PTVA – Internal Assessment – Full Time

Financial Modelling
Name: Sharly Rane
Roll No: F-427

Question 1 – 10 marks

ABC Ltd. provides the following information to you.

Particulars 2022-23 2023-24
Equity Share Capital (FV Rs. 100) 1,500,000 2,000,000
12% Debentures 1,000,000 800,000
10% Debentures 1,000,000 1,200,000
12% Long-Term Bank Loan - 600,000

Further information is given as follows:

• The company issued 5,000 bonus shares during 2023-24 to shareholders at face value
• Interest on debentures paid, in total, during the year was Rs. 60,000
• Interest on bank loan paid during the year was Rs. 25,000
• Dividends paid during the year amounted to Rs.120,000.

Calculate net cash flows from financing activities for the year 2023-24.
Ans:
Particulars ₹₹ ₹₹
₹ ₹
a) Cash Inflow

i) Issue of 10% Debentures 2,00,000

ii) 12% Long-Term Bank Loan 600000
Total Cash Inflow 8,00,000

b) Cash Outflow
i) Payment of Interest on Debentures -60000
ii) Payment of Interest on Debentures -25000
iii) Payment of Interest on Debentures -120000
iv) Redemption of 12% Debentures -200000
(100000-800000) -405000

Net Cash Flow 3,95,000

Question 2 – 20 marks (Solve any 10)

1. A long contract requires that the investor

a) Sell securities in the future
b) Buy securities in the future
c) Hedge in the future
d) Close out his position in the future
Ans: B) Buy Securities in the future

2. __________ is the interest rate at which the present value annual revenue equals the cost of the
investment
a) Fixed rate of interest
b) Internal rate of return
c) Variable rate of interest
d) Nominal rate of interest
Ans: B) Internal rate of return

3. If the annual interest rate is 6%, the price of a 1-year Treasury bill with INR 100 face value would be:
a) INR 94.00
b) INR 94.33
c) INR 95.25
d) INR 96.10
Ans: Price=Face Value/ (1+Interest Rate)
Substituting the values:
Price=100/ (1+0.06)
Price=100/ 1.06
Price≈94.34
B) INR 94.33

4. Banks generally prefer Debt Equity Ratio at:

a) 1:1
b) 1:3
c) 2:1
d) 3:1
Ans: C) 2:1

5. What is an investor’s objective in financial statement analysis?

a) To determine if the firm is risky
b) To determine the stability of earnings
c) To determine changes necessary to improve future performance
d) To determine whether or not an investment is warranted by estimating a company’s future
earnings stream
Ans: d) To determine whether or not an investment is warranted by estimating a company’s
future earnings stream.

6. The return on holding a bond till its maturity is called:

a) Coupon rate
b) Yield to maturity
 c) Current yield
d) Fixed return
Ans: b) Yield to maturity

7. If you purchase INR 100,000 interest-rate futures contract for 105, and the price of the Treasury
securities on the expiration date is 108.
a) your profit is INR 3000
b) your loss is INR 3000
c) your profit is INR 8000
d) your loss is INR 8000
Ans: Profit or Loss=Price of Treasury securities on expiration−Purchase price of futures contracts
=108−105=108−105
=3
Since the price of the Treasury securities increased, the futures contract gained value. Therefore,
the profit is INR 3,000.
So, the correct answer is:
a) your profit is INR 3000

8. The most common type of interest rate swap is:

a) the plain vanilla swap
b) the basic swap
c) the notional swap
d) the ordinary swap
Ans: A) the plain vanilla swap

9. Futures differ from forwards because they are:

a) used to hedge portfolios
b) used to hedge individual securities
c) a standardized contract
d) used in both financial and foreign exchange markets
Ans: C) a standardized contract

10. Which of the following strategies will be profitable if the price of the underlying asset is expected to
decrease?
a) Selling a call
b) Buying a call
c) Buying a put
d) Selling a put
Ans: C) Buying a put

Question 3 – (20 marks)

Financial ratios are grouped into the following categories:

 Liquidity ratios
 Leverage ratios
 Efficiency ratios
 Profitability ratios
 Market value ratios

