1.

A financial statement that lists a company's assets, liabilities, and shareholder equity at a
certain point in time is referred to as a balance sheet. The foundation for calculating investor
return rates and assessing the capital structure of a company is provided by balance sheets.
A balance sheet provides statement that gives a quick overview of the assets and liabilities
of a firm as well as the amount of shareholder investment. When doing basic analysis or
calculating financial ratios, balance sheets can be utilised in conjunction with other crucial
financial data. A company's balance sheet gives a quick snapshot of its financial situation at
any one time. On its alone, it cannot provide an understanding of the tendencies
manifesting over a longer time frame. Due to this, the balance sheet and those from earlier
periods should be compared. The debt-to-equity ratio, the acid-test ratio, and many other
ratios that can be generated from a balance sheet can be used by investors to gauge a
company's financial health. Additionally helpful background for evaluating a company's
financial health can be found in the income statement, statement of cash flows, and any
comments or addenda in a financial result that might make a reference to the balance sheet.
The balance sheet follows the accounting formula below, where assets are on one side and
liabilities and shareholder equity are on the other:
Assets = Liabilities + Shareholding Equity
This formula makes sense. This is so that a business may pay for all it possesses (assets)
either by borrowing money from other people (taking on liabilities) or raising investor
money (issuing shareholder equity).
If a business borrows $4,000 over five years from a bank, its assets (particularly, the cash
account) will rise by $4,000 as a result. In order to balance the two sides of the equation, its
liabilities (more particularly, the long-term debt account) will rise by $4,000 as well. The
company's assets and shareholder equity will both rise by $8,000 if it raises $8,000 from
investors. Any profits the business makes that are more than its costs will be deposited in
the shareholder equity account. On the assets side, these revenues will balance out as cash,
investment, inventory, or other assets.
A company's balance sheet contains details on its assets, liabilities, and shareholder equity,
as was previously mentioned. Always make sure that the assets are equivalent to the
obligations and shareholder equity. The name comes from the fact that the balance sheet
must always be in balance. There may be issues if they don't balance, such as erroneous or
missing data, inventory or currency exchange errors, or improper computations. The details
of a company’s financial position are broken down into each category's many smaller
accounts. Industry-specific differences in these accounts mean that even the identical terms
might have a variety of meanings depending on the type of organisation. Investors are,
nevertheless, likely to encounter a few standard parts. The most liquid assets are cash and
cash equivalents, which can also comprise short-term certificate of deposit and Treasury bills
in addition to physical currency. Equity and debt securities with active markets are referred
to as marketable securities. Money that clients owe the business is referred to as accounts
receivable (AR). As some customers might not pay whatever they owe, this could also
include a provision for shaky accounts. Any item that is available for purchase and valued at
the lower of its cost or market price is referred to as inventory. Prepaid expenses, like
insurance, marketing contracts, or rent, are costs that have already been paid for. Securities
that cannot or will not be liquidated in the upcoming year are considered long-term
investments. Land, tools, equipment, structures, and other long-lasting, typically capital-
intensive assets are examples of fixed assets. Non-physical (yet valuable) assets like goodwill
and intellectual property are examples of intangible assets. Typically, these assets are only
included on the balance sheet whether they are purchased rather than created internally. As
a result, their value may be drastically inflated or drastically underestimated (by not adding,
for instance, a globally recognisable logo). Any sum of money that a business owes to third
parties, including rent, utilities, salaries, interest on bonds issued to creditors, and bills it
must pay to suppliers, is known as a liability. Current liabilities are those that have a one-
year payoff window and are arranged by due date. On the other hand, long-term obligations
are payable at any time after the first year. The fraction of a long-term debt that is due
within the next 12 months is called the current portion of the debt. One year is a current
responsibility and nine years are a long-term liability, for instance, if a business has a loan
with 10 years remaining to pay for its warehouse. The term "interest payable" refers to
cumulative interest that is owed and is frequently required as part of a past-due obligation,
such as a late property tax payment.
Salaries, wages, and perks to employees are referred to as wages payable, frequently for the
most recent pay period. Customer prepayments are sums of money received by a client prior
to the provision of the service or delivery of the product. The business is required to either
provide the requested good or service or refund the customer's payment. Dividends
authorised for payment but not yet issued are referred to as dividends payable.
Prepayments and earned and unearned premiums are similar in that a corporation receives
money up advance but hasn't yet fulfilled their end of the bargain and is required to pay
back unearned cash if they don't. Most frequently, accounts payable is a current liability.
Debt obligations on invoices processed as part of a business's operations are known as
accounts payable and are frequently due 30 days after receipt. Any interest and principal on
issued bonds are included in long-term debt. A company's obligation to contribute to its
employees' retirement plans is referred to as a pension fund liability. The amount of taxes
that have accrued but will not be repaid for another year is known as deferred tax liability.
This number also balances discrepancies between the standards for financial reporting and
the methods used to calculate taxes, such as depreciation computations.
The money that can be traced back to a company's owners or shareholders is known as
shareholder equity. Since it is equal to a company's total assets less its liabilities, or the
debts it owes to parties other than shareholders, it is sometimes referred to as net assets.
Net profits are what a firm keeps after paying its debts and reinvesting them back into the
company. Dividends are paid out to shareholders with the balance remaining. The stock a
corporation has repurchased is known as treasury stock. It may be held back to fend off a
hostile takeover or sold later to raise money. common stock underneath this section. As with
common stock, preferred stock is given an arbitrary par value that is unrelated to the share's
market value. The par value of the shares issued is multiplied by the number of shares to
determine the common stock or preferred stock accounts. The amount shareholders have
