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 …
Explain NPV and IRR and how do you calculate the same? Read More »
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 …
Q If the project’s initial investment is of 100 crores and NPV of the same is ₹10 lakhs, will you go for the project or not? Suppose I am getting 6% bank interest if I keep the amount in FD. Should I still accept the project or not? A. The answer will be yes, because …
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 …
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 …
Cost of Debt is the future interest rate application to the company, net of taxes. It is calculated using Yield to Maturity less taxes, where the bonds are listed. It can also be calculated by taking the risk free rate and adding the credit default spread applicable to the credit rating of the company. Do …
As per Ind AS 37, a provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. As per Ind AS 37, A contingent liability …
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 …
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 …
Suppose there are two companies, how to compare them based on profitability? Read More »
Solvency is defined as the firm’s potential to carry on business activities in the foreseeable future, to expand and grow. It is the measure of the company’s capability to fulfil its long-term financial obligations when they fall due for payment. A solvent company is one that owns more than it owes; in other words, it …
Profitability Ratio 1. Gross Profit Margin 2. Net profit Margin 3. Return on equity 4. Return on assets 5. Return on capital employed 6. Gross Profit margin 7. Net Profit margin 8. Earnings per share Valuation Ratios 1. P/E ratios 2. Earnings Yield 3. Price / Book value Favorite
WACC – Weighted Average cost of capital – (E/E+D)*Ke + [D(1-t)/E+D]*Kd E – Market Value of Equity D – Market Value of Debt Ke – Cost of equity Kd – Cost of Debt T – Tax rate A company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may …
FCFE = Net Income + D&A + Net Borrowings – Net Capital Expenditure – Net Change in working capital FCFF = Net Income + D&A + Interest (1-T) – Net Capital Expenditure – Net Change in working capital Favorite
Financial analysis, the process of accumulating, envisioning, controlling, deciphering, and anticipating financial data and following the aim to evaluate the financial accomplishment of a particular department inside a company or of a company itself. It helps in making more reliable decision making The financial statements that include the income statement, balance sheet and cash flow …
As per Ind AS 108, Identification is based on 3 criteria. That is any operating segment should have 3 characteristics. Component of entity for which discrete financial information is available. (Income, expense, assets, liability) Component of entity whose performance is evaluated and reviewed by the Chief Operating Decision Maker (CODM) for the purpose of allocation …
1. Pan Card 2. Aadhar Card (linked with Pan) 3. Form 16 (Part-B) in case of Salaried Person 4. Bank Statement in case of Salaried Person 5. Books of Account with reconciliation of GST Portal in case of Business return. 6. In capital Gain income required purchase and Sale deed. 7. In House Property Head …
The major factors that are considered in selecting and retaining an auditor include the size of the audit firm, the status of ongoing auditor engagements, the cost of the auditor firm service and the specialty of service the auditing firm offers. one key consideration is the independence of the auditing process as history and research …
What are the things to be kept in mind while Auditor’s appointment and Rotation? Read More »
As per IND AS 12, deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. The criteria for recognising deferred tax assets arising from the carry forward of unused tax losses and tax …
What are the DTA creation criteria as per Ind AS and how they are different from AS? Read More »
The notes shall: (a) present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs 117–124; (b) disclose the information required by Ind ASs that is not presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial …
What are the disclosure requirements of Disclosure note 1 of financial statements? Read More »
Many online Advertisement portals are non-resident and do not have permanent establishment in India. Many resident assessee make payment to this non-resident for advertisement and claim as business expenditure u/s 37. Now India is losing its revenue since payer gets the deduction and amount received by payee is not taxable, so Finance Act 2016 w.e.f. …
Supreme Court’s Landmark Judgement on Income Tax Exemption for Profit Oriented Educational Institutions (trust or societies etc.) Supreme Court overruled two previous judgements – Profit Oriented Educational Institutions (trust or societies etc.) can not Claim Income Tax Exemption u/s 10(23C) New Noble Educational Society vs Chief Commissioner of Income Tax. (Hon. CJI Uday Umesh Lalit, …
Any important recent judgements you’ve read about? Read More »
