Finance Primer

Equit-I, The Finance Club of IIM Indore

Prepared in Association with Placement Preparation Committee

 About Equit-I

Title / Heading
• Equit-I, the Finance Club of IIM Indore, endeavors to spark interest in finance amongst the postgraduate
batch by facilitating a plethora of learning opportunities over the course of the two years.
• The club actively follows the industry and tries to pitch for live projects related to finance. In the past,
Equit-I has facilitated projects in the field of Equity Research and Corporate Finance.
• Equit-I assists participants in exploring financial career opportunities, by organizing workshops and
interactive sessions on various financial topics and career panels.
• The club also assists participants in preparing for their summer and final placements by publishing special
articles and newsletters.
• Companies are able to increase their brand equity and visibility on campus through various initiatives like
talks, newsletters and different on-campus competitions conducted by the club.

The current senior members of the club are:

Aditi Gupta Aditya Kalra Juhi Gupta Komal Bagrodia Shivangi Sahu

Prepared in association with the Placement Preparation Committee

 Events & Publications

Title / Heading
The event featured an allocation problem in the form of House. It was followed by a corporate
Margin Call raiding game that pitched the participants’ with different risk-return tradeoff perceptions.

It was a national level event to test participants on their financial acumen and current affairs. It
Analysis Paralysis
was followed by presentation and valuation skills in Pitch Book preparation.

It stimulates the creative and analytical thinking in term of portfolio formation and industry
Jackstrat
synergies, and tests macroeconomic knowledge at the same time.

It involved a rigorous quiz covering recent events, popular knowledge, and basic concepts of
Finstake
finance followed by a party-game approach to engage with financial concepts for PGP 1s.

This event is one of a kind B-school finance event conducted over three days as part of IRIS, IIM
Mantrana
Indore’s PGP Fest where students from all over the country participate.

Week That Was: A weekly newsletter, which not just includes business news from various sectors in the economy, but
Publications also views and critiques of participants on the recent issues in the field of finance.
Dealscope: A periodical that covers the financial aspects and the rationale behind major M&A deals in the news.

Prepared in association with the Placement Preparation Committee

Title / Heading

Introduction to
basics of

Financial Statements

Prepared in association with the Placement Preparation Committee

 Income Statement

Title / Heading
An Income Statement shows the company’s revenues and expenses during a
particular period.
The main purpose of an income statement is to convey details of
profitability and business activities of the company.

Operating Revenue Cost of Goods Sold (COGS)

Operating revenue is revenue
generated from a company's
primary business activities. For
example, a retailer produces
revenue through merchandise sales
Cost of Materials Consumed
+ Purchases of Stock-in-trade
- Changes in Inventory (Closing
Stock - Opening Stock)

Operating Profit (EBIT) Profit after Tax (PAT)

EBIT is the profit earned from PAT are the earnings of a
normal business operations. business after all income taxes
have been deducted. It is the
EBIT = Revenues - COGS -
final and residual amount of
Operating expenses
profit generated by the
organization.

Prepared in association with the Placement Preparation Committee

 Balance Sheet

Title / Heading
A Balance Sheet shows a company’s financial position at a specified point in time. Its components essentially tell an analyst how much the
company owns, and how much it owes. Information on the firm’s capital structure can also be derived from here.

Assets Liabilities and Equity

Assets are economic resources with monetary value that provide future
benefit to the company. These are owned and controlled by the company.
In the balance sheet, these are usually listed in order of the ease with
which they can be converted into liquid cash.
Liabilities are monetary considerations that a company owes to external
entities.
Equity represents the money attributable to the owners of the company.
Equity = Assets - Liabilities

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

Title / Heading
• Financial ratio analysis is the use of relationships among financial statement accounts (Profit & Loss, Balance Sheet) to gauge the
financial condition and performance of a company.
• Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by
comparing information contained in its financial statements.
Note:A few ratios have been calculated basis the financial statements of HUL. (2017-18)

• We can classify ratios based on the type of information the ratio provides into following categories:

Liquidity Ratios Measures the ability to meet short term and immediate needs

Capital Structure
Measures the effectiveness in financing using different sources of funds
Ratios

Profitability Ratios Measures the ability to manage expenses to produce profit from sales

Activity/ Turnover Ratios Measures the effectiveness in putting its asset investment to good use

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

Title / Heading
Liquidity Ratios Capital Structure Ratios
Current Ratio = Current Assets / Current Liabilities Debt/Equity
Current Assets = Inventories + Financial Assets + Other Current 11123 Debt = Long term borrowings + Short term borrowings 0
Assets
Equity = Equity share capital + Other Equity 7075
Current Liabilities = Financial Liabilities + Other Current Liabilities 8075
D/E 0
Current Ratio 1.38
It is a measure of the degree to which a company is financing its operations through debt
Best measure of debtor’s ability to payoff current obligations without raising external versus wholly owned funds.
capital.

