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BASIC
ANSWERS
What is the Operating profit of a company? Profit generated by a
company's operations before interest payments and tax is called
operating profit.
Net profit A company's total earnings (or profit). Net income is
calculated by taking revenues and adjusting for the cost of doing
business, depreciation, interest, taxesand other expenses. This
number is found on a company's income statement and is an important
measure of how profitable the company is over a period oftime. The
measure is also used to calculate earnings per share.
What is WACC A calculation of a firm's cost of capital in which
each category of capital is proportionately weighted. All capital
sources - common stock , preferred stock, bondsand any other
long-term debt - are included in a WACC calculation.
WACC is calculated by multiplying the cost of each capital
component by its proportional weight and then summing:Where:Re =
cost of equityRd = cost of debtE = market value of the firm's
equityD = market value of the firm's debtV = E + DE/V = percentage
of financing that is equityD/V = percentage of financing that is
debtTc = corporate tax rateBy taking a weighted average, we can see
how much interest the company has to pay for every dollar it
finances.
Difference between Net profit and Gross Profit Gross profit or
sales profit or gross operating profit is the difference between
revenue and the cost of making a product or providing a service,
before deducting overheads, payroll,taxation, and interest
payments. In general, it is the profit shown on a transaction if
one disregards the indirect costs. Whereas Net profit is arrived at
by deducting the indirect costs,depreciation, interest and taxes
from the gross profit.
What does beta co-efficient signify Beta measures the risk
appetite of the company. It reflects the systematic risk of the
company and cannot be managed. Factors like interest rate, currency
rate, inflation etc. whichimpact the market as a whole affect the
company which are market related and cannot be managed
What are the various risks associated with a firm andwhich ones
can be managed
Operational, credit, liquidity, currency, interest rate, legal,
country, business, market risk. The market risk forms the
systematic risk where as the rest are unsystematic risks and can
bemanaged. The company can take appropriate measures like Enhanced
supervision over processes for operational risk, derivatives to
manage the currency risk, abstain from enteringpolitically unstable
markets to contain country risk.
What does EPS signify The portion of a company's profit
allocated to each outstanding share of common stock. EPS serves as
an indicator of a company's profitability.Calculated as:(Net
income-Div on Prefstock)/Avg outstanding sharesAn important aspect
of EPS that's often ignored is the capital that is required to
generate the earnings (net income) in the calculation. Two
companies could generate the same EPSnumber, but one could do so
with less equity (investment) - that company would be more
efficient at using its capital to generate income and, all other
things being equal, would be a"better" company.
PE Ratio The portion of a company's profit allocated to each
outstanding share of common stock. EPS serves as an indicator of a
company's profitability. An important aspect of EPS that'soften
ignored is the capital that is required to generate the earnings
(net income) in the calculation. Two companies could generate the
same EPS number, but one could do so withless equity (investment) -
that company would be more efficient at using its capital to
generate income and, all other things being equal, would be a
"better" company.It basically showsthe how much price one needs to
pay to earn a rupees earning in the company
What is the Interest coverage ratio A ratio used to determine
how easily a company can pay interest on outstanding debt. The
ratio is calculated by dividing a company's earnings before
interest and taxes (EBIT) of oneperiod by the company's interest
expenses of the same period. Ebit is taken as the ability to pay
interest is not affected by tax.
List the leverage ratios for a firm D/E, D/Asset, Interest
coverage and Fixed charges coverage ratio. Fixed charges also
includes loan repayments, lease payments and preference dividends
which are not taxdeductible.
Risk free rate of return The theoretical rate of return of an
investment with zero risk. The risk-free rate represents the
interest an investor would expect from an absolutely risk-free
investment over a specifiedperiod of time. The treasury bill/bond
rate can be used as a proxy.
Dividend yield A financial ratio that shows how much a company
pays out in dividends each year relative to its share price. In the
absence of any capital gains, the dividend yield is the return
oninvestment for a stock. Dividend yield is calculated as
follows:
ROE, ROCE and their difference A measure of a corporation's
profitability that reveals how much profit a company generates with
the money shareholders have invested. ROE= Net income/Shareholders
equity. Alsoknown As RONWA ratio that indicates the efficiency and
profitability of a company's capital investments.ebit/(Total
Assets- Current Liabilities).ROCE should always be higher than the
rate at which thecompany borrows, otherwise any increase in
borrowing will reduce shareholders' earnings.
