Professional Documents
Culture Documents
AFM and FM study material
AFM and FM study material
AFM and FM study material
Semester: III
1
Dr. D Satish
Area Head, Department of Finance & Accounting
Resource Persons:
Dr. D. Sreenivasa Chary (Course Coordinator)
Dr. D Satish
Dr. M.V. Narasimha Chary
Dr. M.V.S. Kameshwar Rao
Prof. C. Anita
Dr. P. Bhanu Sireesha
2
TABLE OF CONTENTS
3
4
1. FAQs on Broader Topic: Financial Accounting
1. Define Accounting
Definition: Accounting is a systematic process of identifying, recording, measuring, classifying, verifying,
summarizing, interpreting and communicating financial information for use by the end users.
Process: Identify accounting information, record all relevant information, measure in monetary terms, similar
transactions classified into groups, verifying the correctness of the recording, find the net balances by
summarizing, analyse to arrive at results, interpret to understand the impact of the result and communicate to
the end users.
Result: It reveals profit or loss for a given period (performance of the business) and the value and nature of a
firm’s assets, liabilities and owners’ equity (position of the business).
5
9. What is Matching concept?
First identify the revenue realizable for the accounting period, then match the corresponding expenses incurred
to generate such revenue.
Explanation: Every sale has revenue attached with expenses. To measure the net effect of the sale, there is a
need to recognize both these aspects in the same accounting period. When an event affects both revenues and
expenses, the effect on each of these should be recognized in the same accounting period.
15. What is the difference between cost concept and money measurement concept?
According to money measurement concept all transactions are to be recorded in monetary terms and according
to cost concept the recording has to be done at the cost incurred by the organization irrespective of its value in
the market.
6
Sub-Topic.2: Journal Entries and their reflection on Financial Statements
3. Give the journal entry for transactions: [Incurring huge expenditure for purchase of Plant, Property &
Equipment (PPE)]: A 5 floored building has been acquired and centrally air conditioned. Total cost incurred
includes Rs.80 lakhs for the building and Rs.12 lakhs for the air conditioning.
4. Give the journal entry for transactions: [Assets depreciated / amortized]: Apart from the Buildings of Rs.80
lakhs, air conditioners of Rs.12 lakhs, the company also has a patent for the design of the products it
manufactures, valued at Rs.10 lakhs. The patent and air conditioners have a life of 5 years, and the building
for 10 years. Depreciation and amortization need to be charged on the assets at the end of the financial
year.
The journal entries for such transactions will be:
Depreciation on Buildings A/c Dr Rs.8,00,000
To PPE (Buildings) A/c Rs.8,00,000
7
Description:
‘Depreciation’ and ‘Amortization’ are treated as Nominal account (they are expenses for the business), ‘PPE’
(possession / asset) is Real account, ‘Patents’ (possession / asset) is Real account.
5. Give the journal entry for transactions: [Payment of interest on loan and repayment of principal loan]: A
loan of Rs.1 crore, taken from ICICI bank five years ago, is maturing this day. The loan carries an interest @
10% p.a. Today the company repays the principal along with the last year’s interest to the bank.
Description:
‘ICICI Bank Loan’ (Bank is the person who offered loan to the company, i.e., the company is having a business
activity with a bank) is Personal account, ‘Interest on bank loan’ (expense) is Nominal account, ‘Bank’
(possession / asset) is Real account.
6. Give the journal entry for transactions: [Payment of corporate tax]: The company made a profit before tax
of Rs.2 crores for the financial year on which it pays income tax @ 30%.
Description:
‘Income tax’ (expense) is Nominal account, ‘Bank’ (possession / asset) is Real account.
Effect on Financial Statements:
Decrease in Bank balance (Assets side of BS) and increase in expenses of the business (resulting in less profit,
decrease in Retained Earnings) (Liabilities side of BS).
7. Give the journal entry for transactions: [Payment of salaries by corporates]: Rs.10000 has been paid as
salary to the employee, after deducting Rs.1000 as income tax and Rs.1500 as employees share of provident
fund, but before employers’ share of provident fund Rs.1500.
Explanation: Generally given answer is “Salaries A/c debited and Cash or Bank A/c credited”. But, when a
company pays salary to its employees, generally there would be certain amounts deducted from the gross salary
to arrive at the salary payable to the employees. These deductions include the employer’s and employee’s
8
contribution to EPF, advance tax payable by the employee to the Income tax department, professional tax
payable by employees, etc. All these will have to be considered while writing the journal entry.
8. Give the journal entry for transactions: [Bad debts incurred]: Mars International India Pvt. Ltd. sold goods
worth Rs.1000,000, to one of its customers, Big Bazaar, a retail outlet on 1 March, 2020. Big Bazaar was
supposed to make the payment by 1 June, 2020, but did not honor the same. Mars International has
exhausted all the possible recovery measures, but could not recover the amounts. On February 28, 2021,
Big Bazaar paid only Rs.2 lakhs in full and final settlement for the supply. Journalize in the books of Mars
International India Pvt. Ltd.
On 28 February, 2021:
Bank A/c Dr Rs.2,00,000
Bad debts A/c Dr Rs.8,00,000
To Big Bazaar A/c Rs.10,00,000
Description:
‘Big Bazaar’ is Personal account, ‘Sales’ (revenue generated) is Nominal account, ‘Bank’ is Real account, ‘Bad
debts’ (loss faced due to non-payment) is Nominal account.
9. Give the journal entry for transactions: [Provision for bad and doubtful debts created]: Since the past 5
years, it has been observed that the company has been facing bad debts @ 2% of its annual sales every year.
During the financial year that ended recently, the company had annual sales worth Rs.5 crores, and it wants
to make a provision to the extent of 2% for the bad and doubtful debts.
9
The journal entry for such transaction will be:
Provision for bad and doubtful debts A/c Dr Rs.10,00,000
To Trade Receivables A/c Rs.10,00,000
Description:
PBDD is an exceptional account created to reduce the asset for a future probable loss, Trade Receivables is the
asset that gets reduced.
10. Give the journal entry for transactions: [Issue of share capital, incurring expenses for raising the capital]:
Issue of 100,000 equity shares of the company of face value Rs.500 each at Rs.1000. For this issue, the
company incurs Rs.20,00,000 as expenses on the public issue, which includes professional consultation,
underwriting commission, legal expenses, printing expenses, listing expenses, etc.