Detail all the ratios along with their formulas within these categories.
1. Liquidity Ratios: Liquidity Ratios: These ratios show how easily a company can pay its short-term
debts. Higher values indicate better liquidity, meaning the company is more capable of covering its
obligations with its current assets.
 Current Ratio: Measures the ability of a company to pay its short-term liabilities with its
short-term assets. Formula: Current Ratio = Current Assets / Current Liabilities
 Quick Ratio (Acid-Test Ratio): Measures the ability of a company to meet its short-term
obligations with its most liquid assets. Formula: Quick Ratio = (Current Assets - Inventory) /
Current Liabilities
 Cash Ratio: Measures the ability of a company to cover its short-term liabilities with its
cash and cash equivalents. Formula: Cash Ratio = (Cash + Cash Equivalents) / Current
Liabilities
 Operating Cash Flow Ratio: Measures the ability of a company to cover its short-term
liabilities with its operating cash flow. Formula: Operating Cash Flow Ratio = Operating Cash
Flow / Current Liabilities.

2. Leverage Ratios: They measure how much debt a company is using to finance its operations. Higher
leverage ratios indicate higher financial risk, as the company has more debt relative to its equity.
 Debt Ratio: Measures the proportion of a company's assets that are financed by debt.
Formula: Debt Ratio = Total Debt / Total Assets
 Debt to Equity Ratio: Measures the proportion of debt and equity used to finance a
company's assets. Formula: Debt to Equity Ratio = Total Debt / Total Equity
 Interest Ratio: Measures a company's ability to meet its interest payments on outstanding
debt. Formula: Interest Ratio = Earnings Before Interest and Taxes (EBIT) / Interest Expense
 Debt Service Coverage Ratio: Measures a company's ability to cover its debt obligations
with its operating income. Formula: DSCR = Operating Income / Total Debt Service.

3. Efficiency Ratios: These ratios assess how well a company utilizes its assets to generate revenue.
Higher efficiency ratios indicate better asset utilization and operational performance.
  Asset Turnover Ratio: Measures the efficiency of a company's use of its assets in
generating revenue. Formula: Asset Turnover Ratio = Revenue / Average Total Assets
 Inventory Turnover Ratio: Measures how many times a company's inventory is sold and
replaced over a period. Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average
Inventory
 Receivables Turnover Ratio: Measures how many times a company's receivables are
collected and replaced over a period. Formula: Receivables Turnover Ratio = Revenue /
Average Accounts Receivable
 Days Sales in Inventory Ratio: Measures the number of days it takes for a company to turn
its inventory into sales. Formula: DSI = 365 / Inventory Turnover Ratio

4. Profitability Ratios: Profitability ratios measure a company's ability to generate profit relative to its
revenue, assets, or equity. Higher values indicate better profitability and financial performance.
 Gross Margin Ratio: Measures the proportion of revenue that exceeds the cost of goods
sold. Formula: Gross Margin Ratio = (Revenue - Cost of Goods Sold) / Revenue
 Operating Margin Ratio: Measures the proportion of revenue that remains after deducting
operating expenses. Formula: Operating Margin Ratio = Operating Income / Revenue
 Return on Assets (ROA) Ratio: Measures how efficiently a company is using its assets to
generate profit. Formula: ROA = Net Income / Average Total Assets
 Return on Equity (ROE) Ratio: Measures how much profit a company generates with the
money shareholders have invested. Formula: ROE = Net Income / Average Shareholders'
Equity

5. Market Value Ratios: These ratios provide insights into how the market values a company's stock.
They help investors assess the attractiveness of investing in the company's shares based on factors
such as earnings, dividends, and price relative to earnings.
 Book Value per Share Ratio: Measures the amount of shareholder equity on a per-share
basis. Formula: Book Value per Share Ratio = Shareholders' Equity / Number of Outstanding
Shares
 Dividend Yield Ratio: Measures the dividend income relative to the market value per
share. Formula: Dividend Yield Ratio = Dividend per Share / Market Price per Share
 Earnings per Share (EPS): Measures the amount of a company's profit allocated to
each outstanding share of common stock. Formula: EPS = (Net Income - Preferred
Dividends) / Weighted Average Number of Common Shares Outstanding
 Price to Earnings (P/E) Ratio: Measures the valuation of a company's stock relative to
its earnings. Formula: P/E Ratio = Market Price per Share / Earnings per Share