Difference between EBIT and operating profit There may be a
difference between EBIT and operating profit. It is almost always
small. It comes from the exclusion from operating profit of certain
profits or losses that are not part ofthe operations of a business
- such as profits on the sale of businesses.EBIT = Operating
Revenue Operating Expenses(OPEX) + Non-operating IncomeOperating
Income = Operating Revenue Operating Expenses
Calculation of Gross, net and operating profit margin Ratios
sheet
Difference between Systematic and unsystematicrisk
Systematic risk arises out of market factors and cannot be
mitigated.Whereas unsystematic risk is specific to the businesses
of a firm and can be mitigated by takng appropriate steps
Total Shareholders' return Total Shareholder Return (TSR)
represents the change in capital value of a listed/quoted company
over a period (typically 1 year or longer), plus dividends,
expressed as a plus orminus percentage of the opening value.Due to
its nature, TSR can not be calculated at divisional level
(Strategic Business Unit) and below.
Financial ratios to assess the stability of a firm Profitabilty,
Activity, Leverage, Liquidity and Valuation ratios.can discuss
further what they are
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What is market capitalisation Market capitalization (aka market
cap or capitalized value) is a measurement of corporate or economic
size equal to the share price times the number of shares
outstanding of a publiccompany. As owning stock represents owning
the company, including all its assets, capitalization could
represent the public opinion of a company's net worth and is a
determiningfactor in stock valuation.
Difference between COGS and Operating Expenses 19. An operating
expense, operating expenditure, operational expense, operational
expenditure or OPEX is an on-going cost for running a product,
business, or system. In business,an operating expense is a
day-to-day expense such as sales and administration, or research
& development, as opposed to Production, costs, and pricing. In
short, this is the moneythe business spends in order to turn
inventory into throughput. Operating expenses also include
depreciation of plants and machinery which are used in the
production process. Thedirect costs attributable to the production
of the goods sold by a company. This amount includes the cost of
the materials used in creating the good along with the direct labor
costsused to produce the good. It excludes indirect expenses such
as distribution costs and sales force costs. COGS appears on the
income statement and can be deducted from revenueto calculate a
company's gross margin..
Debt Service Coverage ratio
What is 10K and 20F 10K - Annual report and 20F is Registration
of securities of foreign private issuers
GDP and GNP Gross National Product measures the total amount of
goods and services that a country's citizens produce regardless of
where they produce them. As a result, GNP includes suchitems as
corporate profits that multinational firms earn in overseas
markets. By contrast, GDP measures the total amount of goods and
services that are produced within a country'sgeographic
borders.
PPP The purchasing power parity (PPP) theory uses the long-term
equilibrium exchange rate of two currencies to equalize their
purchasing power.A purchasing power parity exchange rateequalizes
the purchasing power of different currencies in their home
countries for a given basket of goods. It is often used to compare
the standards of living between countries, ratherthan a per-capita
gross domestic products comparison at market exchange rates.