Description:
‘Bank’ is Real account, ‘Expenses on Public Issue’ (capital expenses) (Nominal account), ‘Equity Share Capital’
(represents the creation of liability to owners) (Personal account), ‘Additional Paid-in Capital’ also called
Securities Premium (capital receipt, it is the extra amount contributed by the owners) (Nominal account).
11. Give the journal entry for transactions: [Creation of general reserve]: From the PBT of Rs.2 crores, the
company paid 30% as income tax, and from the balance (PAT) the company decides to transfer 15% to
general reserve.
Description:
‘Retained Earnings’ (balance of accumulated profits) is exceptional account [2crores * 70% * 15%], ‘General
Reserve’ (accumulated profits set aside) is exceptional account. Both accounts involve the owners’ funds, where
balance from one account is transferred to another account.
12. Give the journal entry for transactions: [Announcement of dividends and later on payment of the
dividends]: Ramco Cements Ltd. announced an annual dividend of Rs.10 lakhs on its equity share capital for
the last financial year. The payment was done within one month of the declaration.
10
The journal entries will be:
For declaration of annual dividend:
Retained Earnings A/c Dr Rs.10,00,000
To Proposed Annual Dividend A/c Rs.10,00,000
Description:
‘Retained Earnings’ (balance of accumulated profits) is exceptional account, ‘Proposed annual dividend’
(accumulated profits set aside) is temporarily created account, ‘Bank’ is real account.
Sub-Topic.3: Financial Statements of different sectors (Corporates, Banks & Financial Services)
5. What is the difference between profit and loss account and income & expenditure statement?
P&L account is prepared for the business organization whose aim is to earn profit by running business whereas
Income and Expenditure statement is prepared for non-profit organizations, like Trusts.
11
7. What are the key line items on Profit & Loss account of companies / banks?
For Company: Revenue from operations, operating expenses, non-operating expenses and tax expenses
[Revenue from operations, other incomes, expenses including material consumed, stock in trade purchases and
changes, employee benefit expenses, finance costs, depreciation and amortization expense, SG&A expenses,
exceptional and extraordinary items, tax expense etc.]
For Banks: Interest income, interest expenses, non-interest income, provisions for credit losses, non-interest
expenses and income tax expenses
16. Who has the first right on the cash flows of the firm: a bondholder or shareholder?
A bond holder always has the first right. Shareholders including those who own preferred stock, must wait until
bondholders are paid during a bankruptcy before claiming company assets.
12
17. Who is more senior creditor: a bondholder or shareholder?
A bond holder is always more senior. Shareholders (including those who own preferred stock) must wait until
bondholders are paid during a bankruptcy before claiming company assets.
21. What are the different activities in a business shown on the cash flow statement?
The Cash Flow Statement showcases the cash generated and used during a period. It involves (a) Operating
activities (where business activities accounting to cash are considered); (b) Investing activities (involving sale
and purchase of assets of the company); and (c) financing activities (involving generation and redemption of
equities and other liabilities).
13
26. Can the profit of a company decrease though its revenue increases? Explain.
Profit of the company is the net of its revenues after deducting the expenses for the period. It is the residual of
all revenues and gains over all expenses and losses for the period. When revenues increase, there could be
increase in COGS, increase in expenses, decrease in allocated asset / resource value, increase in borrowing
interest, increase in tax, etc., thus resulting in a drop in the net income of the company.
27. Is it possible for a company to show positive cash flows but be in grave trouble?
Yes, it is possible, if a company sells off inventory but delays payables it is in such a position.
28. How is it possible for a company to show positive net income but go bankrupt?
A case of deteriorating working capital is an example of this situation. Here the trade receivables are increasing
and trade payables are lowering, for the company to go bankrupt.
29. Why are increases in trade receivables treated as a cash reduction on the cash flow statement?
Since our cash flow statement starts with net income, an increase in trade receivables is an adjustment to net
income to reflect the fact that the company never actually received those funds.
30. I buy a piece of equipment. Walk me through the impact on the 3 financial statements.
Initially, when the equipment is purchased, there is no impact in the Profit and Loss account, the cash goes
down, and PP&E goes up in the Balance Sheet (BS), and the purchase of PP&E is a cash outflow in the Cash Flow
Statement (CFS).
Over the life of the asset: depreciation reduces the net income in the Profit and Loss account, PP&E goes down
by the depreciation, retained earnings go down in the BS, and depreciation is added back in the cash from
operations section as it is a non-cash expense that reduced the net income in the CFS.
31. What is a deferred tax liability and why might one be created?
Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually
paid in that time period, but is expected to be paid in the future.
Explanation: It arises when a company actually pays lesser amount of taxes than they show as an expense on
their P&L account for the period. This could arise due to the difference in recognition of revenues, expenses and
losses between financial accounting and tax accounting. Differences in depreciation expense between GAAP
and Ind AS can lead to differences in income between the two, which ultimately leads to differences in tax
expense reported in the financial statements and taxes payable.
32. How do you categorize interest and dividend in a Cash Flow Statement?
For a financial enterprise: interest paid and interest and dividends received are operating cash flows, and
dividends paid are financing cash flows
For other enterprises: interest and dividend paid are financing cash flows; interest and dividend received are
investing cash flows
Explanation: According to para 30, AS-3, In the case of a financial enterprise, the interest paid and the interest
and dividend received will be classified as cash flows arising from operating activities. Whereas, in the case of
other enterprises, cash flows arising from interest paid should be classified as cash flows from financing activities
while the interest and dividends received should be classified as cash flows from investing activities. Dividends
paid should be classified as cash flows from financing activities only.
33. How would you deal with outstanding and prepaid expenses while preparing final accounts?
Outstanding expenses are recognized as expenses in the Profit and Loss account and are also a current liability
in the Balance Sheet.
Prepaid expenses are expenses paid for a period beyond the current accounting period, hence are reduced from
the total expenses paid in the Profit and Loss account and are a current asset in the Balance Sheet.
34. How would you deal with bad debts and provision for doubtful debts while preparing final accounts?
Bad debts are the actual loss of revenue and provision for doubtful debts are an expected loss of revenue. These
are reduced from the trade receivables in the current assets of the balance sheet and are to be reduced from
the total revenue receivable in the Profit and Loss account.
14
35. What is a deferred tax asset and why might one be created?
Deferred tax asset arises when a company actually pays more in taxes to the Income Tax department than they
show as an expense on their income statement for the period.
