Financial Management

Non-financial considerations for make or buy decision

In addition to financial considerations, there are several non-financial factors that organizations should take into account when making a make or buy decision. These non-financial considerations play a significant role in determining the optimal choice and ensuring the long-term success of the decision. Here are some key non-financial factors to consider: 1. Core Competencies: Assessing…...

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Difference between marginal costing and standard costing?

Marginal costing and standard costing are two different approaches used in cost accounting to analyze and control costs. Here’s a brief explanation of the differences between the two: 1. Definition and Focus: – Marginal Costing: Marginal costing focuses on analyzing the behavior of costs in relation to changes in production volume. It segregates costs into…...

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Why audit committee is entrusted with RPT approval and not any other committee

The audit committee is typically entrusted with the approval and oversight of related party transactions (RPTs) due to its specific role and responsibilities within an organization. The audit committee is a subcommittee of the board of directors and is composed of independent directors who possess financial expertise and knowledge of corporate governance practices. There are…...

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Non-financial considerations for make or buy decision

When evaluating the make or buy decision, it’s crucial to consider not only financial factors but also non-financial considerations that can have a significant impact on the decision-making process. Some key non-financial considerations include: 1. Control and Flexibility: Making a product or performing a service in-house gives the organization greater control and flexibility over the…...

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Difference between CIBIL and crisil rating.

CIBIL (Credit Information Bureau India Limited) and CRISIL (Credit Rating Information Services of India Limited) are both important entities in the financial industry, but they serve different purposes and have distinct roles: CIBIL is a credit information company that collects and maintains credit-related data of individuals and companies. It operates as a credit bureau and…...

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What are DSCR and its calculation? Ideal Ratio and its relevance.

DSCR stands for Debt Service Coverage Ratio. It is a financial metric used by lenders to assess a borrower’s ability to meet their debt obligations, specifically interest and principal payments. The DSCR measures the cash flow available to cover debt payments, providing an indication of the borrower’s capacity to service their debt. The calculation of…...

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What is important yardstick in assessment of Term Loan?

One important yardstick in the assessment of a term loan is the Debt Service Coverage Ratio (DSCR). DSCR is a financial metric used by lenders to evaluate a borrower’s ability to generate sufficient cash flow to meet their debt obligations. It provides an indication of the borrower’s capacity to repay the loan. DSCR is calculated…...

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Why are Debtor days and Inventory days calculated?

Debtor days and inventory days are calculated to assess the efficiency and effectiveness of a company’s working capital management. These ratios provide valuable insights into the company’s liquidity, cash flow, and operational efficiency. Debtor days, also known as accounts receivable days or average collection period, measures the average number of days it takes for a…...

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How will you analyse the annual report of a company?

When analyzing the annual report of a company, several key areas should be considered to gain insights into the company’s financial performance, strategies, and overall health. Here is a structured approach to analyzing an annual report: 1. Financial Statements: Review the balance sheet, income statement, and cash flow statement to assess the company’s financial position,…...

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A company has had positive EBITDA for the past 10 years, but it recently went bankrupt. How could this happen?

The scenario you presented, where a company has had positive EBITDA for the past 10 years but recently went bankrupt, may seem contradictory at first. However, it is important to understand that EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is just one measure of a company’s financial performance and does not capture the full…...

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What are free cash flows of firm?

Free cash flows of a firm refer to the cash generated by its operations that is available for distribution to investors, debt repayment, or reinvestment in the business. It represents the cash flow that remains after deducting operating expenses, taxes, and capital expenditures necessary to maintain and expand the company’s operations. Here are some key…...

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How do you value a Company?

Valuing a company involves assessing its worth or intrinsic value, which can be determined using various methods. Here are some common approaches to company valuation: 1. Comparable Company Analysis: This method involves comparing the company to similar publicly traded companies or recent transactions in the same industry. Key financial ratios, such as price-to-earnings (P/E), price-to-sales…...

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Why is income statement not affected by changes in inventory?

The income statement is not directly affected by changes in inventory because it follows the matching principle of accounting. The matching principle states that expenses should be recognized in the same period as the revenues they help generate. As a result, the income statement primarily focuses on the recognition of revenues and expenses incurred during…...

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What is working capital, and which are the different types of working capital?