Sec 147 : Income escaping Assessment or Reassessment If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any …
Faceless assessment means carrying out of income tax assessment procedure without human interface with the use of technology. The Cases shall be assigned to the department through automated allocation system. There will be no direct contact of A.O with assessee. a) The provisions of the proposed Section 144B will apply to assessment, reassessment, or re-computation …
As Amended by Finance Act, 2022 INTRODUCTION Finance Act, 2021 introduced major changes to the provisions of reopening of assessment of an assessee for previous assessments years. Erstwhile Sections 147 to 151 were replaced with amended Sections 147, 148, 148A, 149, 150 and 151 respectively, with effect from 1 April 2021. Thus, any notice for …
What are most recent changes in assessment procedure? Read More »
Advance tax means tax paid in the financial year immediately preceding the A.Y. (i.e., PY) As per section 208, every person whose estimated tax liability for the year is Rs. 10,000 or more shall pay his tax in advance in the form of advance tax As discussed above, every person whose estimated tax liability for …
The DRP is an Alternative Dispute Resolution (ADR) mechanism for resolving disputes related to Transfer Pricing in International Transactions. Appeal can be filed before CIT(A), when an assessee is adversely affected by Orders passed by various Income tax authorities the taxpayer, being a foreign company or facing TP adjustment (eligible taxpayer), has an option to …
Internal transfer pricing is pricing mechanism of the organisation under which one division of an organisation charges for the product or service transferred to another division of the same organisation thereby forming basis for allocation of combined revenue among the various divisions Division could be departments within a company or a group companies of a …
What do you know about internal transfer pricing? Read More »
Many online Advertisement portals are non-resident and do not have permanent establishment in India. Many resident assessee make payment to this non-resident for advertisement and claim as business expenditure u/s 37. Now India is losing its revenue since payer gets the deduction and amount received by payee is not taxable, so Finance Act 2016 w.e.f. …
Double taxation means the same income getting taxed twice in hands of same assessee. Any country taxes income on baris of two rules i.e. residence rule & source rule Double Taxation Avoidance Agreements is a treaty signed between two or more countries, through which the elimination of international double taxation, promotes the exchange of goods, …
An advance ruling refers to the facility of obtaining a judgment in advance from the Authority for Advance Rulings. The facility is used when the assessee has anticipated contentious issues in the Income Tax assessment. An advance ruling enables the assessee to obtain an authoritative decision of the Authority for Advance Rulings. The Advance ruling …
“Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. A “permanent establishment ” (PE) is a fixed place of business that generally gives rise to income or tax liability in a particular jurisdiction. …
Difference between POEM and PE. What are the types of PE? Read More »
a] Primary adjustment is defined to mean the determination of the transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the taxpayer. A “secondary adjustment” has been defined to mean an adjustment in the books of …
Difference b/w primary and secondary adjustment? Read More »
Arm’s Length Price can be computed by the following methods; 1. Comparable Uncontrolled Price Method 2. Resale Price Method 3. Cost Plus Method 4. Profit Split Method 5. Transaction Net Margin Method 6. Such other methods as may be prescribed by the board 1. Comparable Uncontrolled Price Method: Under this method the price charged or …
What are the Methods for computing ALP along with examples? Read More »
Realized gains refer to profits from completed transactions whereas unrealized gains refer to profits that have materialized, but the transactions have not been completed. Realized gains are the profits earned from already completed transactions, thus they involve a receipt of cash. These are recorded in the income statement. Unrealized gains refer to profits that have …
Difference between Realized and Unrealized gains? Read More »
Ensure the accuracy of the data entry process, which involves journal entries of financial transactions and the posting of journal entries to the ledger which can be done by Automated data entry process, cross-checking the first data entries and assimilating a suite of technology-based and manual data entry techniques The next step towards the accuracy …
How do you ensure completeness and accuracy of financial statements? Read More »
Debt extinguishment occurs when a debt instrument is terminated. This occurs when the borrower repays the lender or bonds are retired by the issuer. Extinguishment may not involve full repayment of a debt; the two parties may agree on a lesser repayment amount if the borrower is unable to make a full repayment of the …