Differences in revenue recognition, expense recognition and net operating losses between financial accounting
and tax accounting can create deferred tax assets.
b. By Functions: Costs are divided according to the functional department where they are incurred.
Examples Production cost, Selling cost, Distribution cost, Ddministrative cost, Research cost,
Development cost.
c. By Traceability: Costs are divided as direct costs or indirect costs based on whether they can be
directly traced to a particular product or service. Direct costs can traced to the end product.
Indirect Costs cannot be traced directly. Indirect Costs are also known as Overheads.
d. By Variability: Costs are classified into three categories, as fixed, variable and semi-variable , based
on their variability with the volume of production or level activity. Fixed costs remain constant
within a particular range of volume of production or level of activity. Variable costs vary
proportionately with the volume of product or level of activity. Semi-variable costs are partly fixed
and partly variable. Fixed Costs per unit decrease as the volume of production increases, Variable
Cost per unit does not change with volume of production.
f. By Normality: Costs are classified as normal or abnormal costs, based on whether such costs are
expected to occur in the normal course of operations of the business. Normal costs are expected
to occur at a particular level of output (Example: Loss of Weight in Coal, Inflammable Liquids).
Abnormal Costs are not expected to occure (Example: Loss of stock by fire, Unexpected Order filling
with overtime work and wages)
16
5. What are overheads? give examples.
Overheads are costs that cannot be directly traced to the product or service. Rent of Factory building,
Office Expenses, legal and audit fees etc.,are some of the examples.
7. What is cost sheet / statement of cost? What is the need of preparing it?
Cost sheet is a statement prepared to show the various elements of cost, like prime cost, factory cost,
cost of production and total cost. Cost sheet shows the cost per unit of any product. It helps the
management in fixing selling prices of their products and services.
8. How many types of inventories can be maintained (for manufacturing / trading / services companies)?
There are four categories of inventories in a manufacturing sector: (a) raw materials (which are waiting
to be worked on), (b) work-in-progress (which are being worked on), finished goods (which are ready
for shipping) and consumables. A trading firm has only finished goods and supplies. In general, services
sector maintains service, upkeep, stationary types of inventory; however, extensive tangible inventory
is required for wholesale and retail service providers.
17
Cost sheet format:
COST OF PRODUCTION
COST OF SALES
Add: Profit
18
Sub-Topic: 2. Cost-Volume-Profit Analysis
4. Advantages of activity-based costing over traditional costing for service / manufacturing sector.
a. In traditional costing system, overhead costs are assumed to be influenced by only the units
produced, whereas in activity based costing the cost drivers are used to assign the costs to various
products and / or services.
b. Activity based costing improves costing by reclassifying many fixed costs as variable costs for better
traceability.
c. It also helps in ascertaining areas where cost reductions are possible.
d. It can lead to improved selling price fixation, especially when certain products are consuming more
resources but are priced less.
20
5. What are the disadvantages of activity-based costing?
a. Activity based costing system is time consuming and expensive to develop and implement. It is
not suitable for small organizations.
b. Determination of most appropriate cost drivers is difficult.
c. In some cases, finding the activity that causes the cost is impossible and impracticable.
d. A limited number of cost drivers may not fully explain the cost behaviour of different items.
e. Implementation of activity-based costing in service industry is difficult as the tracing of costs to
service delivery may result in too many cost drivers.
21
3. FAQs on Broader Topic: Time Value of Money
Sub-topic: 1. Time Value of Money - Concepts and Applications
4. State the relationship between effective rate of interest and the stated annual rate of interest.
EIR=[1+ stated annual interest rate/m]^ m -1
where m=frequency of compounding per year
11. What is the difference between annuity due and ordinary annuity?
If payment is made at the end of each period, it is called an ordinary or deferred annuity. An annuity
whose payments are made at the beginning of each period is called an annuity due.
22
14. What is Growing Perpetuity?
A Perpetuity that grows at a constant rate.
16. Can the real rate of return be larger than the nominal rate?
Yes, when the compounding is done more than once a year.
17. Which one you will prefer: an investment that pays 5 percent a year on which interest is compounded
(a) quarterly, (b) semi-annually, (c) annually? Why?
Quarterly –compounded because the effective interest is maximum for this alternative.
18. What happens to future values as you increase the length of time involved?
Future value increases
19. As you increase the length of time involved, what happens to present values?
Present value decreases
20. What happens to a future value if you increase the interest rate keeping all other parameters
constant?
Future value increases
21. What happens to a present value if you increase the discount rate keeping all other parameters
constant?
Present value decreases
22. What all do you need to find out the present value of an investment?
Future value of the investment, interest rate, period of investment.
23. “A rational human being has a time preference for money.” Do you agree?
Yes. Because the value of Rs.1000 today is more than Rs.1000 after one year. Inflation, present
investment opportunities, preference for present consumption, risk and uncertainty in future are the
reasons for this.
15. How are values of bonds affected when the market rate of interest changes?
There is an inverse relationship between the value of a bond and the market interest rate. The bond
value would decline when the market interest rate rises and vice-versa.
24
19. Various techniques used in stock market to minimize/avoid loss?
1. Stop losses 2. Check fundamentals prior to investment 3. Discount short-term noises (Ex: Nestle India
-issue with Maggi later bounced back)
25
3.Explain the concept of risk in capital budgeting?
Risk can be defined as the variability of the returns of an investment. Risk arises in investment evaluation
because we cannot predict the cash flow sequence correctly since the future events on which they depend are
uncertain.
5.What is the major problem in using this approach to handle risk in capital budgeting?
The constant risk-adjusted discount rate is not valid over the life span of project. It is also quite difficult to specify
risk-adjusted discount rate properly to measure the degree of increasing risk.
A sustainable business performance by a firm requires effective planning and financial management. Ratio
analysis is a tool that throws light on financial results and trends over time, and provide key indicators of
organizational performance. Managers can use ratio analysis to pinpoint strengths and weaknesses, from which
necessary strategies and initiatives can be formulated.
Investors / Funders may use ratio analysis to compare results against other organizations or make judgments
concerning management effectiveness
For ratios to be useful and meaningful, they must be:
• Calculated using reliable, accurate financial information
• Calculated consistently from period to period
• Used in comparison to internal benchmarks and goals
• Used in comparison to other companies in the same industry
• Viewed both at a single point in time and as an indication of broad trends and issues over time
• Carefully interpreted in the proper context, considering there are many other important factors and
indicators involved in assessing performance
Liquidity
• Liquidity is a key factor in assessing a company's basic financial health. Liquidity is the amount of cash
and easily-convertible-to-cash assets a company owns to manage its short-term debt obligations.