invested over and above the common or preferred stock accounts, that are based on par
value instead of market price, is known as additional paid-in investment or capital surplus.
The market capitalisation of a corporation is not directly correlated with shareholder equity.
While paid-in capital is the total amount of equity that has been acquired at whatever price,
the latter is based on the stock's current price. Regardless of the size of a company or
industry in which it operates, there are many benefits of a balance sheet,
Balance sheets determine risk. This financial statement lists everything a company owns and
all of its debt. A company will be able to quickly assess whether it has borrowed too much
money, whether the assets it owns are not liquid enough, or whether it has enough cash on
hand to meet current demands. Balance sheets can also be used to raise money. For a
company to be approved for a business loan, a lender often need a balance sheet. A balance
sheet is typically required when a business seeks private equity investment from investors.
In both situations, the outside party seeks to determine a company's financial stability,
creditworthiness, and ability to pay off short-term loans. Financial ratios are a tool that
managers can use to assess a company's liquidity, profitability, solvency, and cadence
(turnover). Some financial ratios call for data from the balance sheet. Management can
better understand how to improve a company's financial health when data is evaluated over
time or compared to similar organisations. Finally, balance sheets can help recruit and keep
talent. Employees typically prefer to know that their jobs are secure and that their employer
is doing well. Employees have the opportunity to review how much cash a company has on
hand, whether the company is managing debt wisely, and whether they believe the
company's financial health is in connection with the what those who expect from their
employer thanks to the requirement that public businesses that must disclose their balance
sheet. There are several limitations to the balance sheet, despite the fact that it is a crucial
piece of information for analysts and investors. Since the balance sheet is static, most
financial ratios rely on information from the more dynamic income statement of cash flows
as well to provide a more complete picture of the status of a company's operations. Because
of this, a balance may not accurately depict a company's financial situation. A balance sheet
has limitations because of its constrained timing. The financial position of a corporation is
only depicted in the financial statement as of one particular day. It could be tough to
determine whether a company is functioning effectively from just one balance sheet.
Consider a scenario in which a business reports having $1,000,000 in cash on hand just at
end of the month. Knowing how much cash a company has on hand has minimal relevance
without context, a reference point, knowledge of its historical cash balance, and
comprehension of industry operating requirements. The numbers reported on a balance
sheet will also vary depending on the accounting software used and how depreciation and
inventories are handled. Managers can therefore manipulate the figures to make them
appear more favourable. Pay close attention to the footnotes to the balance sheet to
ascertain the systems being used in their accountancy and to spot any warning signs. Last
but not least, a balance sheet is vulnerable to a variety of expert judgement calls that could
significantly affect the report. For instance, receivables need to be continuously checked for
impairment and amended to account for any uncollectible debt. Unable to predict which
receivables it will really receive, a corporation must estimate and include its best guess on
the balance sheet. Executives, investors, analysts, and regulators utilise the balance sheet as
a crucial tool to comprehend the current financial condition of a corporation. It frequently
coexists with the income statement and cash flow statement, the other two categories of
financial statements. The user may quickly see the company's assets and liabilities thanks to
balance sheets. Users can use the balance sheet to determine things like whether a firm has
a positive net worth, if it has enough money and short-term assets to pay its debts, and
whether it is heavily indebted in comparison to its competitors.
To expand their business, companies constantly look for finance sources. The act of
mobilizing funding to finance a programme, project, or necessity is referred to as funding,
often known as financing. Financing can start for both short-term and long-term goals.
Included among the various funding sources are retained earnings, debt capital, and equity
capital. Profit from business operations are used by companies to grow or pay dividends to
their shareholders. Businesses can raise money by either going public or taking out private
bank loans (issuing debt securities). Companies receive equity investment from equity
investors by swapping ownership rights for money.
Looking at balance sheet of Reliance Industries Limited their sources of funds are Equity
Share capital - INR 6,765 CR; Other Equity – INR 4,64,762 CR; Borrowings – INR 1,67,231 CR;
Lease Liabilities – INR 2,790 CR; Profit for the Year – INR 39,084.
Equity share capital is ranked 2nd as it has low cost Equity share capital, also referred to as
share capital, is the money a firm raises by selling shares. It is the money that investors and
business owners contribute to a company's capital and utilise to grow or scale up the
process of their endeavour.
Other Equity Securities is ranked 3rd as it has low cost but higher than Equity share capital.
Other Equity Securities refers to all outstanding options to purchase common shares as of
the filing date as well as any other options, warrants, conversion rights, rights of first refusal,
or other contractual or non-contractual rights to acquire or receive any ordinary stock or
other ownership interests in any applicant or an affiliate of any applicant, as well as any
contracts, subscriptions, commitments, or agreements under which the non-applicant party
is bound.
borrowing is ranked 4th as it has high borrowing costs Given that borrowing shows how
much the business has borrowed from various sources, long-term borrowing is among the
most significant lines on the overall balance sheet. One of the important factors used to
calculate some of the financial ratios is long-term borrowing. The financial ratios will next be
covered in this section.
Profit for the Year is ranked 1st as it is the main point of doing business. Profit for the Year is
the monetary gain, particularly the difference between what was made and what was used
to purchase, operate, or produce something over the year.
 2. The time it takes to recoup the cost of an investment is referred to as the payback period. It
is simply the amount of time it takes an investment to break even. The payback period is
crucial since people and businesses invest money primarily to be reimbursed. In general, an
investment is more appealing the faster its payoff is. Everyone may benefit from knowing
the payback period, which can be determined by dividing the initial investment by the
typical cash flows.
Payback Period = years before break even +