Debt covenants can simply be defined as agreements between the business and the creditors. Under this, the borrowing company is supposed to abide by certain conditions, in order to be entitled to receive the loan. If those conditions are not met, the borrower is considered to be a defaulter. For instance, “the borrower shall not …
So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons: They show your liquidity. That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can afford, and what you can’t. They …
There are two ways to prepare a cash flow statement: the direct method and the indirect method: Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive. Indirect method – The indirect method presents …
Basic Earnings Per Share is the ratio, that is reckoned to know the earnings available to each equity share. It is calculated by considering company’s ordinary shares. On the other extreme, diluted earnings per share are computed when there are potential shares, i.e. convertible securities, in the company’s financial structure. Basic EPS is a tool …
Virtual certainty determination is a matter of judgement to be evaluated on a case to case basis , should be supported by convincing evidence, i.e., evidence available at reporting date in concrete form and cannot be based merely on forecasts of performance Reasonable certainty would normally be achieved by examining past records of the enterprise; …
Difference between virtual certainty and reasonable certainty? Read More »
A walkthrough test is an examination of each step involved in a transaction. A transaction is traced right from the beginning to the end to understand the process flow A walkthrough test is an auditing technique that examines a process from initiation to completion. It is done on a very small sample – it may …
What do you mean by walkthroughs and control testing? Read More »
A. The recognition of revenue in case of FOB (Free on Board) and CIF (Cost, Insurance and Freight) basis is determined by the point at which the ownership of the goods is transferred to the buyer. In case of FOB (Free on Board) basis, the ownership of the goods is transferred to the buyer once …
A. Operating leverage and financial leverage are two types of leverage that refer to how a company uses debt to amplify the returns on its operations or investments. Operating leverage is the extent to which a company’s operations are financed with fixed costs, such as salaries and rent, as opposed to variable costs, such as …
A. Financial ratios are used to evaluate a company’s financial performance and health by comparing different financial metrics. There are many different financial ratios that can be used, but some of the most common ratios include: Liquidity Ratios: 1. Current Ratio: Current Assets/Current Liabilities 2. Quick Ratio or Acid Test Ratio: (Current Assets – Inventory)/Current …
A. Working capital is a measure of a company’s short-term liquidity and is calculated as the difference between a company’s current assets and its current liabilities. Negative working capital occurs when a company’s current liabilities exceed its current assets. This means that a company’s short-term obligations are greater than its short-term resources. When a company …
A. Free cash flow (FCF) is a measure of a company’s cash flow that is available for distribution after accounting for capital expenditures. It is the cash that a company generates after accounting for the funds necessary for maintaining and growing its business operations. The formula for calculating free cash flow is: Free Cash Flow …
A. Deferred revenue is a liability that represents revenue that a company has received but has not yet earned. It is revenue that a company has received in advance for goods or services that will be provided in the future. There is no accounting for deferred revenue. If the customer has already paid it will …
What is Deferred Revenue? What is its importance in Due diligence. Read More »
A. The enterprise value (EV) of a company is a measure of the total value of a company. It is calculated by adding the market capitalization of the company, the outstanding debt, and any preferred stock, and then subtracting any cash and cash equivalents. The formula for calculating enterprise value is: EV = (Market Capitalization) …
A. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s financial performance that excludes certain non-cash expenses, such as interest, taxes, depreciation, and amortization. EBITDA is calculated by taking a company’s net income and adding back interest, taxes, depreciation, and amortization expenses. This results in a measure …
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 …
Differentiate between Tax planning & Tax evasion? Read More »
The tax system is progressive in nature i.e., as the income increases, tax also increases. Assessees having higher income than the prescribed limit are required to pay extra amount of tax in the form of Surcharge. Different threshold limits have been prescribed based on the total income and the type of assessees. For instance, if …
The Finance Act, 2021, introduced Section 194Q of the Income-tax Act, 1961, which is related to Tax Deducted at Source (TDS) on purchase of goods and not to the provisions of services. This section applies to a buyer in the following cases: A buyer whose turnover or gross receipt or sales in the immediately preceding …
The Finance Act, 2022, introduced Section 194R, which pertains to the deduction of tax on benefits or perquisites in respect of businesses or professions. Businesses, companies, or entities often extend multiple types of benefits and perquisites to their distributors, channel partners, agents, or dealers to incentivise and motivate them to promote further growth of a …
A PE firm will typically monetize their investment in one of the following ways: Sale to a Strategic Buyer: Sales to strategic buyers typically have higher valuations and are more convenient since they are willing to pay more for the likelihood of synergies. Another alternative is to sell to another financial buyer (often known as …
What are the private equity firms’ investment exit strategies? Read More »
Professionals in a variety of businesses rely on financial modeling. Here are just a few examples: Bankers use it in sales and trading, equity research, and both commercial and investment banking, public accountants use it for due diligence and valuations, and institutions apply financial models in private equity, portfolio management, and research. Note: You can …
What Types of Businesses Use Financial Modeling? Read More »
A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. It allows companies to make important decisions on whether or not to pursue a specific project. The hurdle rate describes the appropriate compensation for the level of risk present—riskier projects generally have higher hurdle rates …
Matching concept states that expenses that are incurred in an accounting period should be matching with the revenue earned during that period. Thus, all expenses for that accounting period whether or not paid during that year and all revenue whether earned or not during the period should be considered to calculate profit or loss. Hence, …
● Pivot Table is an interactive way to quickly summarize large amounts of data. It is used to summarize, sort, reorganize, and group. It allows us to extract the significance from a large, detailed data set. ● VLOOKUP: It is a function that makes Excel search for a certain value in a column, to return …
The linkage of the 3 financial statements can be described as: ● Financing activities mostly affect the balance sheet and cash from finalizing, except for interest, which is shown on the income statement. ● Net income from the income statement flows to the balance sheet and cash flow statement. ● The sum of the last …
How are the 3 financial statements linked together? Read More »
In Financial Planning & Analysis (FP&A), the practice of creating financial models is primarily for short to medium-term budgeting, forecasting, and planning at a corporation (or operating company). FP&A teams work with the accounting and finance departments to compile consolidated budgets, refine forecasts, and report on actual vs. expected results. The financial models are internal …
A general answer and a structured answer are given below – General Answer: Improving margins and profits is an important goal for any business, and there are several strategies that can be implemented to achieve this. Increase sales: One of the most straightforward ways to improve margins and profits is to increase sales. This can …
Deferred tax asset When profits as per tax laws is more than profits as per books of accounts, A deferred tax asset is required to be created. Deferred Tax Asset journal entry Deferred Tax Asset A/C……. Dr To Profit & Loss A/C………. It is shown under the head of Non Current Assets in the balance …
Golden Rules of Accounting: 1 Debit The Receiver, Credit The Giver 2 Debit What Comes In, Credit What Goes Out 3 Debit All Expenses And Losses, Credit All Incomes And Gains Different types of Accounts: ❖ Personal: Personal Accounts are the ones that are related with individuals, companies, firms, group of associations etc. Eg Veer’s …
● A cash flow statement (CFS) is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. ● The CFS measures how well a company manages its cash position, meaning how well the company generates cash. ● The CFS complements the balance sheet and the income statement. ● …
What is CFS? Components of CFS? What is the treatment of depreciation in CFS? Read More »
For Consolidation of company A and Company B we should check the relationship among the companies such as:- a. If company A holds more than 50% shares in company B, then Holding subsidiary relationship is established. b. If company A holds more than 20% shares in company B, then company A is an Associate of …
Bad Debts Bad Debts amount to that portion of the debts which are either irrecoverable or whose probability of recovery is very rare. Bad Debt Account (Debit), Debtor’s Account (Credit) Provision For Doubtful Debts Provision for bad debts is the estimated percentage of total doubtful debt that needs to be written off during the next …