Before a company can prosper in the long term, it must first be able to survive in the short term
• The two most common metrics used to measure liquidity are the current ratio and the quick ratio
• The Current Ratio is equal to current assets divided by current liabilities; This directly measures the
ability of the company to pay back short-term debts and payables with its liquid assets
• The Quick Ratio, also known as the Acid Test, is a conservative measure of liquidity. This is because it
excludes inventory from assets and also excludes the current part of long-term debt from liabilities.
Thus, it provides a more realistic or practical indication of a company's ability to manage short-term
obligations with cash and assets on hand. A quick ratio lower than 1.0 is often a warning sign, as it
indicates current liabilities exceed current assets.
Solvency
• Related to liquidity is the concept of solvency—a company's ability to meet its debt obligations on an
ongoing basis, not just over the short term. Solvency ratios calculate a company's long-term debt in
relation to its assets or equity
• Debt ratio measures the relative amount of a company’s assets that are provided from debt:
• Debt ratio = Total liabilities / Total assets
• Debt to Equity ratio (D/E) calculates the weight of total debt and financial liabilities against
shareholders’ equity:
27
• Debt to Equity ratio = Total liabilities / Shareholder’s equity
• Interest coverage ratio shows how easily a company can pay its interest expenses:
• Interest coverage ratio = Operating income / Interest expenses
• Debt service coverage ratio reveals how easily a company can pay its debt obligations:
• Debt service coverage ratio = Operating income / Total debt service
• Debt-to-equity (D/E) ratio is generally a solid indicator of a company's long-term sustainability because
it provides a measurement of debt against stockholders' equity, and is, therefore, also a measure of
investor interest and confidence in a company.
• A lower D/E ratio means more of a company's operations are being financed by shareholders rather
than by creditors
• A high D/E ratio can indicate aggressive usage of Debt to take benefit from tax-deductibility of interest
costs, but at the same time can increase the firm’s potential financial risk
• D/E ratios vary widely between industries; Highly capital-intensive industries usually tend to have high
D/E ratios
Operating Efficiency
• A company's operating efficiency is key to its financial success. Efficiency ratios, also known as activity
financial ratios, are used to measure how well a company is utilizing its assets and resources. Some
Common efficiency ratios are:
• Asset Turnover Ratio measures a company’s ability to generate sales from assets:
• Asset turnover ratio = Net sales / Average total assets
• Inventory Turnover Ratio measures how many times a company’s inventory is sold and replaced over
a given period:
• Inventory turnover ratio = Cost of goods sold / Average inventory
• Accounts Receivable Turnover Ratio measures how many times a company can turn receivables into
cash over a given period:
• Receivables turnover ratio = Net credit sales / Average accounts receivable
• Days’ Sales in Inventory measures the average number of days that a company holds on to inventory
before selling it to customers:
• Days’ Sales in Inventory = 365 days / Inventory turnover ratio
Profitability
• Companies can survive for some years without being profitable, operating on the goodwill of creditors
and investors. But to survive in the long run, a company must eventually attain and maintain
profitability.
• Metrics for evaluating profitability are Operating Profit Margin (OPM) and Net Profit Margin (NPM)
• OPM allows investors to see the amount of profit a company makes from its core operations, before
the deduction of interest and taxes. This indicates a company's basic operational profit margin, after
deducting the costs of producing and marketing the company's products or services. It indicates how
well the company's management is able to control costs.
• OPM is key to determining a company's potential earnings, and therefore in evaluating its growth
potential.
• It is also considered to be the best profitability ratio to assess how well-managed a company is since
the management of basic overhead costs and other operating expenses is critical to the bottom-line
profitability of any company.
• Operating margins vary widely between industries and should be compared between similar companies
• Operating margin is one of the best indicators of efficiency.
• NPM is the ratio of net profits to total revenues. It is crucial to consider the net margin ratio because a
simple rupee figure of profit is inadequate to assess the company's financial health.
• A company might show a net profit figure of several hundred crores, but if the profit represents a NPM
of 2% or 3%, then even the slightest increase in operating costs or marketplace competition could
plunge the company into the red
• A larger net margin, especially compared to industry peers, means a greater margin of financial safety,
and also indicates a company is in a better financial position to commit capital to growth and expansion.
28
Industry Sector and Financial Ratios
• When evaluating companies for investments, it's important to look at them in the context of their own
sector.
• Each sector has different attributes that vary from other sectors. For example, capital intensive sectors,
like airline and manufacturing companies, have high levels of debt, while IT companies typically have
low levels of debt. Comparing them would not be an apples-to-apples comparison. As such, different
ratios are better suited to analysing certain sectors than others.
Illustration: Which are the important Financial Ratios to study in Banking Industry?
• Banks operate and generate profit in a different way than most other businesses
• Net interest margin is an important indicator in evaluating banks because it reveals a bank’s net profit
on interest-earning assets, such as loans or investment securities
• Banks with a higher loan-to-assets ratio derive more of their income from loans and investments
• Banks with lower levels of loan-to-asset ratios derive a relatively larger portion of their total incomes
from more-diversified, non-interest-earning sources, such as asset management or trading
Loan-to-Assets Ratio
The loan-to-assets ratio is another industry-specific metric that can help investors obtain a complete analysis of
a bank's operations. Banks that have a relatively higher loan-to-assets ratio derive more of their income from
loans and investments, while banks with lower levels of loans-to-assets ratios derive a relatively larger portion
of their total incomes from more-diversified, noninterest-earning sources, such as asset management or
trading. Banks with lower loan-to-assets ratios may fare better when interest rates are low or credit is tight.
They may also fare better during economic downturns.
Return-on-Assets Ratio
The return-on-assets (ROA) ratio is frequently applied to banks because the cash flow analysis is more difficult
to accurately construct. The ratio is considered an important profitability ratio, indicating the profit per rupee a
company earns on its assets. Since bank assets largely consist of money the bank loans, the per-rupee return is
an important metric of bank management. The ROA ratio is a company's net, after-tax income divided by its
total assets. Since banks are highly leveraged, even a relatively low ROA of 1 to 2% may represent substantial
revenues and profit for a bank
Credit to Deposit Ratio
A credit to deposit ratio is the ratio of how much a bank lends out of the deposit it has mobilized. It helps in
assessing a bank’s liquidity and indicates its health. Ideal Credit to Deposit Ratio is between 80%-90%. This
means that the Bank is lending this percent of funds from the Total deposits that it has.