Capital Gearing Ratio = (Debt + Preference share capital) / Equity

Quick Ratio = Quick Assets / Current Liabilities
Debt + Preference share capital 0
Quick Assets = Current Assets - Inventories - Prepaid expenses 8764
Capital Gearing Ratio 0
Quick Ratio 1.09
Used to measure company’s financial leverage. Stricter version of D/E ratio, treats
Stricter version of current ratio, as it only takes assets which are readily convertible into preference share capital as part of debt.
cash i.e inventory and prepaid expenses are excluded.

Debt to Total Assets Ratio

Cash Ratio = Cash & cash equivalents / Current Liabilities
Debt 0
Cash & cash equivalents = cash + cash in bank + marketable securities 3373
Total Assets 17149
Cash Ratio 0.42
Debt to Total Assets Ratio 0
This ratio is useful in situations where current liabilities are coming due for payment in
the very short term. This ratio indicates the proportion of debt used in financing the total assets of a firm.

Prepared in association with the Placement Preparation Committee

 Ratio Analysis

Title / Heading
Profitability Ratios Turnover Ratios
Net Profit Margin = Net Profit / Total Revenue Stock Turnover Ratio = COGS / Average Inventory
Net Profit 5237 Average Inventory(Finished Goods) = (Opening Inventory + Closing 2360.5
Total Revenue 35787 Inventory) /2

Net Profit Margin 14.63% COGS 16374

This ratio provides the final picture of how profitable a company is after all expenses Stock Turnover Ratio 6.94
including interest and taxes have been taken into account
Explains how many times a company’s inventory is sold and replaced over a period

Return on Equity = Profit after tax / Capital Employed

PAT = Profit for the year 5237 Debtor Turnover Ratio = Net Credit Sales / Average
Debtors(Trade Receivables)
ROE 74.02%
Net Credit Sales(Since credit sales are not specifies separately, take 35218
It measures the total return on equity capital and shows the firm’s ability to turn assets complete sales)
into profits.
Average Debtors (average trade receivables) 1037.5

Debtor Turnover Ratio 33.95

Return on capital employed = Total earnings/ Capital Employed
Shows effectiveness in extending credit and collecting debts
Total Earnings = Profit before exceptional items and tax + Finance Costs 7367

Capital Employed = Equity share capital + Reserves & surplus 7075

ROCE 104.13% Creditors Turnover Ratio = Net Credit Purchases / Average Similar to Debtor
Creditors(Trade Payable) Turnover Ratio
It measures a company's profitability and the efficiency with which its capital is used. In
other words, how well a company is generating profits from its capital. Measures the rate at which company pays off its creditors

Prepared in association with the Placement Preparation Committee

 Mergers and Acquisitions

Title / Heading
In an acquisition, the acquiring company obtains a majority stake in the acquired firm, which does not change its name or legal structure.
Company X + Company Y = Company X (where X acquires Y)

In a simple merger with consolidation, a new entity is created and the old entities cease to exist.
Company X + Company Y = Company Z

Why Mergers & Acquisitions Dealscope

• For greater market share and access to customers • A periodical by Equit-I that covers the financial
• Vertical Integration aspects and the rationale behind major M&A deals
• Horizontal Integration • It includes financial information, deal points and deal
• For technology and intellectual property rationale.
• Financial reasons like tax savings, and dear policy • Deal Points: It refers to the agreed upon terms and
• Diversification the timeline of the deal execution.
• Eliminate competition • Deal Rationale: It explains to us why both parties
• Increasing bargaining power agreed to the deal and the benefits to them therein.