Journal Entries and Differences between Bad Debts and Provision for doubtful debts Read More »
Contingencies A contingency reserve is retained earnings that have been set aside to guard against possible future losses. A contingency reserve is needed in situations where a business occasionally suffers significant losses, and needs reserves to offset those losses. Reserves Reserves are part of profits or gain that has been allotted for a specific purpose. …
Provision Provision liability reduces an asset’s value because of a present obligation arising out of a past event The event which can result in a provisional liability may or may not occur. The estimated amount of the provisional liability is not certain Any increase or decrease in provision liability gets recorded in the Profit and …
Journal Entries and Differences between Provision & Contingent Liability Read More »
Accrued Expenses Accrued Expenses is a term used in accounting where the expense is recorded in the books before it is paid for. Expenses are periodic and are listed on the balance sheet as Accrued Expenses as current liability in balance sheet such as Rent, wages, bank loan interest where payments are made monthly Interest …
Journal Entries and Differences between Accrued Payable & Accrued Expenses Read More »
Dividends are payments a company makes to share profits with its stockholders. They’re paid on a regular basis, and they are one of the ways investors earn a return from investing in stock. On Declaration : Retained Earnings…Dr To Dividend payable… Cr On Payment: Dividend Payable…Dr To Bank…Cr The entity may appropriate proposed dividend to …
Internal Controls are the policies and procedures that a company implements to ensure efficiency of business operations, reliability of financial reporting, compliance with laws & regulations, safeguarding of assets and prevention of frauds. Objectives of Internal Control A. Transactions are executed in accordance with management’s general or specific authorization; B. all transactions are promptly recorded …
Procedures are the systems that are set in place to meet the established standards of the organization. 1. Processes are the actions performed by accounting personnel that are not controls. Controls, on the other hand, are the actions that ensure safety and accuracy. 2. A process is what is being done while Controls ensure accuracy …
What are controls? How are they different from Procedures? Read More »
SA-570 deals with the auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report. Under the going concern basis of accounting, you are required to prepare the financial statements on the assumption that: i) the entity is a going concern; and ii) the entity will continue …
If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion. If adequate disclosure about the material uncertainty is made in the …
What is the reporting requirement of auditor regarding going concern Read More »
The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a …
What is the responsibilities of the auditor regarding going concern? Read More »
You need not cover all, but know at least 6-8 points from this As per SA 570, Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going Concern The following are examples of events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability …
What are the indicators of and whether company is going concern or not? Read More »
As per SA 570, under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. Favorite
DEFINITION OF ASSERTION: It refers to the representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. In preparing financial statements, Company’s management makes implicit or explicit claims (i.e. assertions) regarding: A. Completeness; B. Existence/ occurrence; …
RETURN ON INVESTMENT ROI compares the profits of an investment compared to the cost of the investment to determine gains. RETURN ON CAPITAL EMPLOYED ROCE looks at earnings before interest and taxes (EBIT) compared to capital employed to determine how efficiently a firm uses capital to generate earnings. RETURN ON EQUITY Return on equity (ROE) …
What is the difference between ROI vs ROE vs ROCE. Read More »
As per IND AS 115, the transaction price i.e. ₹1,20,000 will be divided in the proportion of relative standalone prices. ₹120,000 will be divided in proportion of 100,000: 50,000 Price of scooter = 80,000 Price of general maintenance = 40,000 REVENUE RECOGNITION CRITERIA SCOOTER – ₹80,000 for the scooter will be recognised immediately on the …
This is one of the most commonly asked questions of all time, and irrespective of domain. It is as important as the “Tell me something about yourself question”. You must use all technical terms prescribed here and answer in the correct order 1. Identify the contract with the customer- • A contract is an agreement …
What is the 5 step model of recognizing Revenue as per IND AS 115? Read More »
Unsystematic risk, also known as “specific risk,” “diversifiable risk” or “residual risk,” is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of …