In option A
Payback Period = 4 +
= 4 + 0.05
= 4.05
In option B
Payback Period = 4 +
= 4 + 0.21
= 4.21

The difference between the current value of cash inflows and withdrawals over a period of
time is known as net present value (NPV). To evaluate the profitability of a proposed
investment or project, NPV is used in capital budgeting and investment planning. Using the
appropriate discount rate, computations are performed to determine the current value of a
stream of future payments, or NPV. Projects that have a positive NPV are generally
worthwhile pursuing, whereas those that have a negative NPV are not. When comparing the
rates of return of various projects or comparing a predicted rate of interest with the hurdle
rate necessary to accept an investment, net present value (NPV), which takes time worth of
money into account, can be employed. The discount rate, which is based on a company's
cost of capital, may be a hurdle rate for a project because it represents the time value of
money in the NPV formula. A negative NPV indicates that the expected rate of return will be
lower than it, which means that the project won't add value, regardless of how the discount
rate is calculated.
NPV = ∑ ( )

Option A
year R (a) I =5/100 (1+i) (1+i)t R (a)/(1+i)t
0 -40000 0.05 1.05 1 -40000.00
1 5000 0.05 1.05 1.05 4761.90
2 12000 0.05 1.05 1.1025 10884.35
3 10000 0.05 1.05 1.157625 8638.38
4 12500 0.05 1.05 1.215506 10283.78
5 10500 0.05 1.05 1.276282 8227.02
Total 2795.44

Therefore, NPV of Option A is 2795.44

Option B
 year R (b) I =5/100 (1+i) (1+i)t R (b)/(1+i)t
0 -50000 0.05 1.05 1 -50000
1 8500 0.05 1.05 1.05 8095.24
2 15000 0.05 1.05 1.1025 13605.44
3 12000 0.05 1.05 1.157625 10366.05
4 12300 0.05 1.05 1.215506 10119.24
5 10500 0.05 1.05 1.276282 8227.02
Total 413.00

Therefore, NPV of Option A is 413

In financial analysis, the internal rate of return (IRR) is a statistic used to calculate the
profitability of possible investments. IRR is a discount rate that, in a discounted cash flow
analysis, reduces all cash flows' net present values (NPV) to zero. The same formula is used
for NPV calculations and IRR calculations. Remember that the project's true financial value
is not represented by the IRR. The annual return is what brings the NPV to a negative value.
Generally speaking, an investment is more favourable to make the greater the internal rate of
return. IRR can be used to rank a variety of potential investments or projects on a pretty even
basis because it is consistent for investments of all types. Generally speaking, the investments
with the highest IRR would be regarded as the best when comparing options with other
similar attributes.
0=∑ ( )
-C0