Working capital refers to the difference between a company’s current assets and its current liabilities. It represents the funds available to cover day-to-day operations and is a key indicator of a company’s liquidity and short-term financial health. Working capital is essential for meeting short-term obligations, managing inventory, funding operational expenses, and sustaining ongoing business activities…....

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Which company would have a higher beta: A manufacturing company or a technology company?

In general, a technology company would likely have a higher beta compared to a manufacturing company. Beta is a measure of a stock’s volatility or sensitivity to market movements. A beta greater than 1 indicates higher volatility, while a beta less than 1 suggests lower volatility compared to the overall market. Technology companies are often…...

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Tell us something about operating cycle?

The operating cycle, also known as the cash conversion cycle, is a vital financial metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. It reflects the efficiency of a company’s working capital management and provides insights into how quickly a…...

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TOL/ TNW

The ratio of Total Outside Liabilities (TOL) to Tangible Net Worth (TNW) is a financial metric used to assess a company’s financial leverage and risk. It provides insights into the proportion of a company’s total liabilities that are financed by its tangible net worth, which represents the net value of its tangible assets after deducting…...

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Discuss GDP rate?

Gross Domestic Product (GDP) rate is a key economic indicator that measures the overall size and growth of a country’s economy over a specific period. It represents the total value of all goods and services produced within a country’s borders during a given time, typically measured on an annual basis. The GDP rate provides valuable…...

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Which items in financial statements help you judge the financial stability?

Solvency ratios are financial metrics that provide insights into a company’s ability to meet its long-term financial obligations and remain financially stable over time. These ratios focus on the company’s debt levels in relation to its assets, equity, and earnings. Here are some key solvency ratios that help assess financial stability: Debt-to-Equity Ratio: This ratio…...

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Differentiate between Tax planning & Tax evasion?

Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves illegal practices…...

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What is diminishing marginal utility?

Diminishing marginal utility is a concept in economics that states that the satisfaction or benefit derived from consuming an additional unit of a good or service decreases as the quantity consumed increases. In simpler terms, it means that the more of something we have or consume, the less satisfaction we get from each additional unit…....

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Difference between financial controller and financial analyst?

Financial Analyst Financial analysts tend to work with the overall picture. They review financial decisions based on current market trends, stated business objectives, and possible investment options. These professionals’ evaluations help determine whether a project or venture is worthy enough for investment. There are two main types of financial analysis—fundamental analysis and technical analysis. Financial…...

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Current ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm’s current assets to its current liabilities, and is expressed as follows:- Current ratio = Current Assets/Current Liabilities Favorite… To get access, please buy CA Interview Question Bank...

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What is Tangible net worth

Tangible net worth is a financial measure that represents the net worth of a company, excluding intangible assets such as intellectual property, goodwill, and brand value. It focuses on the tangible assets and liabilities of a company, which are the physical assets and liabilities that can be measured and valued. To calculate tangible net worth,…...

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Which kind of company should keep more equity and which type of company should keep more debt?

When the degree of operating leverage is higher than the degree of financial leverage, when the operations are very risky and there are fluctuating cash flows then this type of company should keep more equity. When the degree of financial leverage is higher than the degree of operating leverage, when the operations are less risky…...

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Why is the cost of equity always higher?

The cost of equity is generally higher compared to other sources of funding due to several factors: Higher Risk: Equity represents ownership in a company, which means equity investors bear the highest level of risk. Unlike debt holders who have a fixed claim on the company’s assets and income, equity investors have residual claims and…...

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How to evaluate investment in the concept of capital budgeting?

The most common capital investment evaluation tools are the Payback Period (PP), Return on Investment (ROI), Net Present Value (NPR), and Internal Rate of Return (IRR). Each method can provide insight into investment options, but each also has limitations. If net present value is positive, the project should be accepted. If internal rate of return…...

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What major factors affect the yield on a corporate bond?

The economic factors that influence corporate bond yields are interest rates, inflation, and economic growth. All these factors affect corporate bond yields and exert influence on each other. The pricing of corporate bond yields is a multivariable, dynamic process in which there are always competing pressures. For example, economic growth is bullish for corporations as…...

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What is typically higher – the cost of debt or the cost of equity?

The cost of equity is typically higher than the cost of debt, primarily due to the difference in the inherent risks associated with each source of financing. Cost of Debt: When a company raises funds through debt, it involves borrowing money from creditors (lenders) and agreeing to pay interest and principal over a specified period…....