29
Lending is the main business of the bank so this ratio should be high. If the ratio is too low, it means the bank
may not be earning as much as they should be. If the ratio is too high, it means that the bank might not have
enough liquidity to cover any unforeseen fund requirements, which may affect capital adequacy and asset-
liability mismatch.
30
4. What is capital adequacy ratio?
Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current
liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess
leverage and becoming insolvent in the process.
Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets
The risk weighted assets take into account credit risk, market risk and operational risk.
The Basel III norms stipulated a capital to risk weighted assets of 8%. However, as per RBI norms, Indian
scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are
emphasized to maintain a CAR of 12%.
12.Can you show the break -up of ROE estimation as per Du Pont Formula?
ROE = Profit Margin * Asset Turnover * Leverage Factor
= (Net Profit/Sales) * (Sales/Total Assets) * (Sales/Total Assets Equity)
31
13.How do you calculate Return on total assets (ROA)?
It is estimated as the ratio of after-tax profit divided by total assets of the firm
14. Why is it complicated to compare a given ratio of two companies operating in different sectors/industries?
It is complicated to compare a given ratio of two companies operating in different sectors/industries because
the different nature of operations across industries makes the ratios vary from industry to industry
15.What are three key financial ratios that Banks consider, while evaluating a loan proposal?
Leverage Ratio, Loan to Value Ratio and Debt Service Coverage Ratio
17. What is the difference between the current ratio and the acid test ratio?
The current ratio uses all of the current assets and divides their total by the total amount of current liabilities.
The acid test ratio uses only the following current assets (which are considered to be the "quick assets” and
divides their total by the total amount of current liabilities
Sub-topic: 2. Using concepts of Relative Valuation and Enterprise Value in Valuation of Companies
Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative
to equity market capitalization. EV includes in its calculation the market capitalization of a company but also
short-term and long-term debt as well as any cash on the company's balance sheet.
• Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative
to equity market capitalization.
• Enterprise value includes in its calculation the market capitalization of a company but also short-term and
long-term debt as well as any cash on the company's balance sheet.
• Market Capitalization does not fully represent a firm's value, as it leaves out factors, such as a company's debt
on the one hand and its cash reserves on the other. Enterprise value is basically a modification of market cap,
as it incorporates debt and cash for determining a company's valuation
• Enterprise value is used as the basis for many financial ratios that measure the performance of a company
32
market value of its capital from all sources to a measure of operating earnings generated, such as earnings
before interest, taxes, depreciation, and amortization (EBITDA).
• Enterprise Value/EBITDA metric is used as a valuation tool to compare the value of a company, debt included,
to the company’s cash earnings less non-cash expenses. It's ideal for analysts and investors looking to compare
companies within the same industry
• EBITDA is a measure of a company's ability to generate revenue and is used as an alternative to simple
earnings or net income in some circumstances. EBITDA, however, can be misleading because it strips out the
cost of capital investments like property, plant, and equipment. Another figure, EBIT, can be used as a similar
financial metric without the drawback of removing depreciation and amortization expenses related to
property, plant, and equipment.
Limitations of Using EV
EV includes total debt, but it is important to consider how the debt is being utilized by the company's
management. For example, capital intensive industries such as the oil and gas industry typically carry significant
amounts of debt, which is used to foster growth. The debt could be used to purchase plant and equipment. As
a result, the EV would be skewed for companies with a large amount of debt as compared to industries with
little or no debt.
It is best to compare companies within the same industry to get a better sense of how the company is valued
relative to its peers
• Value Target Company: Pick the appropriate benchmark valuation multiple for the peer group, and value the
target company based on that multiple. Typically, an average or median is used
There are various types of multiples that can be used in a Comps analysis. In general, multiples can be classified
in two broad categories: Operating multiples and Equity multiples. Operating multiples refer to the operating
results of the business as a whole while Equity multiples refer to the value created from the company that is
available to equity/shareholders.
For Operating Multiples, we use Enterprise Value as the numerator of the calculation, while for Equity Multiples,
we use Market Capitalization as the numerator. You should generally not use EV for equity-related performance
metrics, nor should you use Market Capitalization for enterprise-related performance metrics
34
2. Why is cash deducted from Enterprise Value?
To understand why cash is deducted from enterprise value, suppose that you are a private investor wishing to
purchase 100% of a publicly traded company. When planning your purchase, you note that the company’s
market capitalization is Rs.100 crore, meaning you will need Rs.100 crore to buy all the shares from its existing
shareholders. But what if the company also has Rs.20 crore in cash? In that scenario, your real “cost” for
purchasing the company would only be Rs.80 crore, since buying the company would immediately give you
access to its Rs.20 crore in cash. All else being equal, a higher cash balance leads to a lower enterprise value,
and vice-versa.
36
• The benefits of a DCF model are that it includes lots of detail about the company’s business and isn’t
concerned with how other companies are performing. The drawbacks are that many assumptions are
required, and the company’s value is very sensitive to changes in some of those key assumptions
14. What are the most common multiples used to value a company?
EV/EBITDA; EV/EBIT; P/E; and P/B
15. Can a company have a high EV/EBITDA multiple but a low PE multiple? When does it happen?
This relationship implies a significant difference between the firm’s enterprise value and its equity value. The
difference between the two is “net debt”. As a result, a company with a significant amount of net debt will likely
have a higher EV/EBITDA multiple.
The Balanced Scorecard (BSC), proposed by Robert Kaplan, provides executives with a comprehensive
framework that translates a company’s strategic objectives into a coherent set of performance measures. The
Balanced Scorecard is a management system that can motivate breakthrough improvements in such critical
areas as product, process, customer, and market development.