Option A
IRR
(1+IRR) (1+IRR)t C (a)/(1+IRR)t
year C (a) r =r/100
-
0 40000 7.291 0.07291 1.07291 1 -40000.00
1 5000 7.291 0.07291 1.07291 1.07291 4660.22
2 12000 7.291 0.07291 1.07291 1.151136 10424.49
3 10000 7.291 0.07291 1.07291 1.235065 8096.74
4 12500 7.291 0.07291 1.07291 1.325114 9433.15
5 10500 7.291 0.07291 1.07291 1.421728 7385.38
Total -0.02
Therefore, IRR of Option A is 7.291 approximately
Option B
IRR C
(1+IRR) (1+IRR)t
year C (b) r =r/100 (b)/(1+IRR)t
-
0 50000 7.7783 0.077783 1.077783 1 -50000.00
1 8500 7.7783 0.077783 1.077783 1.077783 7886.56
2 15000 7.7783 0.077783 1.077783 1.161616 12913.04
3 12000 7.7783 0.077783 1.077783 1.25197 9584.89
4 12300 7.7783 0.077783 1.077783 1.349352 9115.49
5 10500 0 0 1 1 10500.00
Total -0.02
Therefore, IRR of Option B is 7.7783 approximately
The CFO should choose option A at it has lower Payback Period and Higher NAV. It’s only
downside being that it has a lower IRR.
3. A. Compound interest, also known as interest on principal and interest, is the practise of
adding interest to the principal amount of a loan or deposit. It occurs when interest is
reinvested, or added to the loaned capital rather than paid out, or when the borrower is
required to pay it, so that interest is generated the next period on the principal amount plus
any accumulated interest. In finance and economics, compound interest. Students can
benefit from the "compound interest" miracle by starting out young. The income you earn
on interest is known as compound interest. Simple math may be used to demonstrate this: if
you own $100 and it generates 5% interest annually, you will have $105 just at end the first
year. You will wind up with $110.25 at the conclusion of the second year. In addition to
earning $5 on the initial $100 deposit, you also made $0.25 on the interest generated on
that amount. Although 25 cents may not seem like much at first, it soon adds up. The power
of compound interest will ensure that, even if you never add another penny to that account,
in 10 years you will have more than $162, and in 25 years you will have almost $340.
Compound Interest = P [(1 + i)nt – 1]

i) = 3,00,000[(1+0.08/4)5x4 -1]
= 3,00,000[(1+0.02)20 -1]
= 3,00,000[1.0220-1]
= 3,00,000*0.49
= 1,47,000

Principal + Interest = 3,00,000 + 1,47,000 = 4,47,000

ii) 1st investment

=20,000[1.120-1]
=20,000*5.73
=114,550.00

2nd investment
=20,000[1.116-1]
=71,899

3rd investment
=20,000[1.112-1]
=42,769

4th investment
=20,000[1.18-1]
= 22,872

5th investment
=20,000[1.14-1]
=9,282
 year P interest P+I

1.00 20,000.00 114,550.00 134,550.00

2.00 20,000.00 71,899.00 91,899.00

3.00 20,000.00 42,769.00 62,769.00

4.00 20,000.00 22,872.00 42,872.00

5.00 20,000.00 9,282.00 29,282.00

Total 100,000.00 261,372.00 361,372.00

Sunil should go for option (ii) as it is providing higher profit.

3.b. A bond or other sort of financial instrument that is secured by collateral is referred to as
a debenture. Debentures must rely on the issuer's trustworthiness and reputation for
support because they lack a collateral backstop. Debentures are commonly issued by both
businesses and governments to raise cash or money. Debentures, like the majority of bonds,
may issue periodic interest payments known as coupon payments. Debentures are described
in an indenture, much like other kinds of bonds. A binding legal agreement between bond
issuers and bondholders is known as an indenture. The agreement details the terms of a
debt issue, including the maturity date, the frequency of interest or coupon payments, the
formula for calculating interest, and other details. Debentures may be issued by both
governments and corporations. Long-term securities with maturities longer than 10 years—
are often issued by governments. These government bonds, which have the support of the
issuing government, are regarded as low-risk investments. Debentures are also used by
corporations as long-term loans. The corporate debentures, however, are unsecured.
Instead, they are supported only by the underlying company's financial stability and
creditworthiness. These debt instruments have a defined redemption or repayment date
and charge interest. These planned debt interest payments are often made by a firm prior to
stock dividends to shareholders. Compared to other forms of loans and financial
instruments, debentures have lower interest rates & longer repayment periods, which is
favourable for businesses.
The market price for debentures fluctuates frequently, despite the fact that they are issued
at face value. The debenture is seen to be discounted when the market price is less than the
face value. The debenture is a premium issue, though, if the market price is higher than the
face value.
The annual return on an investment (interest or dividends) is calculated by dividing it by the
security's current market value. Instead, then focusing on a bond's face value, this metric
looks at its current price. The return an investor would anticipate making if they bought and
held the bond for a year is represented by current yield. The return an investor actually
earns if he retains a bond to maturity, however, is not.
Current yield=

Current yield of market price i) = x100

.
= 6.1

Current yield of market price ii) = x100

= 5.88

There is an inverse relation between market price and current yield. when market price
increases current yield decreases and when current yield decreases market price increases.