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Can the IRR be negative? Can IRR be positive and NPV be negative?

Negative IRR indicates that the sum total of the post-investment cash flows is less than the initial investment, i.e. the non-discounted cash flows add up to a value which is less than the investment. Yes, both in theory and practice negative IRR exists, and it means that an investment loses money at the rate of…...

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What is hedging?

Hedging is a risk management strategy used to minimize or offset potential losses or risks arising from price fluctuations or uncertain events in financial markets. It involves taking an opposing position or entering into a financial contract that is designed to mitigate the impact of adverse movements in the value of an asset, liability, or…...

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How to balance between compliances and growth of the organization?

1.Map out the risks Whatever you do, it is important to properly map the risks inherent in your business so that your employees are aware of the best way that they can handle them. There must be absolutely no doubt in your employees mind what they must not do. Even with the best of intentions…...

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What is the end goal of a given financial restructuring?

The end goal of financial restructuring is to improve the financial health, stability, and sustainability of a company. It involves making strategic changes to the company’s financial structure, operations, and obligations in order to achieve specific objectives. The ultimate goals of financial restructuring can vary depending on the circumstances and challenges faced by the company,…...

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Why would company go bankrupt in the first place?

▪ A company cannot meet its debt obligations / interest payments. ▪ Creditors can accelerate debt payments and force the company into bankruptcy. ▪ An acquisition has gone poorly, or a company has just written down the value of its assets steeply and needs extra capital to stay afloat (see investment banking industry). ▪ There…...

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How much dividend should we declare? Is there an alternative?

Dividend should be declared based on future needs of the organisation. If the company has positive NPV projects available do not declare dividend, else do. Alternatives to distribution of dividend: Buy back of shares: This comes out with advantages such as a. When the growth potential is limited they use unused cash to buy back…...

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Difference between marginal costing, absorption costing and standard costing?

MARGINAL COSTING Marginal costing is generally a decision making, you have to use marginal costing when you want to decide whether you want to fulfil the next order or what my actual profit on the additional order. It is generally not used for accounting purpose but a decision making process. And it includes only variable…...

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Suppose I am not paying any dividend then why is there a cost for cost of equity that is my cost of equity should be zero?

The answer is, if you are not paying any dividend then there is opportunity cost for my investor and that opportunity cost is reflected in CAPM, so even if dividend is not being paid there is always a cost. It is measured using CAPM model which does not depend on whether the company is paying…...

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Suppose you want to set up a factory which involves an investment of 100 crores and we want you to help us to decide whether we should start this factory or not?

To evaluate whether to start the factory or not, a comprehensive financial analysis should be conducted. Here are some key steps to consider: Cost-Benefit Analysis: Assess the potential benefits and costs associated with the factory. Identify the expected revenue streams, market demand for the products, and potential profitability. Consider factors such as production costs, operational…...

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Suppose there are two companies, both are loss-making companies: one company took on debt, while the other company hasn’t taken any debt. Why?

There can be various reasons why one loss-making company may choose to take debt while the other may not. Some possible reasons could be: Risk tolerance: The company that has taken debt may have a higher risk tolerance and may be willing to take on more debt to finance its operations or expansion plans, whereas…...

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Tell me some Liquidity and Coverage ratios?

Liquidity Ratios: 1.Current Ratio: Current Assets / Current Liabilities 2.Quick Ratio: (Current Assets – Inventory) / Current Liabilities 3.Cash Ratio: Cash and Cash Equivalents / Current Liabilities Coverage Ratios: 4. Debt-to-Equity Ratio: Total Debt / Total Equity 5.Debt-to-Asset Ratio: Total Debt / Total Assets 6.Interest Coverage Ratio: Earnings Before Interest and Taxes (EBIT) / Interest…...

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Why is Market Cap/EBITDA not a good comparable multiple?

Because Market value is attributable to equity holders and EBITDA is attributable to both equity and debt holders. When we calculate any multiple, we should take numerator and denominator for either equity holders only or both equity and debt holders like below ratios: Equity multiples – P/E, P/BV, P/TBV Firm wide multiples: EV/ EBITDA, EV…...

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How do we calculate Market Cap and Enterprise value (EV) ?

Enterprise Value, or EV for short, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus…...