The BSC presents managers with four different perspectives from which to choose measures. It complements
traditional financial indicators with measures of performance for customers, internal processes, and innovation
and improvement activities. The Scorecard’s measures are grounded in an organization’s strategic objectives
and competitive demands. And, by requiring managers to select a limited number of critical indicators within
each of the four perspectives, the Scorecard helps focus this strategic vision. A balanced Scorecard is a
framework that organizations can use to align business activities to the organization’s strategy and vision
BSC combines both financial and non-financial performance measures to give a ‘balanced’ view of the
organization. Performance measures are established and monitored within each of the following four
perspectives:
• Financial
• Customer
• Internal business processes
• Learning and growth
The Scorecard brings together, in a single management report, many of the seemingly disparate elements of a
company’s competitive agenda: becoming customer oriented, shortening response time, improving quality,
emphasizing teamwork, reducing new product launch times, and managing for the long term
Unlike conventional metrics, the information from the four perspectives provides balance between external
measures like operating income and internal measures like new product development. This balanced set of
measures both reveals the trade-offs that managers have already made among performance measures and
encourages them to achieve their goals in the future without making trade-offs among key success factors. The
balanced Scorecard can serve as the focal point for the organization’s efforts, defining and communicating
priorities to managers, employees, investors, even customers. Although often viewed as a strategic tool, the
balanced Scorecard works equally well at the operational level.
37
BSC can enable companies to track financial results while simultaneously monitoring progress in building the
capabilities and acquiring the intangible assets they would need for future growth. The Scorecard wasn’t a
replacement for financial measures; it was their complement.
Frequently Asked Questions
38
5. FAQs on Broader Topic: Risk and Return
Alternatively, when we are concerned about ex-ante returns the following method is used.
𝑛
𝑅̅𝑖 = ∑ 𝑃𝑖 𝑅𝑖
𝑖=1
(or)
𝑛
𝜎𝑖 = √𝜎𝑖2
39
6. What does a small/high standard deviation of a security indicate?
The smaller the standard deviation the lower the riskiness of the stock and higher the standard deviation higher
is the risk. For a smaller standard deviation, the probability distribution will be tighter.
40
16. How can beta help in investment strategy?
The idea of beta immediately suggests an investment strategy. When the market is moving up, hold high-beta
stocks because they move up more. When the market is moving down, switch to low-beta stocks because they
move down less.
19. How do you decompose total risk into ‘systematic’ and ‘unsystematic’ components?
There are two ways of doing it.
Method-1: Systematic risk is a product of squared beta and market variance whereas unsystematic risk is the
error term.
𝜎𝑖2 = 𝛽𝑖2 𝜎𝑀
2 2
+ 𝜎𝑒𝑖
Method-2: Systematic risk is a product of squared correlation coefficient and security variance whereas
unsystematic risk is the error term.
𝜎𝑖2 = 𝜌𝑖𝑀
2
𝜎𝑖2 + 𝜎𝑒𝑖
2
1. What is ‘covariance’?
Covariance is a measure of the directional relationship between the variability of returns of two securities in the
context of portfolio management.
Method-2: It is calculated by multiplying the correlation between the two variables by the standard deviation
of each variable.
𝜎𝑖𝑗 = 𝜌𝑖𝑗 𝜎𝑖 𝜎𝑗
41
3. What is a ‘scaled covariance’?
The scaled covariance is the coefficient of correlation.
8. What is the relationship between portfolio risk and number of stocks in the portfolio?
If the correlations of stocks were zero or negative, it might help to reduce/eliminate a major portion of the
portfolio risk. However, we may not be able to find stocks with zero or negative correlation all the time.
In that case, we tend to include stocks with smaller correlation coefficients. If we add more number of such
stocks in the portfolio, then the portfolio risk will be minimized.
So, the degree of correlation among the stocks plays an important role in deciding the number of stocks to be
added to a portfolio.
𝑅𝑝 = ∑ 𝑊𝑖 𝑅̅𝑖
𝑖=1
42
10. What is a ‘portfolio beta’? How is it calculated?
Beta for a portfolio of stocks is just the weighted average of the betas of the individual stocks where the weights
are the proportion of amount invested in each stock.
𝑛
𝛽𝑝 = ∑ 𝑊𝑖 𝛽̅𝑖
𝑖=1
3. What are the random events that contribute to the diversifiable risk?
The part of a stock’s risk that can be eliminated is called diversifiable risk. Diversifiable risk is caused by such
random events as lawsuits, strikes, successful and unsuccessful marketing programs, winning or losing a major
contract, and other events that are unique to a particular firm. Because these events are random, their effects
on a portfolio can be eliminated by diversification – favorable events in one firm will offset the unfavorable
events in another.
5. What is the required rate of return as per CAPM-SML approach? How do you calculate?
As per CAPM-SML, any stock’s required rate of return is equal to the risk-free rate of return plus a beta-adjusted
market risk premium.
𝐸(𝑅𝑖 ) = 𝑅𝑓 + 𝛽𝑖 (𝑅𝑀 − 𝑅𝑓 )
43
6. What is characteristic market line?
The characteristic line represents the average relationship between the stock’s return and the market’s return.
The slope tells us on the average how much of a change in stock return has come about with a given change in
market return. The slope is an indication of how much variation in the return on the stock goes along with
variation in the return on the market.
9. What is capital market line (CML)? How do you calculate the expected returns by using CML?
The CML is a line that is used to show the rates of return, which depends on risk-free rates of return and levels
of risk for a specific portfolio.
(𝑅𝑀 − 𝑅𝑓 )
𝐸(𝑅𝑝 ) = 𝑅𝑓 + 𝜎𝑝
𝜎𝑀
44
13. What is a ‘Tangency Portfolio’?
Tangency portfolio, also known as market portfolio, is defined as the risky portfolio with the highest possible
Sharpe ratio. The steepest Capital Allocation Line (CAL), also known as Capital Market Line (CML), passes through
the Tangency portfolio.
14. What is ‘Tangency Point’ in the context of Capital Market Line (CML)?
The tangency point shows the optimal portfolio of risky assets which is known as the market portfolio.
45
16. What is Minimum Variance Frontier?
The minimum variance frontier shows the minimum variance that can be achieved for a given level of expected
return.
46
6. FAQs on Broader Topic: Capital Structure, Working Capital, and Dividend Policy
01. What is capital structure? Name a few financial instruments used to raise capital?
Capital structure is a term which is referred to be the mix of sources from which the long-term funds are
raised. Financial instruments used to raise capital include, Ordinary Shares, Preference Shares, Bonds,
Warrants etc
05. How do you calculate the cost of equity using CAPM model?
The cost of equity is the return that an investor expects to receive from an investment in a business. This
cost represents the amount the market expects as compensation in exchange for owning the stock of the
business, with all the associated ownership risks.