Prepared in association with the Placement Preparation Committee

 Sample Dealscope – Viacom & CBS
13th Nov, 2019 Dealscope
13th Nov, 2019 Dealscope
Date of Announcement
13th August, 2019
Date of Announcement Date of Announcement
13th August, 2019 13th August, 2019

Deal Consideration
Deal Consideration $ 12bn Deal Consideration
$12 bn $12 bn

CBS CBS Viacom Inc. Viacom Inc.

Deal Rationale Founded
Founded in 1927, CBS Corporation is a mass media incompany Foundedis in
1927, CBS Corporation 1971, media
a mass Viacomcompany
creates entertainment
Foundedexperiences Deal
in 1971, Viacom creates Points
entertainment experiences
that creates and distributes industry-leading
thatcontent
createsacross a
and distributes that drive conversation
industry-leading andacross
content culture a around that
the world. Through
drive conversation and culture around the world. Through
variety of platforms to audiences around the world.
variety
Company’s operations span virtually every Company’s
The to audiences
of platforms
field of media
television,around
and span solutions, its brands
CBS and
the• world.
film, digital media,The
Viacomandwill
live events,television,
merchandise
combine
film, and
digital media,in live
anevents,
all-stock transaction
merchandise and under the name
operations virtually every field connect
of mediawithanddiverse, young young
solutions, its at connect with diverse, young and young at
brands
• After two series entertainment,
of mergersincluding
and split-ups of Viacom
cable, publishing,entertainment, and
local TV, and film. CBS. the two
heartpublishing,
including cable, audiences local TV,ViacomCBS.
in more than film.countries.The
and 180 all-stock
Viacom’s
heart network
audiences dealthan
in more is 180
worth $12
countries. bn. Each
Viacom’s share of Viacom voting
network
CBS’ businesses include CBS Television CBS’ Network, The CW
businesses include CBSincludes Comedy
Television Central, The
Network, Paramount
CW Network,
includesNickelodeon,
Comedy Central, Paramount Network, Nickelodeon,
entities has decided to 10
Network come together to become
Australia. Network a 10broadcast
Australia. and MTV, cable
VH1, Logo TV, NickClassJr. etc. A and MTV, Viacom
VH1, Logonon-voting
TV, Nick Jr. etc.Class B will convert to 0.59625 shares of
leader in key markets around the $14.78
Market Capitalisation
world,bn
reaching 4.3 billion+ cumulative
Market Capitalisation CBS voting Class
$9.6 bn A and CBS
Advisors non-voting Class B, respectively.
Advisors
Market Capitalisation $14.78 bn Advisors Market Capitalisation $9.6 bn Advisors
TV subscribers.Enterprise
The combined
Value company
$24.44 bn willEnterprise
have Value
more than 750 series Enterprise
$24.44 bn Value $17.71 bn
• CBS shareholders will own approximately
Enterprise Value $17.71 bn
61% and Viacom shareholders will
Revenue $14.5 bn Centerview
Revenue Partners Revenue
$14.5 bn $12.94 bn
Centerview Partners LionTree
Revenue Advisors $12.94 bn LionTree Advisors
currently ordered to or in production.
EV/EBITDA 7.82xIn addition, it
Lazard
EV/EBITDA
will include a major
EV/EBITDA
7.82x own approximately
Lazard 5.86x EV/EBITDA 39%
Morgan Stanley
of ViacomCBS,
5.86x National
Morgan Stanley
Hollywood film studio, Paramount Pictures.
Deal Rationale • Amusements will own 79.4% of the combined company’s voting Class A
Deal Rationale
• The combined companyAfter
willtwo also
series ofbe oneand of
mergers theofAfter
split-ups largest
Viacom
twoand
content
CBS.
series of the two entities
mergers has shares
decided
and split-ups toand
of Viacom and10.1%
come CBS. the of
together to
two fully
become diluted shares.
a has decided
entities to come together to become a
broadcast and cable leader in key markets around the world, reaching 4.3 billion+ cumulative TV subscribers. The CBS-
spenders, with more than Viacom
$13 billion
merger isspent
expectedin
to the last
the12 months.
broadcast and cable leader in key markets around the world, reaching 4.3 billion+ cumulative TV subscribers. The CBS-
13entertainment
boardto better
members with 6 independent members
position company to better
Viacom merger compete to
is expected with • the
the other
position company industry juggernauts
compete with the other entertainment industry juggernauts from CBS board, 4
• ViacomCBS will operatealso strong
awaited.
broadcast networks in
like Netflix, the
like Netflix, Amazon, Apple, Disney etc. But with all consolidations on such a large scale, potential layoffs and clashes are
Amazon, UK,
Apple, Disney etc. But with all consolidations on such a large scale, potential layoffs and clashes are
independent members from Viacom board, 2 National
• The combined company will deliver financial benefitsalso
thatawaited.
will position the combined company to create significant value for all
Argentina and Australia, as well
shareholders. asaccretive
The EPS pay-TV networks
transaction has an across
estimated 180+
• The combined company will deliver financial benefits that will position the combined company to create significant value for all
• Viacom’s
run-rate annual synergies of $500 million. CEO, Bob Bakish will lead the combined company as President and
shareholders. The EPS accretive transaction has an estimated run-rate annual synergies of $500 million.
• The combined company will have more than 750 series currently ordered to or in production. In addition, it will include a major
• countries. It will also have significant global production
• The
Hollywood film studio, Paramount Pictures.
capabilities
combined company
Joe Ianniello, CBS President will serve as Chairman.
will have more than 750 series currently ordered to or in production. In addition, it will include a major
Hollywood film studio, Paramount Pictures.
across five continents – creating
• The combined content
company will also beinone
45•of the
• ViacomCBS will operate strong broadcast
languages.
The
largest content spenders, with more than $13 billion spent in the last 12 months.
combined
networks company
in the will also be
UK, Argentina andone •asThe
of the largest
Australia, transactions
content
well as spenders,
pay-TV withare
networks moreexpected
than
across tospent
$13 billion
180+ close
in theby
last2019 calendar year end.
12 months.
• ViacomCBS will operate strong broadcast networks in the UK, Argentina and Australia, as well as pay-TV networks across 180+
countries. It will also have significant global production capabilities across five continents – creating content in 45 languages.
countries. It will also have significant global production capabilities across five continents – creating content in 45 languages.
• The combined company will accelerate the growth of its D2C strategy, enhance distribution and advertising opportunities and create
•
a leading producer and licensor of premiumThe combined
content company
to third-party will accelerate
platforms the growth of its D2C strategy, enhance distribution and advertising opportunities and create
globally.
• a leading producer and licensor
In the US, the combined company’s portfolio of broadcast, premium and cable networks of premium content to nickelodeon,
like third-party platforms globally.
Paramount Network,
Prepared in association with the Placement Preparation Committee
comedy central, CBS sports etc will have • Inthethe US, the
highest combined
share company’s
of viewing portfolio
on television of broadcast,
among premium
key audiences, and cable
including Kids, networks
African like nickelodeon, Paramount Network,
comedy central, CBS sports etc will have the highest share of viewing on television among key audiences, including Kids, African
 Assignments