The required rate of return is the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project. The RRR is used in both equity valuation and in corporate finance. Investors use the RRR to decide where to put their money, and corporations use …
In theory, the risk-free rate is the minimum return an investor expects for any investment because he or she will not accept additional risk unless the potential rate of return is greater than the risk-free rate. Usually the government bond rate is used as the Risk free Rate. This raises several questions – which government, …
Unlevered beta compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta of a company without any debt. Unlevering a beta removes the effect of debt on beta. It is a purer form of beta because it indicates the risk arising from the operations of the …
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio incomparison to the market. A security’s beta is calculated by dividing the covariance the security’s returns and the benchmark’s returns by the variance of the benchmark’s returns over a specified period. A beta of 1 indicates that the security’s …
Beta: Beta represents the sensitivity of a stock with respect to market. Examples: Stock with 1.1 of beta means if market is up by 10% over a period, stock will be up by 11% = (1.1*10) Alpha: Excess Return earned over the benchmark market rate of return (like Nifty, Sensex) Favorite
The formula for calculating beta is the covariance of the return of an asset with the return of the Market, divided by the variance of the return of the benchmark over a certain period. Note that this is a “regression beta”. Generally, regression beta is not the ideal way of calculating the beta required for …
The Cost of Equity is always higher than Cost of Debt. Note that we have used the word ALWAYS not USUALLY. This is because for any given company, equity will always be riskier than debt, and hence costlier. Risk is the main reason why equity is more expensive – the equity investor faces an uncertainty …
CAPM = Rf + B (Rm-Rf) Rf = Risk Free rate B = Beta Rm = Market risk The capital asset pricing model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for the pricing of risky securities, generating expected …
The main objectives of FP&A department include measuring historical performance, evaluating future business needs, highlighting issues and strengths in the business, clearly communicating the most relevant financial information to management, and instilling confidence in the quality of information presented. A good financial model must address all of these and be simple enough for anyone to …
What are the hallmarks of a good FP&A financial model? Read More »
Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or are not making the profits they should be making, due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Usually the objective is to buy a badly managed mature firm, turn it around …
What is the difference between a private equity and venture capital? Read More »
Financial modelling is a quantitative analysis which is used to decide or a forecast about a project generally in asset pricing model or corporate finance. Different hypothetical variables are used in a formula to ascertain what future holds for a particular industry or for a particular project. In simple terms financial modelling means forecasting companies’ …
The most popular credit indicators are – For long term debt: Leverage ratios: Debt / Equity, Debt / Total Capital, Debt / EBITDA, Coverage ratios: Interest Coverage (very important), fixed charge coverage, Debt Service Coverage Ratio (also called DSCR – very important) Others: Loan to Value Ratio Debt to equity, Debt to Total Assets, Debt …
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 …
What is working capital and what is net working capital? Read More »
An asset acquisition strategy is the purchase of a company by buying its assets instead of its stock. An asset acquisition strategy may be used for a takeover or buyout if the target is bankrupt – this will enable the buyer to takeover the assets without taking over the debt. Usually, this needs to be …
Goodwill arises when a company acquires another entire business. The amount of goodwill is the purchase consideration of the business minus the fair market value of the net assets that can be identified, and the liabilities obtained in the purchase. Goodwill does not mean any of the following – company’s brand name, solid customer base, …
Suppose you see goodwill in the balance sheet. What does it mean? Read More »
It means that the company has acquired other entities for a consideration higher than Fair Market Value of Net Assets. Goodwill does not measure synergy, it measures how much I overpaid. So I will have to go into the specifics to know whether my Goodwill is justified. Goodwill ends up being impaired very frequently so …
An operating lease is treated like renting – payments are considered operational expenses and the asset being leased stays off the balance sheet. At the end of the operational lease the asset is returned to the lessor. In contrast, a financial lease or capital lease is more like a loan; the asset is treated as …
Difference between operating lease and financial lease? Read More »
