount of equity to support the functions of the business, and
probably has room in its financial structure to take on additional debt, if necessary.
Conversely, a low ratio indicates that a business may be making use of too much debt or
trade payables, rather than equity, to support operations (which may place the company at
risk of bankruptcy).

Thus, the equity ratio is a general indicator of financial stability. It should be used in
conjunction with the net profit ratio and an examination of the statement of cash flows to
gain a better overview of the financial circumstances of a business. These additional
measures reveal the ability of a business to earn a profit and generate cash flows,
respectively.

What is 'Dividend Payout Ratio'


The dividend payout ratio is the ratio of the total amount of dividends paid out to
shareholders relative to the net income of the company. It is the percentage of
earnings paid to shareholders in dividends. The amount that is not paid to
shareholders is retained by the company to pay off debt or to reinvest in core
operations.

Net worth ratio


January 18, 2018
The net worth ratio states the return that shareholders could receive on their investment
in a company, if all of the profit earned were to be passed through directly to them. Thus,
the ratio is developed from the perspective of the shareholder, not the company, and is
used to analyze investor returns. The ratio is useful as a measure of how well a company is
utilizing the shareholder investment to create returns for them, and can be used for
comparison purposes with competitors in the same industry.

To calculate the return on net worth, first compile the net profit generated by the
company. The profit figure used should have all financing costs and taxes deducted from it,
so that it accurately reflects the profit available to shareholders. This is the numerator in
the formula. Next, add together the capital contributions made by shareholders, as well as
all retained earnings; this is the denominator in the formula. The final formula is:

What is the 'Price-Earnings Ratio - P/E Ratio'


The price-earnings ratio (P/E ratio) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings. The price-
earnings ratio is also sometimes known as the price multiple or the
earnings multiple.
Q3. What is the conceptual difference between EBITDA and EBIT? Explain different
situations where EBITDA usage is useful instead of EBIT?
Ans: EBIT refers to “Earnings before Interests and Taxes” where as EBITDA stands for
Earnings before Interest, Taxes, Depreciation and Amortization. So EBIT shows firm’s
operating earnings before Interest and Taxes but after depreciation. In simple terms, EBIT
represents earnings that have interest and taxes added back to them. Because interest and
taxes are “added back” we use the word “Before”, to explain this.
On an income statement, EBIT can be easily calculated by starting at the earnings before
tax line and adding to it any interest expenses the company may have incurred.
On the other hand EBITDA calculates firm’s earnings before any depreciation and
amortization is calculated. The adding back of Depreciation and Amortization is the only
difference between EBIT and EBITDA. So by calculating EBITDA we delete all the non
cash expenses from operating income.
Warren Buffett is well known for disliking EBITDA multiples to value a business
financial performance. But why?
EBITDA is used as a measurement of a company’s earning potential, it does not account
for the cost of debt capital or its tax effects.
A company that spends zero money on capital expenditures could be well suited to
use EBITDA metrics as the non-cash depreciation and amortization part does not have to
be replaced with capex – but this applies to almost no businesses. Companies, who have
large amounts of fixed assets are subject to heavy depreciation charges or who have
acquired intangible assets are subject to large amortization charges use this EBITDA when
measuring their earnings.
For a company or industry with relatively low capital expenditures required to maintain
their operations, EBITDA can be a good proxy for cash flow.
In capital-intensive industries like oil and gas, mining, and infrastructure, EBITDA is a
near meaningless metric. The extensive amount of capital spending required, means that
EBITDA and cash flow will often be very far apart. In this case, EBIT may be more
appropriate, as the Depreciation and Amortization captures a portion of past capital
expenditures.

A5

INCOME STATEMENT FOR THE YEAR 2018-2019


RS
Income:
Revenue 30

Expense:
Cost of goods and other
operating expenses 22
Depreciation 4

Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84
INCOME STATEMENT FOR THE YEAR 2019-2020

RS
Income: 28
Revenue

Expense
:
Cost of goods and other
operating expenses 21
Depreciation 4

Profit
before tax 3
Income tax
expense .84
Profit after
tax 2.16

INCOME STATEMENT FOR THE YEAR 2020-2021

RS
Income:
Revenue 29

Expense
:
Cost of goods and other
operating expenses 22
Depreciation 4

Profit
before tax 3
Income tax
expense .84
Profit after
tax 2.16

INCOME STATEMENT FOR THE YEAR 2021-2022

RS
Income:
Revenue 25

Expense
:
Cost of goods and other
operating expenses 17
Depreciation 4

Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84

INCOME STATEMENT FOR THE YEAR 2022-2023

RS
Income: 30
Revenue

Expense
:
Cost of goods and other
operating expenses 22
Depreciation 4
Profit
before tax 4
Income tax
expense 1.16
Profit after
tax 2.84

Present value of outflow=10cr+10cr/1+0.20=10+8.33=18.33cr

Present value of inflow=profit/(1+.20)*1 +


profit/(1+.20)*2……….𝛼=2.84/(1+.20)*1+ 2.13/(1+.20)*2
+2.13/(1+.20)*3+ 2.84/(1+.20)*4 +2.84/(1+.20)*5=7.589 cr

Present value=inflow-outflow=7.589-18.33=(10.74)cr

Since the inflow<outflow ,we can say that it is financial infeasible

Q5
q-6

wacc=[14000000/110000000]*(25000000+400000)+[(6000000
/110000000)*1800000*(1-0.29)]

=3302436.36

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))

Where:

E = market value of the firm’s equity (market cap)


D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate