Finance Dossier 2024-25

THE FINANCE CLUB
IIM KASHIPUR
FINANCE DOSSIER
A Technical Guide to Finance Interviews
CONTENTS:
⮚ ACCOUNTING & FINANCIAL REPORTING
⮚ FINANCIAL ANALYSIS FOR THE BATCH OF
⮚ CORPORATE FINANCE
⮚ GENERAL FINANCE
⮚ INVESTMENTS
2024-26
⮚ BSFI SECTOR –IMPORTANT CONCEPTS
⮚ FINANCIAL GLOSSARY
ACCOUNTING &
01. FINANCIAL REPORTING
1. What are the three main financial statements?
The three main financial statements are the Income Statement, the Balance Sheet, and the
Statement of Cash Flows.
1. The Income Statement shows a company’s revenues, costs, and expenses, which together
yield net income.
2. The Balance Sheet shows a company’s assets, liabilities, and equity.
3. The Cash Flow Statement starts with net income from the Income Statement; then it shows
adjustments for non-cash expenses, non-expense purchases such as capital expenditures,
changes in working capital, or debt repayment and issuance to calculate the company’s
ending cash balance.
2. What are the three components of the Statement of Cash Flows?

The three components of the Cash Flows Statement are Cash from Operations, Cash from
Investing, and Cash from Financing.
Cash from Operations – Cash generated or lost through normal operations, sales, and
changes in working capital (more detail on working capital below).
Cash from Investing – Cash generated or spent on investing activities; may include, for
example, capital expenditures (use of cash) or asset sales (source of cash). This section will
also show any investments in the financial markets and operating subsidiaries. Note: This
section can explain a large negative cash flow during the reporting period, which is not
necessarily a bad thing if it is due a large capital expenditure in preparation for future growth.
Cash from Financing – Cash generated or spent on financing the business; may include
proceeds from debt or equity issuance (source of cash) or cost of debt or equity repurchase
(use of cash).
3. Walk me through the major line items of an Income Statement.

The first line of the Income Statement represents revenues or sales. From that you subtract the
cost of goods sold, which leaves gross margin. Subtracting operating expenses from gross
margin gives you operating income. From operating income, you subtract interest expense and
any other expenses (or add other income), such as tax payments or interest earnings, and what’s
left is net income.
Income statements: Revenue; Cost of Goods Sold; SG&A (Selling, General & Administrative
Expenses); Operating Income; interest; income tax.
4. What is the difference between the Income Statement and the Statement of Cash Flows?
The Income Statement is a record of Revenues and Expenses while the Statement of Cash
Flows records the actual cash that has either come into or left the company.
The Statement of Cash Flows has the following categories: Operating Cash Flows, Investing
Cash Flows, and Financing Cash Flows.
Interestingly, a company can be profitable as shown in the Income Statement, but still go
bankrupt if it does not have the cash flow to meet interest payments.
Accounting & Financial Reporting | Page 1

5. What is the link between the Balance Sheet and the Income Statement?
The main link between the two statements is that profits generated in the Income Statement gets
added to shareholder’s equity on the Balance Sheet as Retained Earnings. Also, debt on the
Balance Sheet is used to calculate interest expense in the Income Statement.
6. What is the link between the Balance Sheet and the Statement of Cash Flows?
The Statement of Cash Flows starts with the beginning cash balance, which comes from the
Balance Sheet. Also, Cash from Operations is derived using the changes in Balance Sheet
accounts (such as Accounts Payable, Accounts Receivable, etc.). The net increase in cash flow for
the prior year goes back onto the next year’s Balance Sheet.
7. What is EBITDA?
A proxy for cash flow, EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization.
8. What is net debt?

Net debt is a company’s total debt minus the cash it has on the balance sheet. Net debt assumes
that a company pays off any debt it can with excess cash on the balance sheet.
9. How could a company have positive EBITDA and still go bankrupt?

Bankruptcy occurs when a company cannot make its interest or debt payments. Since EBITDA is
Earnings BEFORE Interest, if a required interest payment exceeds a company’s EBITDA, then if
they have insufficient cash in hand, they would soon default on their debt and could eventually need
bankruptcy protection.
10. If you knew net income of Paritosh & sons Ltd, a listed company, how would you figure
out its “free cash flow”?
Start with the company’s Net Income. Then add back Depreciation and Amortization. Subtract the
company’s Capital Expenditures (called “Capex” for short, this is how much money the company
invests each year in plant and equipment).
The number you get is the company’s free cash flow: Free Cash Flow (FCF) = Net Income +
Depreciation and Amortization -Capital Expenditures -Increase (or + decrease) in net working
capital.
11. What are the major line items on a Cash Flow statement?
First the Beginning Cash Balance, then Cash from Operations, then Cash from Investing Activities,
then Cash from Financing Activities, and finally the Ending Cash Balance.
12. What happens to each of the three primary compenents of financial statements when you
change -
a) Gross margin
Gross margin is gross profit/sales, or the extent to which sales of sold inventory exceeds costs.
Hence, if gross margin were to decrease, then gross profit decreases relative to sales.
Thus, for the Income Statement, you would probably pay lower taxes, but if nothing else changed,
you would likely have lower net income. The cash flow statement would be affected in the top line
with less cash likely coming in. Hence, if everything else remained the same, you would likely have
less cash.
Going to the Balance Sheet, you would not only have less cash, but to balance that effect, you
would have lower shareholder’s equity.
b) Capital expenditures
If capital expenditure were to say, decrease, then first, the level of capital expenditures would
decrease on the Statement of Cash Flows. This would increase the level of cash on the balance
sheet, but decrease the level of property, plant and equipment, so total assets stay the same.
On the income statement, the depreciation expense would be lower in subsequent years, so net
income would be higher, which would increase cash and shareholder’s equity in the future.
13. What is the difference between LIFO and FIFO?

LIFO and FIFO are different methods of dealing with inventory and COGS in a company’s
accounting policy. With LIFO, the last inventory produced or purchased will be the first to be
recognized when goods are sold. With FIFO, the first inventory produced or purchased will be the
first recognized when goods are sold.
14. What is the difference between cash-based accounting and accrual accounting?
With cash-based accounting, a company will not recognize expenses or revenues until the cash is
disbursed or collected. With accrual accounting, a company will recognize expenses and revenues
when it has entered into a transaction or agreement that will require it to pay or be paid, even if
cash will not change hands until sometime in the future.
Most companies use accrual accounting since credit is so prevalent.
15. What is the difference between EBITDA and Operating Profits?

EBITDA, as its name implies, strips out some of the costs of doing business in order to more
clearly reveal its profitability from its core operations.
Operating income adds some of those costs back in to reveal the company's actual net profit.
16. What is the difference between Top-Line and Bottom-Line growth?

The top line and bottom line are two of the most important lines on the income statement for a
company. Investors and analysts pay particular attention to them for signs of any changes from
quarter to quarter and year to year.
The Top-Line refers to a company's revenues or gross sales. Therefore, when a company has
"top-line growth," the company is experiencing an increase in gross sales or revenues.
The Bottom-Line is a company's net income, or the "bottom" figure on a company's income
statement.
More specifically, the bottom line is a company's income after all expenses have been deducted
from revenues. These expenses include interest charges paid on loans, general and
administrative costs, and income taxes. A company's bottom line can also be referred to as net
earnings or net profits.

17. If you could use only one financial statement to evaluate the financial state of a
company, which would you choose?
I would want to see the Cash Flow Statement so I could see the actual liquidity position of the
business and how much cash it is using and generating. The Income Statement can be
misleading due to any number of non-cash expenses that may not truly be affecting the overall
business. And the Balance Sheet alone just shows a snapshot of the Company at one point in
time, without showing how operations are performing.
But whether a company has a healthy cash balance and generates significant cash flow indicates
whether it is probably financially stable, and this is what the CF Statement would show.
18. When would a company collect cash from a customer and not show it as revenue?
This typically occurs when a company is paid in advance for future delivery of a good or service,
such as a magazine subscription. If a customer pays for delivery of 12 months of magazines in
advance, cash from that purchase goes onto the Balance Sheet as cash, but also increases
deferred revenue, a liability.
As each issue is delivered to the customer over the course of the year, the deferred revenue line
item will go down, reducing the company’s liability, while a portion of the subscription payment
will be recorded as revenue.
19. How would a $10 increase in depreciation expense affect the each of the three financial
statements?
Let us start with the Income Statement.The$10increase in depreciation will be an expense and
will reduce net income by $10 times (1–the tax rate). Assuming a 40% tax rate, this will mean a
reduction in net income of 60% or $6. So, $6 flows to cash from operations, where net income
will be reduced by $6 but depreciation will increase by $10, resulting in an increase of ending
cash by $4.
Cash then flows onto the Balance Sheet where it increases by $4, PP&E decreases by $10, and
retained earnings decreases by $6, keeping everything in balance.
20. What could a company do with excess cash on its Balance Sheet?
The company could pay a dividend to its equity holders or bonuses to employees, although a
growing company will tend to reinvest rather than pay out cash. It can reinvest its cash in plants,
equipment, personnel, or marketing; it can pay off debt, repurchase equity, or buy out a
competitor, supplier, or distributor. If nothing else, that cash can earn a little something invested
in CDs until it can be put to better use.

02. FINANCIAL ANALYSIS
1. What is Ratio analysis?
Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational
efficiency, and profitability by comparing information contained in its financial statements.
It is the fundamental aspect of fundamental analysis of a company. It involves evaluating the
performance and financial health of a company by using current and historical financial
statements along with industry data.
2. How do you calculate a company’s Current Ratio?

Current assets (cash, accounts receivable, etc) / Current liabilities (accounts payable and other
short-term liabilities).
A high current ratio indicates that a company has enough cash (and assets they can quickly turn
into cash, like accounts receivable) to cover its immediate payment requirements on liabilities
3. Piyush Anand & Co. just released second quarter financial results. Looking at its balance
sheet you calculate that its Current Ratio went from 1.5 to 1.2. Does this make you more or
less likely to buy the stock?
Less likely. This means that the company is less able to cover its immediate liabilities with cash on
hand and other current assets than it was last quarter.
4. What is Inventory Turnover?

Inventory turnover is a ratio showing how many times a company has sold and replaced inventory
during a period.
The company can then divide the days in the period by the inventory turnover formula to calculate
the days it takes to sell the inventory on hand. It is calculated as sales divided by average
inventory.
5.What is the difference between Public Equity Value and Book Value of Equity?
Public Equity Value is the market value of a company’s equity, while the book value is just an
accounting number. A company can have a negative book value of equity if it has been taking
large cash dividends or running at a net loss; but it can never have a negative Public Equity Value,
because it cannot have negative shares or a negative stock price.
Public Equity Value highly depends on the market forces.
6. Can a company have a negative book Equity Value?

Yes, a company could have a negative book Equity Value if the owners are taking out large cash
dividends or if the company has been operating for a long time at a net loss, both of which reduce
shareholders ‘equity.
Financial Analysis | Page 5

7. What is Operating Leverage?
Operating leverage is the percentage of costs that are fixed versus variable. A company whose
costs are mostly fixed has a high level of operating leverage. If a company has a high level of
operating leverage, it means that much of any increase in revenue will fall straight to the bottom
line in the form of profit, because the incremental cost of producing another unit is so low.
Operating leverage is the relationship between a company’s fixed and variable costs. A company
with more fixed costs has a higher level of operating leverage.
8. What is Return on Equity (ROE)?

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. ROE is expressed as a
percentage and calculated as:
Return on Equity (ROE) = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stockholders but after
dividends to preferred stock.) Shareholder's equity does not include preferred shares.
9. What is Earnings Per Share (EPS)?

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share
of common stock. Earnings per share serves as an indicator of a company's profitability. EPS is
calculated as:
EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares
10. How do you calculate a company’s Days Sales Outstanding?

(Average Accounts Receivable/ Sales) x 365 days
Note: The average accounts receivable for any period can be approximated by: (Ending accounts
receivable + beginning accounts receivable) ÷ 2
11. How to use the ratios?

Financial ratios on their own do not give much useful information unless they are compared to
some benchmarks. Ratios can be interpreted in following ways:
Comparison with some rule of thumb: For some financial ratios there are established rule of
thumbs against which they may be compared, in the absence of any other comparable
metric. For example, The current ratio of Srijan, Nikhil & brothers is 3:1. The company's
current ratio will be considered good. Usually, a current ratio of 2:1 is considered a healthy
one for a company. But this comparison has its own shortcoming, as this number may be
high for a service industry where there is not much working capital requirement. Hence, rules
of thumb needs to be applied cautiously.
Ratios over a timeline: By plotting ratios of a company over a large number of financial
period, we may come to know of company changes that would not be evident if looking at a
given ratio that represents just one point in time.

Comparison with Industry peers: Comparing a company to its peers or its industry averages
is another useful application for ratio analysis. Calculating one ratio for competitors in a
given industry and comparing across the set of companies can reveal both positive and
negative information.
12. Can a company have a negative EPS? If yes, then what does it mean?
Yes, a company can have a negative earnings per share. This doesn't mean that investors
loose money, but, this means that the company is having a negative accounting profit, or, it is in
loss. A negative EPS doesn't also mean that stock price is negative, a negative EPS company
will also have a positive stock price, although as an investor, one should be wary of the risks
involved with investing in an unprofitable company.
13. What factors are necessary to perform bond valuation?

Investors buy bonds to get a return on their investment, while borrowers use them to raise
money.
There are two key things to consider when it comes to bonds: their cash flow and valuation.
Bond Cash Flows:
Bonds make periodic payments called coupons. This is the interest you earn for lending
your money. The coupon rate is a fixed percentage of the bond's face value (the amount
you get back when the bond matures) that you receive at regular intervals, typically semi-
annually (twice a year).
Finally, at the end of the bond's term (maturity), you get your original investment back, which
is the bond's face value.
Bond Valuation:
The price you pay for a bond might not always be the same as its face value. Bond valuation
helps you understand the bond's fair value based on its future cash flows (coupon payments
and face value at maturity). Here's why the price might differ:
Interest Rates: Bond prices and interest rates have an inverse relationship. When interest
rates go up, existing bonds with lower rates become less attractive, so their price goes
down. Conversely, when interest rates fall, the value of existing bonds with higher rates
goes up.
Time to Maturity: Generally, bonds with longer maturities (time until they pay back) are
riskier and offer a higher return (interest rate) compared to shorter-term bonds. This means
they might also cost more upfront.
14. How do you perform a Profitability Analysis?

Profitability analysis is conducted to determine a company’s ability to make profits. To track the
company’s financial performance, analysts identify the most and least profitable aspects of the
business, analyse historical data and compare it with competitors. With the financial ratios
(known as profitability ratios) mentioned, we can conduct a thorough profitability analysis:

Ratio Analysis: tells how much returns are gained from the investments or capital used. Two
major types of ratios are margin ratios(how a business produces profits) and return ratios (how
well a company utilizes its assets or resources):
Gross profit margin (Gross Profit/Sales)
Operating profit margin (EBIT/Sales)
Cash flow margin (Cash Flow/Net Revenue)
Net profit margin (Net Profit/ Sales)
Return on Assets (Income from operations/Total assets)
Return on Equity (Net Income/Shareholder’s equity)
Return on Investment (Net Income/Investment Expense)
Break-even analysis: A break even point is where revenue equals total costs. Break even
analysis tells how much a company should produce or generate revenue in order to stay
profitable.
Break even sales volume = total fixed costs / contribution margin
Break even revenue = total fixed costs / contribution margin ratio
[contribution margin = price - variable cost per unit]
[contribution margin ratio = contribution margin/price]

03. CORPORATE FINANCE
1. What is Corporate Finance?
Corporate finance is the branch of finance that deals with sources of finance, corporate
capital structures and management measures to maximize the firm's value to shareholders.
It also studies the tools and analysis used to allocate financial resources. The main function
of corporate finance is to maximize or increase shareholders value.
2. What is Time Value of money?

The time value of money is the concept that money available at the present time is worth
more than money available in the future due to its potential earning capacity. This principle
behind this is that money can earn interest and any amount of money is worth more the
sooner it is received.
3. What is Present value?

Present value, also called "discounted value”, is the current worth of a future sum of money
or stream of cash flow at a specified rate of return.
Future cash flows are discounted at the discount rate. The higher the discount rate, the lower
the present value of the future cash flows.
4. What is Future value?

The worth of a current asset at a future date based on an estimated rate of growth is known
as future value (FV). Investors and financial planners respect future value because it allows
them to anticipate how much an investment made now will be worth in the future.
The equation to calculate the same is as below
FV = PV*(1+r)n
Here,
FV = Future value
PV = Present value
r = Rate of Interest
n = number of time periods
Interest is paid on the money(principal) because of the following factors
1. Inflation
2. Risk premium
3. Time value of money
5. What is Risk premium?

The market risk premium is the excess return that investors require for choosing to purchase
stocks over “risk-free” securities. It is calculated as the average return on the market minus
the risk-free rate (current yield on a 10-year Government of India bond rate).
Corporate Finance | Page 9

6. Explain the Capital Asset Pricing Model (CAPM)?
The Capital Asset Pricing Model is used to calculate the expected return on an investment. Beta
for a company is a measure of the relative volatility of the given investment with respect to the
market, i.e., if Beta is 1, the returns on the investment (stock/bond/portfolio) vary identically with
the market’s returns. Here “the market” refers to a well-diversified index such as the Nifty50. The
formula for CAPM is as follows:
re = rf + ß (rm -rf)
Here,
rf = Risk-free rate, 10-year Government of India bond rate for the period for which the projections
are being considered.
rm = Market return
rm -rf = Excess market return
ß = Leveraged Beta
re = Discount rate for (leveraged) equity (calculated using the CAPM)
7. What is SEBI and what are its objectives?

The Securities and Exchange Board of India is the regulator of the securities markets in India.
SEBI has the dual responsibility of development and regulation of the market to ensure safe and
transparent dealings in securities.
The basic objectives of SEBI are,
Protecting the interests of investors in securities
Promoting the development of the stock market
Regulating the stock market
8. What is Correlation?
Correlation is the way that two investments move in relation to one another. If two investments
have a strong positive correlation, they will have a correlation near 1 and when one goes up or
down, the other will do the same. When you have two investments with a strong negative
correlation, they will have a correlation near -1.This means that when one investment moves up in
value, the other investment should ideally move down.
9. What is cost of capital?

The cost of various capital sources varies across companies, and it depends on factors such as
the company's operating history, profitability, credit worthiness, industry in which company is
operating and so on. A company can raise money through debt or equity, and the cost of capital is
determined accordingly.
The firm’s overall cost of capital is based on the weighted average of these costs. For example,
consider an Gokulabalan Ltd., a large enterprise, with a capital structure consisting of 60% equity
and 40% debt; its cost of equity is 10% and after tax cost of debt is 7%. Therefore, its WACC
would be (0.6 x 10%) + (0.4 x 7%) = 8.8%.
WACC = E/(D+E) * Re + D/(D+E) * Rd * (1-t)
Here,
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity

D = market value of the firm's debt
E/(D+E) = percentage of financing that is equity
D/(D+E) = percentage of financing that is debt
t = corporate tax rate
WACC is used by the firm internally to decide on the economic feasibility of expansionary
opportunities and mergers.
10.What do you mean by Initial Public offering (IPO)?

IPO is the acronym for Initial Public Offering. It is the first time a privately held company sells
shares of stock to the public market. Usually, a company goes public to raise capital for growing
the business or to allow the original owners and investors to cash out some of their investment.
11. Explain Primary and Secondary market?

The primary market is the market where a new stock or bond is sold the first time it comes to
market.
The secondary market is where the security will trade after its initial public offering (BSE, NSE,
etc).
12. What is money market and what are some of the common instruments?
Think of the money market as a giant lending pool for short-term needs. Here, banks and
businesses can borrow and lend cash for up to a year. These loans are made in the form of
investments with super short maturities, like under a year, making them very liquid (easy to sell
quickly). This high liquidity also makes them relatively safe because you can easily get your
money back if you need it.
Some of the common instruments present in the money market:
Banker's acceptance (BA): Imagine this as a fancy post-dated check guaranteed by a bank.
So, if someone can't pay you back right away, the bank promises to cover it.
Treasury bills (T-bills): These are short-term loans to the government. You basically buy an
IOU from the U.S. government that they promise to pay back in a few months to a year, with
a little extra cash as a thank you for the loan. These are super safe because, well, it's the
government!
Certificates of deposit (CDs): Think of this as a locked savings account. You agree to sock
away some money for a fixed period, like a few months or a year, and the bank pays you a
bit of interest for letting them hold onto your cash.
Commercial paper: This is an IOU issued by a big corporation to get some quick cash. They
basically borrow from investors for a short period at a discounted rate.
Repurchase agreements (repos): Imagine this as a short-term pawn shop for securities.
Someone might sell government securities to someone else for a day or two to get some
quick cash, then buy them back later for a slightly higher price.
13. What are capital markets and what are some of the ways through which companies
raise funds?

The capital market is another lending pool, but this one is typically for more than a year. This is
where companies and governments go to borrow bigger chunks of money for things like
expansion projects or big infrastructure developments. They do this by issuing bonds/ loans
and or equity and preference shares.
The capital market has two main parts:
Primary market: This is where new bonds or shared are first sold to investors.
Secondary market: This is where investors can buy and sell previously issued
bonds/shares among themselves.
14. Walk me through a DCF Model.

1. Projection of Financial Statements: build a forecast of the three financial statements for
typically five years.
2. Calculating Free cash flow to firm: unlevered free cash flow (FCFF).
FCFF is EBIT-Capex+depreciation and amortization-changes in working capital.
3. Discount rate: the discount rate equals WACC.
WACC = Debt/(Debt+Equity) * cost of debt (1-tax rate) + cost of equity *
Equity/(Debt+Equity)
4. Terminal value: By two techniques, exit multiple approach and perpetual growth rate,
terminal value can be calculated.
Terminal Value = Final Year Projected Cash Flow * (1+ Infinite Growth Rate)/ (Discount
Rate-Long Term Cash Flow Growth Rate)
5. Present value calculations: by discounting down the cash flows, calculate the Net Present
Value.
15. How can we value a private company?

Since obtaining sufficient financial information for private companies is harder than public
companies, it can be valued using the same valuation techniques with some exceptions.
Without a beta, WACC cannot be calculated, so the beta of a close competitor is used.
All calculations may be based on assumptions and estimations. To determine the EBITDA or
EV multiple, revenue growth, etc. we can use findings and information from close competitors.
16. When can a mergers and acquisitions deal take place?

Merger: when two companies combine into a single new entity for mutual profit and increasing
shareholder value.
Acquisition: When a company buys another company, assuming the control of the acquired
company.
M&A deals are driven to diversify, increase market share, creating synergies, economies of
scale, improving supply chain by buying supplier or distributor, gain new technology, etc.
17. For what purpose is an LBO model used?

When a firm has financed the purchase of a company with a higher amount of debt, then the
firm uses the company’s cash flows to pay off the debt over time. The acquisition’s assets may
be used as collateral.

18. Describe a Dividend Growth Model.
Also known as the Gordon Growth Model, it is a method to evaluate the intrinsic value of a
stock based on the expected future flow of dividends. It assumes that the dividends will grow
continuously at a constant rate, suitable for companies with stable growth rate.
Value of Stock = Annual dividend of next period/(discount rate-dividend growth rate)
19. What are the most common multiples used in valuation?

EV/EBIT
Price/Cash Flow
EV/Sales
PEG ratio
Price/Book Value
PE ratio
20. State the valuation methodologies.

DCF, precedent transactions, comparable companies analysis, LBO analysis, Sum of the parts,
liquidation valuation, M&A analysis, and Replacement value.
21. How do we value a bank?

Price to book value multiple is a primary metric to value a bank because banks have
periodically marked to market assets and liabilities. Hence, the balance sheet expresses the
market value.
22. What are some industry-specific valuation multiples?

Retail/Airlines: Enterprise value/EBITDAR
Technology: EV/Unique Visitors, EV/Page views
Energy: Price/Net Asset Value
REITs: Price/Funds from operations, Price/adjusted funds from operations
23. Describe an LBO Model.

An LBO (Leveraged Buyout) is used to estimate the returns a private equity firm is expected to
earn by investing in a company.
Step 1: Entry: Determine the entry valuation, how much the PE firm will pay to buy the
company based on its enterprise value.
Step 2: Sources and Uses: Figure out how much money is required to complete the deal, from
where the money will come from (equity or by debt financing) and the purchase price (equal to
the enterprise value).
Step 3: Financial Projections: Create projections of all financial statements of the target
company for the time you hold the investment.
Step 4: Debt Schedule: For the debt taken to buy the company, complete repayments
(amortization or debt repayments)

Step 5: Interest Schedule: For paying out interest of the debt, include the interest expense in
the income statement of the target company.
Step 6: Exit: Evaluate the enterprise value at the end of the time period of investment by
multiplying the projected EBITDA by an assumed exit multiple to sell the business at the
enterprise value.
Step 7: Calculating returns: From this enterprise value, subtract the remaining debt and add
any cash generated from the business recorded in the balance sheet. This is the equity value
which the PE firm gets.
By comparing it with the equity we used earlier to buy the company, we calculate MOIC
(multiple of invested capital) and IRR (internal rate of return).

04. GENERAL FINANCE
1. What is Hedging?
Hedging is a risk management technique used to reduce any substantial losses or gains suffered
by an individual or an organisation.
Suppose Amit Patil, a long-term investor, owns a portfolio of stocks worth Rs 10 lakhs. The price
movement of a stock is dependent both on the micro (profitability of the company, its growth
potential, business model, management competency etc.) and the macro factors (GDP growth of
the country, interest rates, overall state of economy etc.). Therefore, Mr. Patil can hedge his
portfolio by selling Index Futures (like Nifty future) and thereby removing the risk of macro
variables from his portfolio.
2. What is Arbitrage?
Arbitrage involves the simultaneous buying and selling of an asset in order to profit from small
differences in price. Often, arbitrageurs buy stock on one market (for example, a financial market
in the United States like the NYSE) while simultaneously selling the same stock on a different
market (such as the London Stock Exchange). Since arbitrage involves the simultaneous buying
and selling of an asset, it is essentially a type of hedge and involves limited risk, when executed
properly. Arbitrageurs typically enter large positions since they are attempting to profit from very
small differences in price.
3. What is Speculation?
Speculation, on the other hand, is a type of financial strategy that involves a significant amount of
risk. Financial speculation can involve the trading of instruments such as bonds, commodities,
currencies and derivatives. Speculators attempt to profit from rising and falling prices.
A trader, for example, may open a long (buy) position in a stock index futures contract with the
expectation of profiting from rising prices. If the value of the index rises, the trader may close the
trade for a profit. Conversely, if the value of the index falls, the trade might be closed for a loss.
4. What is “junk?”
Called “high-yield” bonds by the investment banks, these bonds are below investment grade, and
are generally unsecured debt. Below investment grade means at or below BB (by Standard &
Poor’s) or Ba (by Moody’s).
5. What are the 3 Principles of Finance?

The 3 principles of finance are as follows:
i) Principles of Liquidity and Profitability

Liquidity refers to the ability to pay short-term liabilities. The more cash an organization has, the
more liquid it is. If the liquidity is higher, the investment will be lower.
The link between cash and liquidity is inverse. Excessive cash reduces profitability, whereas
excessive investment for the sake of high profit creates a financial crunch.
One of the cornerstones of finance is to maintain a balance between liquidity and profitability.
General Finance | Page 15

ii) Principles of Risk and Return
Risk is the possibility that the actual profit will be less than the expected profit from any
investment project. Therefore, according to this principle, when making financial decisions, the
financial manager has to adjust the risk with the expected profit because most financial decisions
are made between risk and uncertainty.
An investor has to take extra risks to make a profit. Generally, the rate of return on investment in
private securities is higher than that of government securities. At the same time, the amount of
risk is higher when investing in private securities than public securities.
iii) Principles of Portfolio diversification

Portfolio diversification can help businesses reduce risk because businesses can reconcile one
project’s success or failure with others project success or failure.
This principle aims to limit risk, which means that investing more money in a project is frequently
risky.
6. What is a Credit Default Swap (CDS)?

A credit default swap is essentially insurance on a company’s debt. It is a way to ensure that an
investor will not be hurt if the company defaults. Credit Default Swaps are sold over the counter
in an unregulated market.
7. What is the difference between public issue and private placement?

When an issue is not made to only a select set of people but is open to the general public and
any other investor at large, it is a public issue. But if the issue is made to a select set of people,
it is called private placement.
As per Companies Act, 2013, an issue becomes public if it results in allotment to 50 persons or
more. This means an issue can be privately placed where an allotment is made to less than 50
persons excluding Qualified Institutional Buyers and Employee Stock Options.
8. What is valuation?
Valuation refers to the process of determining the present value of a company or an asset. It
can be done using a number of techniques. Analysts that want to place value on a company
normally look at the management of the business, the prospective future earnings, the market
value of the company’s assets, and its capital structure composition.
Value of Assets = Debt + Equity

The major valuation techniques can be outlined as follows –
Market based approach – Relative Valuation
a. Guideline Transaction Method
b. Guideline Public Company Method
Income based approach – Intrinsic Valuation
a. Capitalization of Cash Flow Method
b. Discounted Cash Flow Method
Asset Based Approach - focuses on the net asset value (NAV) of a company as a way
to determine its worth. (NAV = Total Assets - Total Liabilities)

9. Why are companies like Facebook, Twitter, and Instagram receiving multi-billion-dollar
valuations?
With the social media giant Facebook, investors are expecting the company to find a better way
to monetize their massive user base. With over 800 million members, if Facebook can figure out
how to charge more for advertising, their earnings could be astronomical!
Another reason a company like Facebook may be valued in the billions is because companies
like Microsoft are willing to pay astronomical premiums for a small equity stake to catch the wave
of the future. For example, when Microsoft invested in 2007, Facebook was valued at $15 billion;
at its IPO in 2012, Facebook’s value was around $100 billion.
10. How does a bank operate?

Banks take deposits from savers and pay interest on some of these accounts. They pass these
funds on to borrowers and receive interest on the loans. Their profits are derived from the spread
between the rate they pay for funds and the rate they receive from borrowers. This ability to pool
deposits from many sources that can be lent to many different borrowers creates the flow of
funds inherent in the banking system. By managing this flow of funds, banks generate profits,
acting as the intermediary of interest paid and interest received, and taking on the risks of
offering credit.
The main functions of commercial banks can be divided under the following heads:
1. Accepting deposits: The most important function of commercial banks is to accept deposits
from the public.
2. Giving loans: The second important function of commercial banks is to advance loans to its
customers. Banks charge interest from the borrowers and this is the main source of their
income.
3. Overdraft: Banks advance loans to its customers’ up to a certain amount through over drafts,
if there are no deposits in the current account. For this, banks demand a security from the
customers and charge very high rate of interest.
4. Discounting of Bills of Exchange: This is the most prevalent and important method of
advancing loans to the traders for short-term purposes. Under this system, banks advance
loans to the traders and business firms by discounting their bills. In this way, businessmen
get loans on the basis of their bills of exchange before the time of their maturity.
5. Investment of Funds: The banks invest their surplus funds in three types of securities
Government securities, other approved securities and other securities.
6. Agency Functions: Banks function in the form of agents and representatives of their
customers. Customers give their consent for performing such functions.
11. If you worked in the finance division of a Ujjwal India Pvt. Ltd., a private company, how
would you decide whether to invest in a project?
To decide, you determine the IRR of the project. The IRR is the discount rate, which will return
an NPV of 0 of all cash flows. If the IRR of the project is higher than the current cost of capital for
the project, then you would want to invest in the project.

12. Why are cash flow statements not used in banking analysis?
The reason why bankers do not use the statements is that they do not consider the information
provided to be relevant. The results furthermore indicate that the cash flow statements of banks
are not used because the existing accounting standard does not consider the credit creation
function in banks. This is exemplified in the negative operative cash flow during periods of lending
growth.
Banks are different from other firms and hence, the reporting of banks‘ cash flows functions also
differs because cash is their product and they create deposits on their balance sheet when
providing loans to their customers.
The accounting transaction of lending does not involve any prior funding or cash inflow, but occurs
in the accounting system, creating deposit as a liability and loan as an asset of the bank.
These results contribute to the debate needed in accounting and banking about useful cash flow
statements for banks and provide an overview to prepare new accounting regime.
13. What is an institutional investor?

An institutional investor is an entity which pools money to purchase securities, real property, and
other investment assets or originate loans. There are generally six types of institutional investors:
endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance
companies.
They are the largest force behind supply and demand in securities markets and perform most
trades on major exchanges thus greatly influencing the prices of securities.
14. What is Private Equity?

Private equity is an alternative investment class and consists of capital that is not listed on a
public exchange.
Private equity is composed of funds and investors that directly invest in private companies, or that
engage in buyouts of public companies, resulting in the delisting of public equity.
Private equity investment comes primarily from institutional investors and accredited investors,
who can dedicate substantial sums of money for extended time periods.
15. What is old regime and new regime of Income taxes?

New tax regime:
The Indian income tax system imposes taxes on individual taxpayers based on their taxable
income or profits earned. Taxpayers can choose to pay lower taxes by forgoing exemptions and
deductions by opting for the new regime.
The 2023 budget extended the rebate for individuals subject to the new income tax regime for
annual incomes up to INR 700,000, whereas those with incomes up to INR 500,000 previously
paid no income tax under either the old or new schemes.
Moreover, the new income tax regime includes a standard deduction of INR 50,000, allowing
salaried taxpayers to avail an upfront deduction of INR 50,000 from their total taxable income,
which was previously only available under the old structure.
The government has also rationalized the tax slabs under the new income tax system, reducing
the total number of taxable brackets to five.

Old tax regime:
Under the old taxation system, the assessee can make use of deductions, exemptions, and other
allowances to carefully organize their finances and reduce their tax burden.
In case of a resident individual of the age of 60 years or above but below 80 years, the basic
exemption limit is Rs. 3,00,000.
In case of a resident individual of age of 80 years or above, the basic exemption limit is Rs
5,00,000.
Rate of surcharge:
37 percent on base tax where specified income exceeds INR 50 million;
25 percent where specified income exceeds INR 20 million but does not exceed INR 50
million
15 percent where total income exceeds INR 10 million but does not exceed INR 20 million;
and
10 percent where total income exceeds INR 5 million but does not exceed INR 10 million.
In case of AOP, consisting of only companies as its members, the rate of surcharge not to
exceed 15 percent.
Health and Education cess at four percent on aggregate of base tax and surcharge.
Resident individuals having total income not exceeding INR 500,000 can avail rebate of INR
12,500 or actual tax liability whichever is lower.
Do note that there are changes made by the finance ministry hence it is advised to go through the
ammended sections to know the latest laws and regulations.
Double Taxation Avoidance Agreements:

Most expatriates worry about “double taxation” – paying taxes to two different countries on the
same income. A foreign taxpayer working in India may be able to reduce taxable income in their
country of primary residence (and double taxation) under a double taxation avoidance agreement.
16. What were the new income tax rates for corporates?
A resident company is taxed on its worldwide income. A non-resident company is taxed only on
income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India.
The corporate income tax (CIT) rate applicable to an Indian company and a foreign company for
the tax year 2022/23.
A beneficial CIT rate of 22% (plus surcharge of 10% and applicable health and education cess of
4%) can be availed with effect from tax year 2019/20. This beneficial rate is at the option of the
company and is applicable on satisfaction of a few conditions.
17. What is Corporate Banking?

Corporate banking includes providing financial services to large corporates, governments and
institutions. Financial services such as cash management, trade finance, and foreign exchange.
18. What is the difference between Commercial Banking and Retail Banking?
Retail banking provides financial services to the public such as banking services (saving accounts,
Certificates of deposit), credit and financing (mortgages, credit cards, etc.). It is also known as
consumer or personal banking.

Commercial banks are financial institutions that offer banking services to consumers and
businesses (deposit accounts, loans, etc.). Commercial banks create credit, capital and liquidity in
the economy and play a huge role in increasing employment, production, consumer spending and
supporting the economy.

05. INVESTMENTS
1. When should a company issue stock rather than debt to fund its operations?
There are several reasons for a company to issue stock rather than debt. If the company believes
its stock price is inflated, it can raise money (on very good terms) by issuing stock.
Second, if the projects for which the money is being raised may not generate predictable cash
flows in the immediate future, it may issue stock. A simple example of this is a start-up company.
The owners of start-ups generally will issue stock rather than take on debt because their ventures
will probably not generate predictable cash flows, which is needed to make regular debt
payments, and so that the risk of the venture is diffused among the company’s shareholders. A
third reason for a company to raise money by selling equity is if it wants to change its debt-to-
equity ratio. This ratio in part determines a company’s bond rating. If a company’s bond rating is
poor because it is struggling with large debts, the company may decide to issue equity to pay
down the debt.
2. What kind of stocks would you issue for a start-up?

A start-up typically has more risk than a well-established firm. The kind of stocks that one would
issue for a start-up would be those that protect the downside of equity holders while giving them
upside. Hence the stock issued may be a combination of common stock, preferred stock and debt
notes with warrants (options to buy stock).
3. Is the dividend paid on common stock taxable to shareholders? Preferred stock? Is it

tax deductible for the company?
A start-up typically has The dividend paid on common stock is taxable on two levels in the U.S.
First, it is taxed at the firm level, as a dividend comes out from the net income after taxes (i.e., the
money has been taxed once already). The shareholders are then taxed for the dividend as
ordinary income (O.I.) on their personal income tax. Dividend for preferred stock is treated as an
interest expense and is tax-free at the corporate level.
4. When should a company buy back stock?

When it believes the stock is undervalued, has extra cash, and believes it can make money by
investing in itself. This can happen in a variety of situations. For example, if a company has
suffered some decreased earnings because of an inherently cyclical industry (such as the
semiconductor industry), and believes its stock price is unjustifiably low, it will buy back its own
stock.
Investments | Page 21
5. Why would an investor buy preferred stock?
An investor that wants the upside potential of equity but wants to minimize risk would buy preferred
stock. The investor would receive steady interest-like payments (dividends) from the preferred
stock that are more assured than the dividends from common stock.
The preferred stock owner gets a superior right to the company’s assets should the company go
bankrupt.
A corporation would invest in preferred stock because the dividends on preferred stock are taxed at
a lower rate than the interest rates on bonds.
6. Why would a company distribute its earnings through dividends to common

stockholders?
Regular dividend payments are signals that a company is healthy and profitable. Also, issuing
dividends can attract investors (shareholders). Finally, a company may distribute earnings to
shareholders if it lacks profitable investment opportunities.
7. You are on the board of directors of a Anirudh & sons and own a significant chunk of the
company. The CEO, in his annual presentation, states that the company’s stock is doing
well, as it has gone up 20 percent in the last 12 months. Is the company’s stock in fact
doing well?
Another trick stock question that you should not answer too quickly. First, ask what the Beta of the
company is. (Remember, the Beta represents the volatility of the stock with respect to the market.)
If the Beta is 1 and the market (i.e., the Dow Jones Industrial Average) has gone up 35 percent,
the company has not done too well compared to the broader market.
8. What is insider trading and why is it illegal?

Undergraduates may get this question as feelers of their general knowledge of the finance
industry. Insider trading describes the illegal activity of buying or selling stock based on
information that is not public information. The law against insider trading exists to prevent those
with privileged information (company execs, I-bankers, and lawyers) from using this information to
make a tremendous amount of money unfairly.
9. What is the difference between technical analysis and fundamental analysis?

Technical analysis is the process of picking stocks based on historical trends and stock
movements. Fundamental analysis is examining a company’s fundamentals, financial statements,
industry, etc., and then picking stocks that are “undervalued.”
10. What are the different asset classes?
Asset classes are categorized into bonds, derivatives, equity, real estate, gold, cash and cash
equivalents, and alternative investments.
Taxation, risk, liquidity, tenure, market volatility, and returns vary with each asset class.
Investors diversify their portfolio by investing in a variety of asset classes.
Fixed Income: This asset class includes government and corporate bonds, corporate debt
securities, money market instruments. They pay investors interest until maturity.
Derivatives: A form of advanced investing, derivatives are financial contracts whose value
depends on an underlying asset. Most common underlying assets for derivatives are
stocks, bonds, commodities, currencies, interest rates and market indexes.
Equities: Equities or shares are part ownership issued by companies.
Real Estate: Real Estate focuses on tangible investments in land plots, commercial
buildings, apartments, etc.
Gold: A highly liquid asset that can be invested in the form of physical gold, Sovereign
gold bonds, gold ETFs, gold mutual funds, or digital gold. Historically, it has been
observed that gold and stock markets have a negative correlation for all economies,
hence it is used to diversify the portfolio having mostly equity.
Cash and Cash Equivalents: Short-term investments with high liquidity, can also be
known as current assets.
11. How are different mutual fund schemes categorized?

By Structure:
Open ended schemes (do not have a fixed maturity period, these funds sell and
repurchase units at all times at price linked to the NAV. They can be subscribed or exited
at any time)
Close ended schemes (the fund is open for subscription for a specific period of time at the
initial launch of the scheme, exit is allowed only after the maturity period)
By active or passive management:

Actively managed funds (fund manager has a bigger role in managing and deciding the
mutual fund portfolio)
Passive funds (follow the proportion and constituents of a market index or benchmark,
also called index funds)
Exchange Traded Funds (an amalgamation of a stock and a mutual fund, available for
purchase or sale on the stock exchange. It is a basket of securities that replicate the
composition of an index)
Categorization as per SEBI Guidelines:

Equity Schemes (minimum 65% of the assets should be equity or equity related
instruments, subcategories are large cap, small cap, mid cap, multi cap, etc., depending
on market capitalization of the stocks)
Debt Schemes (Liquid fund, ultra short duration, short duration, medium, long duration,
corporate bond fund)
Hybrid Funds (dynamic asset allocation, balanced funds, multi asset and arbitrage funds)
Solution oriented:
Retirement fund (an open ended scheme with a lock in period of 5 years or till retirement
age of the investor)
Children’s fund (an open ended scheme for children with a lock in period of 5 years or till
the child attains the age of 18)
Other schemes:
Funds of funds (schemes that invest in other mutual funds)
Gold ETFs (they invest 99.99% pure gold, the NAV of these ETFs depends on the real
time prices of gold. It is a secure and cost efficient way to invest in gold.)
13. What are the roles and functions of AMFI?

To define and maintain high professional and ethical standards in all mutual fund industry
operations.
Recommend and enforce good business practices and codes of conduct for members
and others involved in mutual fund and asset management activities, including companies
involved in or involved in capital markets and financial services inclusive, follow.
To liaise with SEBI and make representation before SEBI on all matters relating to the
mutual fund industry.
To represent the Government, Reserve Bank and other organizations on all matters
relating to mutual fund business. To conduct a nationwide investor awareness program to
promote proper understanding of the concept and operation of mutual funds.
To disseminate information on the mutual fund industry and conduct research and
analysis directly and/or in collaboration with other agencies.
To monitor the conduct of distributors, including disciplinary action (cancellation of ARNs)
for Code of Conduct violations.
To protect investors/unit holders interest.
14. What are the quantitative measures used to assess a mutual fund’s performance?
Alpha return (measures the risk-adjusted returns of a mutual fund scheme against its
underlying benchmark)
Alpha return = Portfolio’s return-Risk free rate of return-Beta*(market return-Risk free
rate of return)
Sharpe Ratio (measures the return that a mutual fund scheme generates over and above
the risk-free rate of return)
Sharpe ratio = (Portfolio return - Risk free rate)/standard deviation of the mutual fund
Beta (measures the volatility of the mutual fund against the broader market)
Beta = Covariance(portfolio return,market return)/Variance(market return)
15. Explain modern portfolio theory.
Developed by Harry Markowitz in 1952, Modern Portfolio Theory suggests that portfolios can
be constructed to maximize returns at a given level of risk. It is emphasized that a portfolio
with assets with low correlations will have reduced overall risk. MPT introduced the concept
of efficient frontier which represents the set of portfolios offering highest expected returns for
a given risk level or lowest risk for a given level of return.
16. What is rebalancing?

It is the process of adjusting the weightage of assets in a portfolio to attain a desired
allocation. Rebalancing follows portfolio reviews and can be done because of market or
economic changes.
17. What are the strategies to manage risk in a portfolio?

Diversification (portfolio with a mix of assets which are not highly correlated)
Hedging (in order to offset potential losses, using options and futures)
Stress Testing (simulating unusual and adverse market conditions to assess portfolio
performance)
Risk Budgeting (allocation of a risk budget to some components of the portfolio according
to their historical or expected risk adjusted performance)
04. BFSI SECTOR
1. What are loans?
A loan is a credit that you have borrowed from the NBC or bank with a promise of returning it
within a specific period. The lender decides on a fixed rate of interest, which you have to pay
along with the principal amount within a specific period. Here are different types of loans
available in India.
Types of loans
Loans are classified into two factors based on the purpose that they are used for:
• Secured loans
• Unsecured loans
Secured loans - are the ones that require collateral where you have to pledge an asset as
security while borrowing from the lender. That way, if you cannot repay the loan, the lender still
has some means to get back their money. The interest rate on secured loans tends to be lower
than those for loans without collateral.
Unsecured loans -These are loans that do not require collateral. The lender gives you the
money based on past associations, your credit score and history. Thus, you have to have a
good credit history to avail of these loans. Unsecured loans usually come at a higher interest
rate due to the lack of collateral.
2. What are the types of secured loans?

Home loan
Home loans are a secured mode of finance that gives you the funds to buy or build the home of
your choice. You can apply online for a home loan at lower interest rates at Bajaj Finance.
The following are the types of home loans available in India:
Land purchase loan: To purchase land for your new home.
Home construction loan: To build a new home.
Home loan balance transfer: Transfer the balance of your existing home loan at a lower
interest rate.
Top-up loan: Can be used to renovate an existing home or have the latest interiors for your
new home.
Note that while buying a new property/home, the lender requires you to make a down payment
of at least 10-20% of the property's value. The rest is financed. The loan amount disbursed
depends on your income, its stability, and current liabilities, among others.
Loan against property (LAP)

A loan against property is one of the most common forms of a secured loan. You can pledge
any residential, commercial, or industrial property to avail of the funds required. The loan
amount disbursed is equivalent to a certain percentage of the property's value and varies
across lenders.
BFSI Sector | Page 26

While some lenders may offer an amount equivalent to 50-60% of the property's value, others
may offer an amount close to 80%. A loan against property helps you unlock the dormant value
of your asset and can be used to satiate personal life goals such as higher education for children
or marriage. Businesses use a loan against property for business expansion, R&D and product
development, among others.
Loans against insurance policies

Yes, you can also avail of loans against your insurance policy. However, note that all insurance
policies do not qualify for this. Only policies, such as endowment and money-back policies, which
have a maturity value, can avail of loans. Thus, you cannot avail of a loan against a term
insurance plan as it does not have any maturity benefits. Also, loans cannot be availed against
unit-linked plans as the returns are not fixed and depend on the market's performance. It is
essential to note that you can opt for a loan against endowment and money-back policies only
after they have acquired a surrender value. These policies gain a surrender value only after
paying regular premiums continuously for three years.
Gold loans
For the longest time, gold has been one of the most favoured asset classes. The organised
Indian gold loan industry is expected to touch Rs. 3,101 billion by 2019-20, according to a
KPMG report, thanks to flexible interest rates offered by financial institutions. A gold loan
requires you to pledge gold jewellery or coins as collateral. The loan amount sanctioned is a
certain percentage of the gold's value pledged. Gold loans are generally used for short-term
needs and have a short repayment tenure compared to home loans and loans against property.
Loans against mutual funds and shares

Mutual funds can also be pledged as collateral for a loan, an ideal vehicle for long-term wealth
creation. You can pledge equity or hybrid funds to the financial institution for availing of a loan.
For doing so, you need to write to your financier and execute a loan agreement. Your financier
then will write to the mutual fund registrar and put a lien on the specific number of units to be
pledged. Typically, you can get 60-70% of the value of units pledged as a loan.
Similarly, financial institutions create a lien against shares for which the loan is taken, and the
loan value is equivalent to a percentage of the value of the shares.
Loans against fixed deposits

A fixed deposit not only offers assured returns but can also come in handy when you need a
loan. The loan amount can vary between 70-90% of the FD's value and varies across lenders.
However, it is essential to note that the loan tenure cannot be more than the FD's tenure.

3. What are the types of unsecured loans?
Personal loan
A personal loan is one of the most popular types of unsecured loans that offer instant liquidity.
However, since a personal loan is an unsecured mode of finance, the interest rates are higher
than secured loans. A good credit score and high and stable income ensure you can avail of
this loan at a competitive interest rate. Personal loans can be used for the following purposes:
1. Manage all expenses of a family wedding.
2. Pay for a vacation or an international trip.
3. Finance your home renovation project.
4. Fund the cost of your child's higher education.
5. Consolidate all your debts into a single loan.
6. Meet unexpected/ unplanned/ urgent expenses.
A personal loan is an unsecured loan, which means it does not require any security or
collateral and can be obtained with minimal paperwork. The money obtained from this loan
can be used for any immediate or unexpected purposes. You must pay it back according to
the terms set forth by the lender, just like any other loan.
Short-term business loans

Another type of unsecured loan, a short-term business loan, can be used to meet various
entities' and organisations' expansion and daily expenses.
1. Working capital loans.
2. Machinery loans and equipment finance
3. Small business loans for MSMEs
4. Loans for women entrepreneurs
5. Loans for traders
6. Loans for manufacturers
7. Loans for service enterprises
4. Which type of loan is the cheapest?

Depending on your credit score, income, and other eligibility requirements, the affordability of
a loan may change. Secured loans are typically a more affordable choice as they are backed
by collateral and have lower interest rates than unsecured loans. Unsecured loans lack any
form of collateral security, which results in higher interest rates. But the interest rate should
not be the sole consideration when applying for a personal loan. The loan approval process,
documentation, stamp duty, and other factors should also be considered while applying for a
loan.
5. What are Flexi Loans?

With a Flexi loan, you can avail of funds from your approved limit and, withdraw the amount
whenever required and pay interest only on the amount you have utilised. You can withdraw
on your loan limit any number of times and prepay when you have extra cash at no additional
cost. Such a unique facility gives you the freedom to fully control your finances, unlike Term
Loans, Flexi Personal Loans offer you savings on your EMIs by up to 45%. Here, you also
have the option to pay only interest as EMIs, with the principal payable at the end of the
tenure.

6. What are the methods of securing a loan with security/collateral?
Pledge: A pledge is used when the lender (pledgee) takes actual possession of assets
(i.e. certificates, goods).Such securities or goods are movable securities. In this case, the
pledge retains the possession of the goods until the pledger (i.e. the borrower) repays the
entire debt amount. In case there is a default by the borrower, the pledgee has a right to
sell the goods in his possession and adjust its proceeds towards the amount due (i.e.
principal and interest amount). Some examples of the pledge are gold/jewellery loans,
advances against goods/stock, Advances against National Saving Certificates etc.
Hypothecation: Hypothecation is used for creating charges against the security of
movable assets, but here the possession of the security remains with the borrower itself.
Thus, in case of default by the borrower, the lender (i.e. to whom the goods/security has
been hypothecated) will have to first take possession of the security and then sell the
same. The best example of this type of arrangement is Car Loans. In this case, the Car /
Vehicle remains with the borrower but the same is hypothecated to the bank /financer. In
case the borrower, defaults, banks take possession of the vehicle after giving notice and
then sell the same and credit the proceeds to the loan account. Other examples of these
hypothecations are loans against stock and debtors.
Mortgage: A mortgage is used for creating a charge against immovable property which
includes land, buildings or anything that is attached to the earth or permanently fastened
to anything attached to the earth (However, it does not include growing crops or grass as
they can be easily detached from the earth). The best example of when a mortgage is
created is when someone takes a Housing Loan / Home Loan. In this case, the house is
mortgaged in favour of the bank /financer but remains in possession of the borrower,
which he uses for himself or even may give on rent.
Lien: A lien means the claim of the lender on any asset used to secure the loan. The
legal right of a creditor to sell the collateral property of a debtor who fails to meet the
obligations of a loan contract. A lien exists, for example, when an individual takes out an
automobile loan. The lien holder is the bank that grants the loan, and the lien is released
when the loan is paid in full.
7. What are NPAs (Non Performing Assets)?

Non Performing Assets (NPAs) are loans or advances issued by banks or financial
institutions that no longer bring in money for the lender since the borrower has failed to make
payments on the principal and interest of the loan for at least 90 days. A debt that has been
past due and unpaid for a predetermined period is known as a non performing asset (NPA).
When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its
capacity to lend falls, and the possibility of loan defaults and write-offs rise. To address this
issue, the government and the Reserve Bank of India have introduced various policies and
methods to manage and reduce the amount of non-performing assets (NPAs) in the banking
sector.

8. What are the different types of Non-Performing Assets (NPAs)?
The different types of non-performing assets depend on how long they remain in the NPA
category.
a) Sub-Standard Assets: An asset is classified as a sub-standard asset if it remains as an
NPA for a period less than or equal to 12 months.
b) Doubtful Assets: An asset is classified as a doubtful asset if it remains as an NPA for more
than 12 months.
c) Loss Assets: An asset is considered a loss asset when it is “uncollectible” or has such little
value that its continuance as a bankable asset is not suggested. However, some recovery
value may be left in it as the asset has not been written off wholly or in parts.
9. What is NPA Provisioning?

Keeping aside the technical definition, provisioning means an amount that the banks set aside
from their profits or income in a particular quarter for non-performing assets, such as assets
that may turn into losses in the future. It is a method by which banks provide for bad assets
and maintain a healthy book of accounts.
Provisioning is done according to which category the asset belongs. The categories have
been mentioned in the above section. Not only the type of asset but provisioning also depends
on the type of bank. Like, Tier-I banks and Tier-II banks have different provisioning norms.
10. What is leasing?

A lease is a contract outlining the terms under which one party agrees to rent an asset—in this
case, property—owned by another party. It guarantees the lessee, also known as the tenant,
use of the property and guarantees the lessor (the property owner or landlord) regular
payments for a specified period in exchange. Both the lessee and the lessor face
consequences if they fail to uphold the terms of the contract. A lease is a form of incorporeal
right.
11. What are the types of leasing?

Financing lease: A financing lease is also called a full pay-out lease. It is one of the long-
term leases and cannot be cancellable before the expiry of the agreement. It means a
lease for terms that approach the economic life of the asset, the total payments over the
term of the lease are greater than the leaser's initial cost of the leased asset. For example:
Hiring a factory or building for a long period. It includes all expenditures related to
maintenance.
Operating lease: An operating lease is also called a service lease. An operating lease is
one of the short-term and cancellable leases. It means a lease for a time shorter than the
economic life of the assets, generally the payments over the term of the lease are less than
the leaser‘s initial cost of the leased asset. For example: Hiring a car for a particular travel.
It includes all expenses such as driver salary, maintenance, fuels, repairs etc.

Sale and lease back: Sale and leaseback is a lease under which the lessee sells an asset
for cash to a prospective leaser and then leases back the same asset, making fixed
periodic payments for its use. It may be in the firm of operating leasing or financial
leasing. It is one of the convenient methods of leasing which facilitates the financial
liquidity of the company.
Direct lease: When the lease belongs to the owner of the assets and users of the assets
with a direct relationship it is called a direct lease. A direct lease may be a Dipartite lease
(two parties in the lease) or a Tripartite lease. (Three parties in the lease)
Single investor lease: When the lease belongs to only two parties namely the leaser and it
is called a single investor lease. It consists of only one investor (owner). Normally all types
of leasing such as operating, financial, sale and lease back and direct lease are coming
under this category.
Leveraged lease: This type of lease is used to acquire the high-level capital cost of assets
and equipment. Under this lease, there are three parties involved; the leaser, the lender
and the lessee. Under the leveraged lease, the leaser acts as an equity participant
supplying a fraction of the total cost of the assets while the lender supplies the major part.
Domestic lease: In the lease transaction, if both parties belong to the domicile of the same
country, it is called domestic leasing.
International lease: If the lease transaction and the leasing parties belong to the domicile
of different countries, it is called as international leasing. Advantages of Leasing finance is
one of the modern sources of finance, which plays a major role in the part of the asset-
based financing of the company.

07. FINANCIAL GLOSSARY
1. Net Asset Value (NAV): NAV represents the value of a unit in the scheme and is the main
performance indicator for a mutual fund.
2. Paid up share capital: The portion of a company's issued capital that has been paid up by
its shareholders.
3. Margin: Margin enables investors to purchase securities with money borrowed from a
broker. The margin amount borrowed is charged interest to the investor.
4. Yield to Maturity: The rate of return an investor will receive if he or she holds a bond until it
matures.
5. Interest Coverage ratio: It is a measure of a company’s ability to pay interest on its debts
(operating income divided by interest expenses).
6. Insider Trading: Insider trading is when someone with non-public, substantial information
about a public company's shares trades in that stock for whatever purpose. Depending on
motive and the time when the insider makes the trade, insider trading can be either unlawful
or legal.
7. Insolvency: Inability of an organization to pay its debts when they are due.
8. Hedging: The technique of establishing an equal but opposite position in the futures market
to counterbalance the price risk inherent in any cash market position.
9. CBDC: Central bank digital currency (CBDC) is digital money that a central bank of an
country, like the RBI in case of India can produce. It isn't physical money like notes and coins.
It is in the digital form and the balance and transactions can be recorded and stored on a
blockchain.
10. Rupee cost averaging: Investing at regular set intervals over a period a fixed amount of
rupees in a specific security. For example: Rupee cost averaging results in a lower average
cost per share, compared with purchasing a constant number of shares at set intervals. Let's
say Mr. Ravindra, an investor, tends to buy more shares when the price is low and buys fewer
shares when the price is high, which results in lower average cost per share for him.
11. Call Option: An option that gives the holder the right to purchase an asset for a specified
price on or before a specified expiration date.
12. Capital Asset Pricing Model (CAPM): A model used to calculate the discount rate of a
company’s cashflows.
Financial Glossary | Page 32

13. Angel Investors: Angel investors provide capital or seed money for startups and they get
ownership equity in the company in return. Angel investors may be the primary source of
funding for a starting business if they like the startup idea, they expect rewards from their
invested money if the business takes off.
14. Beta: A value that represents the relative volatility of a given investment with respect to
the market.and earnings reports, not to mention possible shareholder lawsuits.
15. Buy side: The clients of investment banks (mutual funds, pension funds and other entities
often called “institutional investors”) that buy the stocks, bonds and securities sold by the
investment banks. (The investment banks that sell these products to investors are known as
the “sell-side.”)
16. Capital Market Line: CML is a theoretical concept that represents portfolios with an
optimal combination of risk-free rate of return and market portfolio of risky assets. According
to the Capital Asset Pricing Model, investors should borrow or lend at the risk free rate,
maximizing returns. This will be called choosing a position on the Capital Market Line.
17. Commercial Bank: A bank that lends, rather than raises money. For example, if a
company wants $30 million to open a new production plant, it can approach a commercial
bank like Bank of America or Citibank for a loan. (Increasingly, commercial banks are also
providing investment banking services to clients.)
18. Commodities: Assets (usually agricultural products or metals) that are generally
interchangeable with one another and therefore share a common price. For example, corn,
wheat, and rubber generally trade at one price on commodity markets worldwide.
19. Common stock: Also called common equity, common stock represents an ownership
interest in a company (as opposed to preferred stock, see below). Most of the stock traded in
the markets today is common, as common stock enables investors to vote on company
matters. Let's say, Mr. Sharoon owns 51 percent of more shares in a company. Then, he can
appoint anyone to the board of directors or the management team.
20. Convertible Preferred stock: A type of equity issued by a company, convertible preferred
stock is often issued when it cannot successfully sell either straight common stock or straight
debt. Preferred stock pays a dividend, like how a bond pays coupon payments, but ultimately
converts to common stock after a period. It is essentially a mix of debt and equity, and most
often used as a means for a risky company to obtain capital when neither debt nor equity
works.

