46. What is the Difference between IPO & FPO?

Answer:

Sr
Parameter IPO- Initial Public Offering FPO- Follow Up Public Offering
No.

The first issue of shares by a Issuance of shares by a company to raise

1. Meaning
company additional capital after IPO
EV=MC+Total Debt−C

Where: MC=Market capitalization; equal to theprice

current Price is market
stock price multiplied by thedriven andofdependent on
number
2. Price Fixed or variable range
number of shares increasing or decreasing
outstanding stock shares

Total debt=Equal to the sum Increases

of short-termbecause the company
and long-term debt Number of shares increases in dilutive
3. Share capital issues fresh capital to the public FPO and remains the same in non-dilutive
C=Cash and cash equivalents;forthelisting. FPO
liquid assets of a company, but may not include marketable
securities.
Cheaper in most cases because the value
4. Value Expensive
of the company is getting further diluted.

5. Risk Riskier  Comparatively less risky 

Status of the An unlisted company issues an

6. An already listed company issues an FPO
company IPO

It depends on your risk level and goals. Your risk levels need to be extremely high to invest in an IPO
because you do not have much idea about the company. An FPO is relatively a safer bet for individual
investors and new investors. Investing in an IPO requires more research than FPO. You need to
understand the company fundamentals. If you are a long term investor, with a good risk appetite and have
faith in the company, you can consider investing in an IPO. When it comes to the differences between
FPO and IPO, risk and returns are very important components. However, risk and returns are correlated.
IPOs have more potential to return more money if the company kicks off to a good start but there are
more ‘ifs’ to it to understand your profile as an investor and then take the decision.

47. What is Enterprise value and it’s most used multiple?

Answer: Enterprise value (EV) is a measure of a company's total value, often used as a more
comprehensive alternative to equity market capitalization. EV includes in its calculation the market
capitalization of a company but also short-term and long-term debt as well as any cash on the company's
balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover.
The enterprise value/EBITDA metric is used as a valuation tool to compare the value of a company,
debt included, to the company’s cash earnings less non-cash expenses. It's ideal for analysts and investors
looking to compare companies within the same industry.

EV/EBITDA is useful in a number of situations:

● The ratio may be more useful than the P/E ratio when comparing firms with different degrees of
financial leverage (DFL).
● EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and
amortization.
● EBITDA is usually positive even when earnings per share (EPS) are not.

48. How is relative valuation used?

Answer: Relative valuation uses multiples, averages, ratios, and benchmarks to determine a firm's value.
A benchmark may be selected by finding an industry-wide average, and that average is then used to
determine relative value. An absolute measure, on the other hand, makes no external reference to a
benchmark or average. A company's market capitalization, which is the aggregate market value of all of
its outstanding shares, is expressed as a plain dollar amount and tells you little about its relative value. Of
course, with enough absolute valuation measures in hand across several firms, relative inferences can be
drawn.

49. What are some of the most common multiple in relative valuation?

Answer: There are many different types of relative valuation ratios, such as price to free cash flow,
enterprise value (EV), operating margin, price to cash flow for real estate and price-to-sales (P/S) for
retail.

One of the most popular relative valuation multiples is the price-to-earnings (P/E) ratio. It is calculated by
dividing stock price by earnings per share (EPS), and is expressed as a company's share price as a
multiple of its earnings. A company with a high P/E ratio is trading at a higher price per dollar of earnings
than its peers and is considered overvalued. Likewise, a company with a low P/E ratio is trading at a
lower price per dollar of EPS and is considered undervalued. This framework can be carried out with any
multiple of price to gauge relative market value. Therefore, if the average P/E for an industry is 10x and a
particular company in that industry is trading at 5x earnings, it is relatively undervalued to its peers.

50. What is the optimal capital structure of the company?

Answer: The optimal capital structure of a firm is the best mix of debt and equity financing that
maximizes a company’s market value while minimizing its cost of capital. In theory, debt financing offers
the lowest cost of capital due to its tax deductibility. However, too much debt increases the financial risk
to shareholders and the return on equity that they require. Thus, companies have to find the optimal point
at which the marginal benefit of debt equals the marginal cost.
To gauge how risky a company is, potential equity investors look at the debt/equity ratio. They also
compare the amount of leverage other businesses in the same industry are using—on the assumption that
these companies are operating with an optimal capital structure—to see if the company is employing an
unusual amount of debt within its capital structure.

The cost of debt is less expensive than equity because it is less risky. The required return needed to
compensate debt investors is less than the required return needed to compensate equity investors, because
interest payments have priority over dividends, and debt holders receive priority in the event of a
liquidation. Debt is also cheaper than equity because companies get tax relief on interest, while dividend
payments are paid out of after-tax income.

However, there is a limit to the amount of debt a company should have because an excessive amount of
debt increases interest payments, the volatility of earnings, and the risk of bankruptcy. This increase in the
financial risk to shareholders means that they will require a greater return to compensate them, which
increases the WACC—and lowers the market value of a business. The optimal structure involves using
enough equity to mitigate the risk of being unable to pay back the debt—taking into account the
variability of the business’s cash flow.

51. Explain fixed and floating rate mechanism?

Answer:

A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official
exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but
also other major currencies such as the euro, the yen, or a basket of currencies). In order to maintain the
local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in
return for the currency to which it is pegged.

Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and
demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will
automatically be corrected in the market. Look at this simplified model: if demand for a currency is low,
its value will decrease, thus making imported goods more expensive and stimulating demand for local
goods and services. This, in turn, will generate more jobs, causing an auto-correction in the market. A
floating exchange rate is constantly changing.

52. How does interest rate and inflation affect the exchange rate?

Answer: Inflation is closely related to interest rates, which can influence exchange rates.

Inflation is closely related to interest rates, which can influence exchange rates. Countries attempt to
balance interest rates and inflation, but the interrelationship between the two is complex and often
difficult to manage. Low interest rates spur consumer spending and economic growth, and generally
positive influences on currency value. If consumer spending increases to the point where demand exceeds
supply, inflation may ensue, which is not necessarily a bad outcome. But low interest rates do not
commonly attract foreign investment. Higher interest rates tend to attract foreign investment, which is
likely to increase the demand for a country's currency.
53. What is the role of credit rating agencies?

Answer: A rating agency is a company that assesses the financial strength of companies and government
entities, especially their ability to meet principal and interest payments on their debts. The rating assigned
to a given debt shows an agency’s level of confidence that the borrower will honor its debt obligations as
agreed.

Rating agencies assess the credit risk of specific debt securities and the borrowing entities. In the bond
market (fixed Income Market), a rating agency provides an independent evaluation of the
creditworthiness of debt securities issued by governments and corporations. Large bond issuers receive
ratings from one or two of the big three rating agencies. In the United States, the agencies are held
responsible for losses resulting from inaccurate and false ratings.

Rating agencies focus on the type of pool underlying the security and the proposed capital structure to
rate structured financial products. The issuers of the structured products pay rating agencies to not only
rate them, but also to advise them on how to structure the tranches.

Rating agencies also give ratings to sovereign borrowers, who are the largest borrowers in most financial
markets. Sovereign borrowers include national governments, state governments, municipalities, and other
sovereign-supported institutions. The sovereign ratings given by a rating agency shows a sovereign’s
ability to repay its debt.

The ratings help governments from emerging and developing countries to issue bonds to domestic and
international investors.