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Diff between share and bond

Shares and bonds are both financial instruments used to raise capital, but they differ in several ways: 1.Ownership: Shares represent ownership in a company, while bonds represent a loan to a company. 2.Return: Shareholders are entitled to a share of the company’s profits in the form of dividends and capital gains, while bondholders receive a…...

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What is financial risk management?

Financial risk management is the process of identifying, assessing, and managing various types of financial risks that a company may face in its operations. Financial risks can arise from a variety of sources such as market fluctuations, credit risks, liquidity risks, interest rate risks, currency risks, and commodity price risks. Effective financial risk management involves…...

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What is option trading?

Option trading refers to a financial derivative strategy that involves the buying or selling of options contracts. Options are financial instruments that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) within a specified period. Option trading allows investors to speculate on…...

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If accounts receivable are going up, what could be the possible driver?

An increase in accounts receivable could be driven by various factors within a company’s operations, financial management, or external environment. Here are some possible drivers of an increase in accounts receivable: Sales Growth: If the company is experiencing higher sales or increased business activity, it may lead to a larger volume of credit sales and…...

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How do you model working capital for a company?

Modeling working capital for a company involves projecting and managing the company’s short-term assets and liabilities, such as accounts receivable, accounts payable, and inventory. The goal is to ensure that the company has sufficient liquidity to cover its operational needs. Here’s a step-by-step approach to modeling working capital: Understand Components: Familiarize yourself with the key…...

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Can you walk us through the P&L and Balance sheet of our company?

Note: Students are advised to go through the Financial Statements and Annual reports of the specific company beforehand. Let’s start with the Profit and Loss (P&L) statement, also known as the income statement. The P&L statement provides a summary of the company’s revenues, expenses, and profits over a specific period, typically a quarter or a…...

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How would you forecast the revenue of our company? Or What are the key drivers or metrics for revenue in our industry?

Revenue Forecasting for Telecom Industry: Key Drivers/Metrics: Subscriber Growth: The number of new subscribers and the churn rate (subscriber attrition) directly impact revenue. Average Revenue Per User (ARPU): Calculated by dividing total revenue by the number of subscribers, ARPU reflects the average revenue generated from each customer. Data Usage: As data consumption increases, revenue from…...

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What is financial risk management?

Financial risk management is the process of identifying, assessing, and managing various types of financial risks that a company may face in its operations. Financial risks can arise from a variety of sources such as market fluctuations, credit risks, liquidity risks, interest rate risks, currency risks, and commodity price risks. Effective financial risk management involves…...

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What is NIFTY and SENSEX?

NIFTY and SENSEX are stock market indices in India. NIFTY represents the National Stock Exchange of India’s 50 largest companies by market capitalization, while SENSEX represents the Bombay Stock Exchange’s 30 largest and most actively traded companies. They are used as barometers to measure the overall performance of the Indian stock market and provide investors…...

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What is difference between EBIT and EBITDA? Can EBIT be greater than EBITDA?

The differences between EBIT and EBITDA: 1.EBIT stands for Earnings Before Interest and Taxes, while EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. 2.EBIT is calculated by subtracting the company’s operating expenses from its revenue, while EBITDA is calculated by adding back depreciation and amortization expenses to EBIT. 3.EBIT represents the amount of…...

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What is the first step of taking loan?

The first step of taking a loan is to assess the need for borrowing and determine the amount needed. This involves evaluating the purpose of the loan and identifying the specific financial requirements to achieve the intended goal. Once the amount needed has been determined, the borrower should assess their ability to repay the loan,…...

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What is currency swap, interest rate swap?

Currency swap is a financial contract between two parties to exchange principal and interest payments denominated in two different currencies. In a currency swap, each party borrows and lends in a different currency. The purpose of a currency swap is to manage currency risk and reduce the cost of borrowing in a foreign currency. Interest…...

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What is working capital and what is net working capital?

Working capital is the amount of a company’s current assets minus the amount of its current liabilities. The adequacy of a company’s working capital depends on the industry in which it operates, its relationship with its customers and suppliers, its inventory levels and more. Working Capital and Net Working Capital are usually interchangeable – Current…...

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Profitability and valuation ratios?

Profitability ratio: Profitability ratios measure a company’s ability to generate profits from its operations. 1.Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100% 2.Net Profit Margin = Net Profit / Revenue x 100% 3.Return on Equity = Net Income / Shareholders’ Equity x 100% Valuation ratio: Valuation ratios assess a…...