Title / Heading Assignment 1

• You are required to download the consolidated Financial Statements of Nestle Group for the year ended 31 December 2019
and calculate all the ratios which have been mentioned in the primer for the year 2019 and 2018.

Assignment 2
• Test your Wits: Go through the Dealscope given in slide 11 carefully and mention three points on why the deal should be
made (How does it affect the two units positively?) and three points on why should they not go ahead with this deal.
Deal: GOOGLE & FITBIT
(Hint: Studying the synergies (Operational, financial etc) might help | Dealscope is made on Merger, Acquisition, Joint Venture,
Alliance etc.)

Prepared in association with the Placement Preparation Committee

 Assignments
Few pointers
Title / Heading
For Assignment 1:
• Make the calculation in an excel sheet. Word document or PDF containing the calculation will not be evaluated.
• In case you differ from the ratio formula used in the primer, kindly write down the formula that you have used.
• Do attach the copy of the financial statements used by you for calculation of ratios.
• Naming Convention: - “Full Name_PGP2020-22.xls”
For Assignment 2:
• Make the submission in one PDF file.
• Naming Convention: - “Full Name_PGP2020-22.pdf”

Submission details
• Send in your entries with the subject “Primer Submission 2020-21” to equiti@iimidr.ac.in
• Send a zip folder containing all the three files.
• Naming convention: - “Full Name_PGP2020-22.”

Prepared in association with the Placement Preparation Committee