Cost of equity = Risk free rate of return + [Beta × (market rate of return – risk free rate of return)]
06. How do you calculate Cost of Debt? Why is cost of debt considered only post tax?
To calculate the cost of debt, a company must determine the total amount of interest it is paying on each
of its debts for the year. Then it divides this number by the total of all of its debt. The result is the cost of
debt. The cost of debt formula is the effective interest rate multiplied by (1 - tax rate).
Cost of Debt = Interest rate * (1-Tax Rate)
Cost of debt is considered post-tax because the interest paid on debt provides tax advantage.
47
09. How do you calculate the Cost of Debentures, using approximation method?
Cost of Debentures = Kd = [ I (1-t) + ((RV-NP)/n)] / (RV+NP)/2
11. What is meant by leverage? Why is increasing leverage also indicative of increasing risk?
Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset
base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money
specifically, the use of various financial instruments or borrowed capital to increase the potential return of
an investment. Leverage can also refer to the amount of debt a firm uses to finance assets.
The business borrows money with the promise to pay it back. Debt increases the company's risk of
bankruptcy. But if the leverage is used correctly, it can also increase the company's profits and returns
specifically its return on equity.
13. What is financial leverage? How do you calculate it? What does high/ low financial leverage indicate?
Financial leverage refers to the use of debt in the capital structure, with a view to enhance earnings to
equity shareholders (since interest on debt is deductible as business expense, for estimating taxable profits.
Financial leverage = EBIT / (EBIT – Interest – pre-tax preference dividend)
High financial leverage indicates usage of more debt by company. Low financial leverage indicates usage of
less debt by company.
17. What is Miller and Modigliani hypothesis? What is the underlying logic under MM hypothesis?
MM hypothesis tells that firm's value is independent of capital structure. The same return can be received
by shareholders with the same risk.
MM Approach uses the logic of arbitrage to prove that two firms with similar risk (business risk) and return
cannot have value different from each other in long run.
18. What is net operating income theory (NOI)? What is the underlying logic under net operating income
theory (NOI)?
48
NOI, an approach in which both the value of the firm and the weighted average cost are independent of
capital structure.
NOI uses the logic that the advantage of using more of cheaper source of fund (debt) is completely offset
by the higher compensation demanded by equity owners. Equity owners demand higher return as they are
exposed to higher financial risk.
19. Explain a capital structure relevance theory. (Net income (NI) approach)
Net income (NI) approach is an approach in which both cost of debt, and equity are independent of capital
structure. Further the cost of debt is lower than cost of equity. Hence more the debt firm employs more will
be its value. In contrast to NOI approach, the overall cost of capital will come down with the infusion of
cheaper debt.
01. What is working Capital? Explain the different types of working capital?
Working Capital: Capital required for day-to-day operational requirement of a business unit is called
working Capital.
Working capital is basically of two types i) Gross working capital and ii) Net working capital
i. Gross Working Capital: The total of current assets is called the Gross working capital
ii. Net Working Capital: The excess of current assets over the current liabilities is called net working
capital. (Current Assets – Current liabilities) It refers to the portion of working capital financed by long-
term sources of funds (which includes capital and reserves)
06. Calculate net- working capital in the following two cases and explain?
i.Current assets are Rs. 60 lakhs and current liabilities are Rs. 40 lakhs.
ii.Long term sources of funds including the Capital and reserves are Rs. 100 lakhs and non-current
liabilities are Rs 80 lakhs
49
Net working capital can be defined as two ways.
Amount in Lakhs of Amount in Lakhs of
LIABILITIES ASSETS
Rupees Rupees
Capital and Reserves 100 Fixed and Non-Current
80
& Assets
Long Term Liabilities
CURRENT ASSETS 60
CURRENT LIABILITIES 40
TOTAL 140 TOTAL 140
ii.Long term sources of funds including Capital and Reserves ( - ) Non- current assets including
the fixed assets = Rs 100 lakhs - Rs 80 lakhs = Rs 20 Lakhs.
Step. I: In both the methods, first the working capital gap is to be calculated. Working Capital Gap =
Current assets – (Current liabilities excluding short term Bank Borrowings)
Step. II: Subtract MARGIN from the above. Margin for Method No I is 25% on Working Capital
Gap and for Method No II is 25% on Current assets.
10. Explain the method of financing working capital for MSME units?
Working Capital finance for MSME units is done as per Nayak Committee recommendations. It is called
Turnover method. Under this method, at first the projected turnover of the MSME unit shall be acceptable
to both the Bank and Customer. The working capital finance shall be 20% of the projected turnover,
provided the customer brings in a margin (own funds) to the extent of 5% of the projected turnover.
50
12. What is ABC analysis?
ABC Analysis, is an inventory categorization method, which classifies the inventory primarily into three
distinct categories A- Small volume of stock with highest value; B- slightly higher volume of goods with
moderate value; and C- large volume of stock with lower value. ABC inventory management technique helps
business entrepreneurs and stock owners identify the essential products in the stock and prioritize their
management based on the value. The inventory analysis is based on the Pareto Principle, which states that
80% of the sales volume gets generated from the top 20% of the items.
13. Define the term “Receivables”. Explain their importance in working capital management?
Receivables, also called as accounts receivable, are debts owed to a firm by its customers for goods or
services used or delivered but not yet paid for. Receivables are created by expanding the line of credit to
customers and are listed as current assets on the company's balance sheet.
Accounts receivable management incorporates in all about ensuring that customers pay their invoices.
Good receivables management helps prevent overdue payment or non-payment. It is therefore a quick and
effective way to strengthen the company's financial or liquidity position.
14. What does Debtor’s turnover indicate? How is it calculated? Should it be higher or lower?
Debtor’s turnover ratio is also known as Receivables Turnover Ratio, Debtor’s Velocity and Trade
Receivables Ratio. It is an activity ratio that finds out the relationship between net credit sales and average
trade receivables of a business. Debtor’s Turnover is arrived at by dividing the net credit sales by average
receivables. Higher turnover indicates, faster recovery and good demand and quality of goods. It also speaks
on quality of the debtors.
15. What does Creditor’s turnover indicate? How is it calculated? Should it be higher or lower?
Creditor’s turnover ratio is an activity ratio that finds out the relationship between net credit purchases and
average trade payables of a business.
