Q1: Company A d to eq ratio 0.1x. Looking to raise 100 cr capital.

If you are cfo how would

raise the capital.
ANS. Debt to Equity Ratio = Total Liabilities/Total Shareholder’s equity
0.1:
Everything else being equal, a company wants the cheapest form of financing. Debt is generally
cheaper than equity because interest payments are tax-deductible. The debt to equity ratio
suggests that only 1/11 of the business is financed using debt. Since most of the financing is
being done through equity, we can raise the capital from Debt.
NOTE: We need to know what is the current Interest coverage ratio and what will be Debt to
Equity ratio, etc. after financing, which we can only if we have absolute numbers. Without that
we cannot make a decision.

0.1X:
Everything else being equal, a company wants the cheapest form of financing. Debt is generally
cheaper than equity because interest payments are tax-deductible.

But, we cannot make a decision based on the given information. We need to answer the
following questions before we make a decision:
-Debt to Equity ratio after financing
-Current Interest coverage ratio and expected Interest coverage ratio after Financing

But if I still have to make a decision based on the given numbers, I would raise capital using
equity. This is because looking at the 100Cr. number, I am assuming that it is a startup or a
small-cap company right now. That being said, if we raise capital using equity, we will not have
to pay interest and we can use all the profits to invest in the business (or pay as dividend to
shareholder’s at our convenience) which will help us grow the company in a better way. This is
also because it takes time to start making profit in some businesses and if over that we have to
pay interest, we will never be able to grow.

Q2:Company X is domestic Indian airline. Buys oil in USD. Hedged oil AND fx. FX exposure
hedged at Rs. 65/$. oIL HEDGE AT x.
oIL AT 60$ AND FX IS 62. FIND x IF COMPANY MADE A GAIN OF RS 470/BARREL.

Would have paid: 60*62 without hedge

Now paying : 65X
Dollar came down, oil went up
(60*62)-65X= 470
X = 50$/barrel

Q3.COMPANY ABC AND XYZ has roe of 20% of 10%. Explain profit reason for profit margin of
10% for abc and 5% xyz
ROE = Net Income/ Equity =(Net Income/ Sales ) * (Sales/Total Assets) * (Total Assets/Equity)
= Profit Margin * Total Assets Turnover * Leverage
Q4. Copper prices have incr 50%. X and Y use copper as primary raw material. However share
price of x plummeted while Y only slightly declined. Reason (3)?
Because copper is a raw material for company X and Y, If prices of copper go up, COGS will be
higher. This will reduce profits if the companies have not hedged against price rise in copper.
The main reason should be that company Y hedged itself against price rise in copper while
company X did not.

Because company X did not hedge, this can affect their financial statements severely. Their
profits will drop significantly. They may also go into losses depending upon the price of their
final product.

Prices of Y also dropped slightly, because although they may not make a loss right now but after
the period they have hedged for is over, cost of final product will be much higher than before
which may lead to a fall in demand of the final product itself.

List example of transaction that impact the cashflow and balance sheet but not income,
income and Bal but not cashflow, and income and cashflow but not balance sheet

Cash flow and balance sheet, not income statement

issuing stock for cash comes on the balance sheet and the cash flow statement

When company takes a loan, principal amount taken will not affect income statement until we
start paying interest. Similarly, paying principal amount will also not come.

Purchase of inventory through cash will not come on income statement until we sell the
inventory

Paying accounts payable

Paying for anything in advance (eg. Marketing)

Income statement and Balance sheet, not cash flow

non-cash transactions eg: depreciation, ammortization
writing-off on bad debts

Income statement and Cash Flow, not balance sheet

NONE
Company A and B are in automobile with identical revenue in 2017. Gross margin of A is
32.5% while that of B is 30.7%. Both companies have the same Ebit MARGIN OF 12.30 %. All
other items are equal as a percentage of sales. Which company will have a greater FCF ?