ADVANCE
ANSWERS
Difference between NPV and IRR Difference between the present
value of future cash flows and the initial outflow. IRR is the
discount rate where NPV=0
Different profitability metrics that can be used to analyse
a
firm
All profitability ratios- Gross profit margin, net profit
margin, ROA, ROE,ROCE
How to assess the credit worthiness of a firm/individual Check
the Debt coverage ratio, liquidity ratios,net worth, D/E, defaults,
future income and cash flows,liabilities and the historical
financial stability
Structure of an income statement
Revenues-COGS=Gross-Expenses-Dep=EBIT-Int-Tax=PAT
Relation between interest and bond prices Inversely related.One
the bond price is found by dicounting the future cash flws
generated by the bond. Hence, the higher the discount rate the
lower the value.Secondly, if the interestrate rises, then no one
would but the bond with lower coupon rate but when the price
reduces the bond yield matches the new interest rate and becomes
attractive
If the sales of a company rises and EBIT falls, is it
possiblefor the PAT to rise
Yes it is possible for PAT to rise as there might be lower or no
financial cost than the previous year causing the PAT to be more
even though the EBIT has fallen
If the Quick ratio is high for a company and the Acid testratio
is low, what does it signify
It means that the assets of the company are in the form of
inventory and illiquid.Hence, the company need to have proper
inventory management in place
Diff between authorised, issued, subscribed and
paid-upcapital
Diff between interest coverage and fixed charges
coverageratio
Interest coverage is taken for tax deductible items whereas
fixed charges also takes the loan repayment, lease payment, emi
into consideration to give a better picture
If EPS is same for two companies, what does it reflect forthe
MPS
Not enough data.It only tells the PAT and the nuber of shares
and not the MPS of the firm
Diff between capital gains,dividend yield and total yield
Capital gains is the change in price of stock over a period of
time(P1-P0)/P0. Dividend yield is the Dividend received over the
MPS over time.the total yield is the sum of the capitalgains and
dividend yield
What are derivatives and why are they used Dervatives are
financial instruments which derive value from another
asset.Derivates are in the form of futures, optons,swaps,
forwards.Basically used as a risk managemnet tool butalso for
speculation and arbitrage as they are high risk products which give
high returns as well
Diff between nominal and real GDP GDP, or Gross Domestic Product
is the value of all the goods and services produced in a country.
The Nominal Gross Domestic Product measures the value of all the
goods andservices produced expressed in current prices. On the
other hand, Real Gross Domestic Product measures the value of all
the goods and services produced expressed in the prices ofsome base
year.
Industry related
Difference between a traditional and a ULIP A traditional plan
gives life cover whereas a ULIP has cover with investment in stocks
and bonds for which units are issued and one gets appreciation in
fund value
What are the three pillars of BASEL2 Minimum capital
requirement, Supervisory committee and market discipline - Pillar 1
of the new capital framework revises the 1988 Accords guidelines by
aligning the minimumcapital requirements more closely to each banks
actual risk of economic loss. First, Basel II improves the capital
frameworks sensitivity to the risk of credit losses generally
by
requiring higher levels of capital for those borrowers thought
to present higher levels of credit risk, and vice versa. Three
options are available to allow banks and supervisors tochoose an
approach that seems most appropriate for the sophistication of a
banks activities and internal controls.Supervisors will evaluate
the activities and risk profiles of individualbanks to determine
whether those organisations should hold higher levels of capital
than the minimum requirements in Pillar 1 would specify and to see
whether there is any need forremedial actions.Pillar 3 leverages
the ability of market discipline to motivate prudent management by
enhancing the degree of transparency in banks public reporting.
How do you calculate the dividend of a mutual find Dividend is
calculated on the Face value of the units of the mutual
fund.Whereas the dividend yield is calculated by the
dividend/NAV
Difference between a bank and a NBFC NBFCs are doing functions
akin to that of banks, however there are a few differences:(i) a
NBFC cannot accept demand deposits;(ii) it is not a part of the
payment and settlement system and as such cannot issue cheques to
its customers
What is short se lling To prof it from the stock pr ice going
down, short se llers can borrow a securi ty and sell it , expect
ing that it wi ll decrease in value so that they can buy it back at
a lower pr ice and keepthe difference. The short seller owes his
broker, who usually in turn has borrowed the shares from some other
investor who is holding his shares long; the broker itself seldom
actuallypurchases the shares to lend to the short seller.
EIC analysis EIC analysis of any banking stock-ICICI.So the
candidate can do an EIC analysis.Start with the economy figures
like GDP growth, infrastructure development, interest rates
thengetting to banking industry-FDI opening, new products, private
banking rising, and then coming to the specific company and the
nalaysis
Diff between options and futures Options are contracts which
give you the right to buy or sell the underlying stock if the Spot
price goes above Strike price.Put option gives the right to sell if
the Spot price falls belowthe Strike price and the call option
gives you the right to buy the underlying asset is the spot price
goes above the strike price. to buy or sell a certain underlying
instrument at a certaindate in the future, at a specified price.
The future date is called the delivery date or final settlement
date. The pre-set price is called the futures price. The price of
the underlying asseton the delivery date is called the settlement
price.
What is Open interest The total number of options and/or futures
contracts that are not closed or delivered on a particular day