21. Convexity: It is the curvature in the relationship between bond prices and bond yields.
Convexity reflects the rate at which the duration of a bond changes as the interest rates
change. It measures a portfolio’s exposure to market risk.
Bond duration increases when yields increase => Bond has negative convexity.
Bond duration increases when yields decrease => Bond has positive convexity.
22. Cost of Goods sold (COGS): The direct costs of producing merchandise. It includes
costs of labour, equipment, and materials to create the finished product.
23. Discount rate: A rate that measures the risk of an investment. It can be understood as
the expected return from a project of a certain amount of risk.
24. Discounted cashflow analysis (DCF): A method of valuation that takes the net present
value of the free cash flows of a company.
25. Dividend: A payment by a company to shareholders of its stock, usually to distribute

some or all of the profits to shareholders.
26. EBIAT: Earnings Before Interest After Taxes. Used to approximate earnings for the
purposes of creating free cash flow for a discounted cash flow.
27. EBIT: Earnings before interest and taxes
28. EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.
29. Enterprise Value: Levered value of the company, the Equity Value plus the market
value of debt
30. Equity: Equity means ownership in a company that is usually represented by stock.
31. FCFE: Free Cash Flow to Equity is the amount of cash remaining for equity holders
after accounting for operating expenses, re-investments, and outflows from financing
activities.
32. FCFF: Free Cash Flow to the Firm is the amount of cash from operations remaining for
distribution after accounting for depreciation, taxes, changes in working capital, and
investments. It is a measurement of a company’s profitability after all expenses.
33. Hedge Funds: Hedge Funds are actively managed funds using risky investment
strategies. The fund managers hedge the funds’ positions by investing a portion of the
assets whose prices move in the opposite direction of the fund’s holdings. Hedge funds
also invest in derivative securities (options and futures).

34. Holding Period return: The income earned over a period as a percentage of the bond
price at the start of the period.
35. Initial Public Offer: The dream of every entrepreneur, IPO is the first time a company
issues stock to the public. “Going public” means more than raising money for the company.
By agreeing to take on public shareholders, a company enters a whole world of required
SEC filings and quarterly revenue and earnings reports, not to mention possible shareholder
lawsuits.
36. Interest Rate Risk: Interest rate risk is the potential loss in investments due to increase in
interest rates in new debt instruments. If interest rates rise, value of a bond or a fixed income
investment will decrease.
37. Leveraged Buyout (LBO): The buyout of a company with borrowed money, often using
that company’s own assets as collateral. LBOs were the order of the day in the heady 1980s,
when successful LBO firms such as Kohlberg Kravis Roberts made a practice of buying
companies, restructuring them, and reselling them or taking them public at a significant profit.
38. Liquidity: The amount of a particular stock or bond available for trading in the market. For
commonly traded securities, such as large cap stocks and U.S. government bonds, they are
said to be highly liquid instruments. Small cap stocks and smaller fixed income issues often
are called illiquid (as they are not actively traded) and suffer a liquidity discount, i.e., they
trade at lower valuations to similar, but more liquid, securities.
39. Money market securities: This term is generally used to represent the market for
securities maturing within one year. These include short-term CDs, Repurchase Agreements,
Commercial Paper (low-risk corporate issues), among others. These are low risk, short-term
securities that have yields similar to Treasuries.
40. Market capitalization: The total value of a company in the stock market (total shares
outstanding x price per share).
41. Multiple's method: A method of valuing a company that involves taking a multiple of an
indicator such as price-to-earnings, EBITDA, or revenues.
42. Mortgage-backed bonds: Bonds collateralized by a pool of mortgages. Interest and

principal payments are based on the individual homeowners making their mortgage
payments. The more diverse the pool of mortgages backing the bond, the less risky they are.
43. Net Present Value (NPV): The present value of a series of cash flows generated by an
investment, minus the initial investment. NPV is calculated because of the important concept
that money today is worth more than the same money tomorrow.

44. Non-Convertible preferred stock: Sometimes companies issue nonconvertible preferred
stock, which remains outstanding in perpetuity and trades like stocks. Utilities are the most
common issuers of nonconvertible preferred stock.
45. P/E ratio: The price to earnings ratio. This is the ratio of a company’s stock price to its
earnings-per-share. The higher the P/E ratio, the faster investors believe the company will
grow.
46. Securitize: To convert an asset into a security that can then be sold to investors. Nearly any
income generating asset can be turned into a security. For example, a 20-year mortgage on a
home can be packaged with other mortgages just like it, and shares in this pool of mortgages
can then be sold to investors.
47. Selling, General & Administrative expenses: Costs not directly involved in the production of
revenues. SG&A is subtracted as part of expenses from Gross Profit to get EBIT.
48. Statement of cash flow: One of the four basic financial statements, the Statement of Cash
Flows presents a detailed summary of all the cash inflows and outflows during a specified
period.
49. Statement of Retained Earnings: One of the four basic financial statements, the Statement
of Retained Earnings is a reconciliation of the Retained Earnings account. Information such as
dividends or announced income is provided in the statement. The Statement of Retained
Earnings provides information about what a company’s management is doing with the
company’s earnings.
50. REITs: Real Estate Investment Trusts own and operate large scale real estate assets
(office buildings, malls, hotels, apartments, warehouses, mortgages or loans). A REIT buys and
develops properties to keep them as part of their investment portfolio, these properties become
income-producing for the companies.
51. Venture Capital: A form of private equity and financing for startups and small businesses
with substantial long term profit-making potential. They also provide backing with technical and
managerial expertise. VCs raise money from LPs or larger venture funds to invest in these
startups.

52. Unsystematic Risk: It is the risk associated with a particular investment, company or
industry. It can be reduced through diversification while systematic risk(beta) is inherent in
the market depending on broader market factors. Unsystematic risk may be caused by
employee strikes, regulatory change, change in management, or natural disasters, this risk
cannot be calculated, it can be extrapolated by subtracting systematic risk from total risk.
53. Yield Volatility: It is the measure of how much a bond’s yield changes over a given
period. It is calculated as the standard deviation of the yield over a specific time frame
54. Forwards - A forward contract is an agreement between two parties to buy or sell an
asset at a specified price on a future date.
55. Futures - A futures contract is similar to a forward contract but is standardized and
traded on exchanges. These contracts are marked to market daily, which means that daily
changes are settled daily until the end of the contract.
56. Options - An option is a financial contract that gives the holder the right, but not the
obligation, to buy or sell an underlying asset at a predetermined price on or before a
specified date. There are two types of options: calls (which give the right to buy) and puts
(which give the right to sell).
57. Swap - A swap is a derivative contract through which two parties exchange financial
instruments, such as cash flows or liabilities from two different financial instruments. The
most common types are interest rate swaps, currency swaps, and commodity swaps.

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THE FINANCE CLUB

2. What are the three components of the Statement of Cash Flows?

3. Walk me through the major line items of an Income Statement.

Accounting & Financial Reporting | Page 1

8. What is net debt?

9. How could a company have positive EBITDA and still go bankrupt?

13. What is the difference between LIFO and FIFO?

15. What is the difference between EBITDA and Operating Profits?

16. What is the difference between Top-Line and Bottom-Line growth?

Accounting & Financial Reporting | Page 3

Accounting & Financial Reporting | Page 4

2. How do you calculate a company’s Current Ratio?

4. What is Inventory Turnover?

6. Can a company have a negative book Equity Value?

Financial Analysis | Page 5

8. What is Return on Equity (ROE)?

9. What is Earnings Per Share (EPS)?

10. How do you calculate a company’s Days Sales Outstanding?

11. How to use the ratios?

Financial Analysis | Page 6

13. What factors are necessary to perform bond valuation?

14. How do you perform a Profitability Analysis?

Financial Analysis | Page 7

Financial Analysis | Page 8

2. What is Time Value of money?

3. What is Present value?

4. What is Future value?

5. What is Risk premium?

Corporate Finance | Page 9

7. What is SEBI and what are its objectives?

9. What is cost of capital?

Corporate Finance | Page 10

10.What do you mean by Initial Public offering (IPO)?

11. Explain Primary and Secondary market?

Corporate Finance | Page 11

14. Walk me through a DCF Model.

15. How can we value a private company?

16. When can a mergers and acquisitions deal take place?

17. For what purpose is an LBO model used?

Corporate Finance | Page 12

19. What are the most common multiples used in valuation?

20. State the valuation methodologies.

21. How do we value a bank?

22. What are some industry-specific valuation multiples?

23. Describe an LBO Model.

Corporate Finance | Page 13

Corporate Finance | Page 14

5. What are the 3 Principles of Finance?

i) Principles of Liquidity and Profitability

General Finance | Page 15

iii) Principles of Portfolio diversification

6. What is a Credit Default Swap (CDS)?

7. What is the difference between public issue and private placement?

Value of Assets = Debt + Equity

General Finance | Page 16

10. How does a bank operate?

General Finance | Page 17

13. What is an institutional investor?

14. What is Private Equity?