Gross profit = Revenue - COGS

EBITDA = Gross profit - SGA
EBIT = EBITDA - Depriciation and amortization

For EBIT to be same, Depriciation and amortization has to be higher for A.

Therefore, Everything else being same, FCF for A will be higher because
FCF = EBIT - Taxes + Depreciation & Amortization - Capex – Change in Working Capital

Pharma company X and drug GR as a main source of sales and earnings. GR under regulatory
scrutiny Over last 3 months. Which is having a effect on stock price of x. Next month decision
whether by regulator. Suggest a strategy using options
Because major part of sales and earnings come from ‘X’ we can safely assume if the drug is
banned, company’s business might stop.
Since, it has been under scrutiny for 3 months already, stock price will be lower than before.
I think it will go even lower if drug is banned.
On the other hand, there will be a high jump in stock price, if drug is not banned.

I will suggest to create a straddle because we are expecting the stock to be really volatile. We
will purchase a call and a put option for the same expiration. Our strike price will be the closest
strike price available to our current stock price.
In this way, we will limit our loss to the premium which we have paid and our potential for
profit will be unlimited irrespective of whether the stock goes up or down.

Company A and B have debt of 100 B and 500 B respectively. Interest rates are expected to
rise. Which company is better placed? Would you look for any other info before investing ?

We can’t say which company is better placed just based on the amount of debt. We also need
to know what is the shareholder’s equity and what is company’s operating income. They maybe
paying different interest rates based on their respective credit ratings. We need to find debt to
equity ratio and interest coverage ratio. This will provide us with a better picture.

As far as investing is concerned, apart from the debt part, there are a lot things one should look
into. To start with we need to look at current stock valuation. We should look at:
Book value per share
Earnings per share
Price to Earnings ratio

We should look into Return on Assets, Return on Equity AND Operating Profit Margin. We
should see if ROE is high and what is the reason for it. ROE can be higher because of high
leverage as well. ROA should be high as well. We need to see how much Free cash Flow the
company is generating.

We should see how strong is the management of the company and what is their view for the
company’s future. We should see what are the growth prospects in the sector the company
operates in. We should look at what EDGE the company has compared to other companies in
the same business. We should look at the longevity of the business. At the end, we definitely
need to look at the price.

This is not an exhaustive list but it will provide us with a fair idea of what the company is about
and if we are getting more value than the price we are paying.

Test 2:

Balance sheet.
Match the balance sheet for 2017 y filling in missing items

Calculate the net Debt XYZ and correlation between net interest and net debt

Net Debt = Short-Term Debt + Long-Term Debt – Cash and Cash Equivalents
Net interest = total Interest paid - Total Interest income
=CORREL(A2:A7,B2:B7) (for excel)

Plot the graph for net interest and net debt over time. Indicate R^2 between 2 series.
:Answer in R2 Goldman
=(COVAR(B2:B16,C2:C16))/(STDEV(B2:B16)*(STDEV(C2:C16))) A: time | Column B: net debt|
Column C : Net interest

Analysts has missed entering a bond issuing of USD 600mn(5% COUPON) In 2017 financial
statement. Describe the major changes in respective statement in 2017. INC, CASH , BAL,

Assuming company sold bond at par value, Bonds are not amortized

Balance sheet:
Cash on balance sheet will be less by 600 MN $

It should also appear in bonds payable account (long term debt)

As interest of 5% will not be paid, retained earnings will not go down by the same amount and
hence will be more than 30 MN(7.5 MN quaterly basis). Bond issuance cost if any will also be
not taken care of in retained earnings.
The cash flow statement
In operating cash flow statement, interest payments of 30 MN. (7.5MN on quarterly basis) will
not be there.
In cash flow from financing activities statement, bond issuance proceeds of 600 mn will be
missing.

Income statement
The income statement will not show the 5% interest expense in the coming year. i.e. 30 MN.
(7.5MN on quarterly basis)
If there is bond issuance cost, it is spread over years. This will also not appear in expense.