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How much dividend should we declare? Is there an alternative?

Dividend should be declared based on future needs of the organisation. If the company has positive NPV projects available do not declare dividend, else do. Alternatives to distribution of dividend: Buy back of shares: This comes out with advantages such as a. When the growth potential is limited they use unused cash to buy back…...

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Suppose we issued equity to purchase a machinery, how will it be affecting cash flow statement for the entire year?

Ther will be no direct impact in cash flow statement either in Investing activity or financing activity as there is no cash flow. However the tax sheid on depreciation which is added back to net income and it also impacts the tax paid with affects the balance of CFO. Favorite… To get access, please buy...

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Difference between broad money and narrow money?

The term “narrow money” typically covers the most liquid forms of money, i.e. currency (banknotes and coins) as well as bank-account balances that can immediately be converted into currency or used for cashless payments (overnight deposits, checking accounts, etc). Broad Money is M3 M0 is the sum of Currency in Circulation, Bankers’ Deposits with RBI,…...

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What SLR, CRR, REPO, Reverse Repo and rates?

CRR is a reserve maintained by banks with the RBI. It is a percentage of the banks’ deposits maintained in cash form. SLR is an obligatory reserve that commercial banks must maintain themselves. It is a percentage of commercial banks’ net demand and time liabilities, maintained as approved securities. These are defined liquid securities. Repurchase…...

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Difference between EBITDA and cash flow from operation?

The main difference between EBITDA and cash flow from operation is working capital changes and taxes. In EBITDA, it is before tax and in cash flow from operations, it is after tax. The second difference is that EBITDA is on an accrual basis and cash flow from operations is on cash basis. Favorite… To get...

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How is a firm valued?

Financial analysts can evaluate a corporation in a variety of ways. The discounted cash flow (DCF) approach and the relative valuation method are the two most popular methods of valuation. In the first approach, we must first determine the free cash flow before determining the present value of a company. In the second approach, we…...

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What is payback period and discounted payback period?

The payback period is the length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.The discounted payback period is a capital budgeting…...

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What is DCF and why do we calculate DCF?

A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher…...

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How to evaluate investment in the concept of capital budgeting?

The most common capital investment evaluation tools are the Payback Period (PP), Return on Investment (ROI), Net Present Value (NPR), and Internal Rate of Return (IRR). Each method can provide insight into investment options, but each also has limitations. If net present value is positive, the project should be accepted. If internal rate of return…...

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What is Capital budgeting? Give an example of a capital budgeting decision.

Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected. As part of capital budgeting, a company might assess a prospective project’s…...

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What is securitization?

Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming it (or them) into a security. Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate…...

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What is loan syndication?

Loan syndication is the process of involving several different lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that may be too much for a single lender to provide or outside the scope of a lender’s risk exposure levels. Thus,…...

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Explain NPV and IRR and how do you calculate the same?

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. NPV = Cash inflows / (1+r) ^n – Cash outflows Internal rate of return (IRR) is a metric…...

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How will you calculate enterprise value? And how is it different from market capitalisation

Enterprise Value, or EV for short, is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. The market capitalization of a company is simply its share price multiplied by the number of shares a company has outstanding. Enterprise value is calculated as the market capitalization plus…...

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What is accretion and dilution?

Accretion is asset growth through addition or expansion. Accretion can occur through a company’s internal development or by way of mergers and acquisitions. Dilution is a reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Adding to the number of shares outstanding…...

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What is book value?

The book value of a company is the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated. An asset’s book value is equivalent to its carrying value on the…...

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Tell me some Liquidity and Coverage ratios?

Liquidity – Current ratio; Quick Ratio; Cash Ratios Liquidity Ratios A company with adequate liquidity will have enough cash available to pay its ongoing bills in the short run. Here are some of the most popular liquidity ratios: Current Ratio Current ratio = Current assets / Current liabilities The current ratio measures a company’s ability…...

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Suppose there are two companies, how to compare them based on profitability?

The operating margin ratio uses operating income and revenue to determine the profit a company is getting from its operations. This ratio, along with net profit margin, can give investors a good visibility on the profitability of a company as a whole. The operating margin ratio is calculated by dividing net operating income by total…...

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