It finds out how efficiently the assets are employed by a firm and indicates the average speed with which
the payments are made to the trade creditors.
Creditor’s turnover is calculated by dividing the Net Credit purchases by Average trade payables.
A high ratio may indicate Low credit period available to the business or early payments made by the
business.
16. What is Inventory turnover ratio? Explain its significance with suitable example.
Inventory turnover ratio (ITR) is an activity ratio and is a tool to evaluate the liquidity of company’s
inventory. It measures how many times a company has sold and replaced its inventory during a certain
period of time. Inventory turnover ratio is computed by dividing the cost of goods sold by average inventory
at cost. A high ratio indicates fast moving inventories and a low ratio, on the other hand, indicates slow
moving or obsolete inventories in stock.
51
20. Current assets are Rs 50 lakhs. It includes stock of Rs 20 lakhs. Current liabilities are Rs 30 lakhs. It
includes existing cash credit / Overdraft limit of Rs 10 lakhs. Calculate the following.
a) Current Ratio.
b) Quick / Acid Test Ratio
c) Gross Working Capital.
d) Net Working Capital
e) Working Capital Gap
f) Maximum Permissible Bank finance as per Tandon committee Method – I
g) Maximum Permissible Bank finance as per Tandon committee Method – II
03. What is the difference between Dividend payout ratio and Dividend per share?
Dividend pay-out ratio is a percentage measuring the percent of profits declared as dividend. Whereas
Dividend per share is expressed in Rupees. It states the amount of dividend that each shareholder will get.
05. What is the relation between Dividend payout ratio and Retention ratio?
The summation of both ratios gives us one. i.e., they measure two different aspects of the same equation.
06. Is the dividend paid on common stock taxable to shareholders? What about Preferred stock? Is it tax
deductible for the company?
Earlier a company declaring dividends used to pay Dividend distribution tax (DDT). However, the Finance
Act, 2020 changed the method of dividend taxation. The DDT liability on companies and mutual funds stand
withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of
Rs 10 lakh (Section 115BBDA) also stands withdrawn. Hence forth, all dividend received on or after 1 April
2020 are taxable in the hands of the investor/shareholder.
The Finance Act, 2020 also imposes a TDS on dividend distribution by companies and mutual funds on or
after 1 April 2020. The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a
52
company or mutual fund. However, as a COVID-19 relief measure, the government reduced the TDS rate to
7.5% for distribution from 14 May 2020 until 31 March 2021
07. Does the dividend paid by the company appear in the Profit and Loss statement? Is it a revenue or an
expense?
Dividend paid by a company is not shown in profit and loss statement. Dividend is an appropriation of profits
made in retained earnings statement. Dividend is neither revenue nor an expense.
53
14. What are Bonus shares?
A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to
existing shareholders. A company may decide to distribute further shares as an alternative to increasing the
dividend pay-out. For example, a company may give one bonus share for every five shares held.
15. How Bonus shares are issued? What is the source of funds for the issue of Bonus shares?
Bonus shares are issued to the existing shareholders, as fully paid shares, in proportion to their existing
holdings. Section 63 of Companies Act 2013, provides that a company may issue fully paid-up bonus
shares to its members, out of;
a) Its free reserves,
b) The securities premium account, or
c) The capital redemption reserve account.
16. What impact does Bonus issue has on the Balance sheet of a company?
A bonus issue is a simple reclassification of reserves, which causes an increase in the share capital of
the company on the one hand and an equal decrease in other reserves. The total equity of
the company therefore remains the same although its composition is changed.
18. What is the impact of Stock splits on the financial statements of a company?
A stock split will not change the general ledger account balances and therefore will not change the Rupee
value reported in the stockholders' equity section of the balance sheet. Although the number
of shares increase, the total Rupee value will not change.
However, a stock's price is affected by a stock split. After a split, the stock price will be reduced, since the
number of shares outstanding has increased. Thus, although the number of outstanding shares increases
and the price of each share changes, the company's market capitalization remains unchanged.
20. Under what circumstances companies are permitted to buy back their shares?
Sections 68 to 70 of the Companies Act, 2013 and Rule 17 of the Companies (Share Capital and
Debentures) Rules, 2014 deal with buy-back of shares. A company may purchase its shares out of:
• its free reserves;
• the securities premium account; or
• the proceeds of the issue of any shares or other specified securities.
However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the
same kind of shares.
Buyback of shares can be undertaken only when the company is solvent, and is permitted to do so as per
the Articles of association. A board resolution is required to be passed for buy back of shares and it should
be approved in AGM.
-x-x-x-
54
7. FAQs on Excel
07.What are Excel functions? How many types of functions are there?
Various functions are available in Excel that can be used extensively, right from the basic business data storage
to the complicated financial model building projects.
To obtain the required results, every function has different arguments for which relevant information is to be
provided.
55
These functions are broadly classified under 6 categories.
Simpler functions are grouped under the categories like basic functions; logical, analysis and reference
functions; financial functions; organizing functions;
Advanced and complicated functions are grouped under the categories like what-if analysis and decision-making
functions; and trouble-shooting (presentation) functions.
56
21. What is Rand function?
It returns an evenly distributed random real number greater than or equal to 0 and less than 1. This changes
every time the excel sheet is opened
25. What functions are included under the logical, analysis and reference functions category?
Logical, analysis and reference functions include And, Not, Or, Choose, Isblank, Iferror, If, Lookup, Hlookup,
Vlookup, Match, Index, and Offset functions.
41. What functions are included under the financial functions category?
Financial functions include Rate, Nper, PV, FV, Pmt, Ipmt, Ppmt, Cumipmt, Cumprinc, NPV, IRR, SLN, and DDB
functions.
58
46. What is Pmt function?
It calculates the payment for a loan based on constant payments and a constant interest rate. The syntax is
=pmt(rate, nper, pv, [fv], [type])
55. What functions are included under the organizing functions category?
Organizing functions include Find, Search, Today, Left, Right, Trim, Yearfrac, Concatenate, and Hyperlink
functions.
59
57. What is Search function?
It returns the location of one text string in another. It is a function or process of finding letters, words, files,
web pages or other date. Many operating systems, software programs and websites contain a search or find
feature to locate data
65. What functions are included under the what-if analysis and decision-making functions category?
What-if analysis and decision-making functions include Sumproduct, Data tables, Scenario-manager, Goal-seek,
and Solver functions.
61