Corporate Corporate FinanceFinance

PIYOOSH BAJORIAPIYOOSH BAJORIA

Time Value of Money - Time Value of Money - CompoundingCompounding

PIYOOSH BAJORIA

Time Value of Money - Time Value of Money - DiscountingDiscounting

PIYOOSH BAJORIA

Time Value of Money - Time Value of Money - AnnuityAnnuity

PIYOOSH BAJORIA

Bond Valuation – Yield to Bond Valuation – Yield to MaturityMaturity

Yield to Maturity (YTM)Yield to Maturity (YTM) refers to the  refers to the expected rate of return a bondholder expected rate of return a bondholder will receive if they hold a bond all the will receive if they hold a bond all the way until maturity while reinvesting way until maturity while reinvesting all coupon payments at the bond yield. all coupon payments at the bond yield.

Another way of putting it is that the Another way of putting it is that the yield to maturity is the rate of return yield to maturity is the rate of return that makes the present value (PV) of that makes the present value (PV) of the cash flow generated by the bond the cash flow generated by the bond equal to the price. equal to the price.

PIYOOSH BAJORIA

Bond Valuation – YTM Bond Valuation – YTM FormulaFormula

PIYOOSH BAJORIA

Ratio Analysis – Liquidity Ratio Analysis – Liquidity RatiosRatios

Current Ratio – Indicates the short Current Ratio – Indicates the short term liquidity position of the firmterm liquidity position of the firm

Formula:Formula:

Current Assets/Current LiabilitiesCurrent Assets/Current Liabilities

PIYOOSH BAJORIA

Ratio Analysis – Liquidity Ratio Analysis – Liquidity RatiosRatios

Quick Ratio – More stringent Quick Ratio – More stringent indicator of short term liquidity of indicator of short term liquidity of the firmthe firm

Formula:Formula:

(Current Assets – Inventories)/Current (Current Assets – Inventories)/Current LiabiltiesLiabilties

PIYOOSH BAJORIA

Ratio Analysis – Turnover Ratio Analysis – Turnover RatiosRatios

Accounts Receivable Turnover Ratio – Accounts Receivable Turnover Ratio – Indicates how many times receivables Indicates how many times receivables are generated and collected during are generated and collected during the yearthe year

Formula:Formula:

Net Credit Sales/Average Accounts Net Credit Sales/Average Accounts ReceivableReceivable

PIYOOSH BAJORIA

Ratio Analysis – Turnover Ratio Analysis – Turnover RatiosRatios

Average Collection Period – Average Collection Period – Indicates the number of days it takes Indicates the number of days it takes to collect the accounts receivableto collect the accounts receivable

Formula:Formula:

360/Average Accounts Receivable360/Average Accounts Receivable

PIYOOSH BAJORIA

Ratio Analysis – Turnover Ratio Analysis – Turnover RatiosRatios

Inventory Turnover Ratio – Indicates Inventory Turnover Ratio – Indicates the efficiency of the firm in the efficiency of the firm in managing inventoriesmanaging inventories

Formula:Formula:

Cost of Goods Sold/Average InventoryCost of Goods Sold/Average Inventory

PIYOOSH BAJORIA

Ratio Analysis – Turnover Ratio Analysis – Turnover RatiosRatios

Asset Turnover Ratio – Indicates the Asset Turnover Ratio – Indicates the efficiency of the firm in using the efficiency of the firm in using the assets for generating a volume of assets for generating a volume of sales.sales.

Formula:Formula:

Sales/Average AssetsSales/Average Assets

PIYOOSH BAJORIA

Ratio Analysis – Profitability Ratio Analysis – Profitability RatiosRatios

Gross Profit Margin – Indicates the Gross Profit Margin – Indicates the relation between production and relation between production and selling price. It is also a measure of selling price. It is also a measure of the efficiency of the production the efficiency of the production process of the firm.process of the firm.

Formula:Formula:

Gross Profit/Net SalesGross Profit/Net SalesPIYOOSH BAJORIA

Ratio Analysis – Profitability Ratio Analysis – Profitability RatiosRatios

Operating Profit Margin – Indicates Operating Profit Margin – Indicates the efficiency of the firm in the efficiency of the firm in managing its production costs as managing its production costs as well as the overheads.well as the overheads.

Formula: Formula:

Operating Profit/Net SalesOperating Profit/Net Sales

PIYOOSH BAJORIA

Ratio Analysis – Profitability Ratio Analysis – Profitability RatiosRatios

Net Profit Margin – Indicates the Net Profit Margin – Indicates the efficiency of the firm in managing its efficiency of the firm in managing its production expenses, overheads, production expenses, overheads, financing costs and taxes.financing costs and taxes.

Formula:Formula:

Net Profit/Net SalesNet Profit/Net Sales

PIYOOSH BAJORIA

Ratio Analysis – Leverage Ratio Analysis – Leverage RatiosRatios

Debt-Equity Ratio – Is a measure of Debt-Equity Ratio – Is a measure of the capital structure of the firm and the capital structure of the firm and indicates the amount of debt raised indicates the amount of debt raised for every rupee of equity.for every rupee of equity.

Formula:Formula:

Debt/EquityDebt/Equity

PIYOOSH BAJORIA

Ratio Analysis – Leverage Ratio Analysis – Leverage RatiosRatios

Debt/Assets Ratio – Indicates the Debt/Assets Ratio – Indicates the percentage of assets of the firm percentage of assets of the firm financed by debt.financed by debt.

Formula:Formula:

Debt/AssetsDebt/Assets

PIYOOSH BAJORIA

Ratio Analysis – Coverage Ratio Analysis – Coverage RatiosRatios

Interest Coverage Ratio – Indicates Interest Coverage Ratio – Indicates the ability of the firm to service its the ability of the firm to service its interest obligations.interest obligations.

Formula:Formula:

EBIT/Interest ExpenseEBIT/Interest Expense

PIYOOSH BAJORIA

Ratio Analysis – Coverage Ratio Analysis – Coverage RatiosRatios

Debt Service Coverage Ratio – Indicates Debt Service Coverage Ratio – Indicates the ability of the firm to meet its total the ability of the firm to meet its total obligations.obligations.

Formula:Formula:

(PAT + Depreciation + Non-cash Charges + (PAT + Depreciation + Non-cash Charges + Interest)/ (Interest + Repayment of term Interest)/ (Interest + Repayment of term loan)loan)

PIYOOSH BAJORIA

Ratio Analysis – Dividend Ratio Analysis – Dividend RatiosRatios

Dividend Pay-out Ratio – Is the Dividend Pay-out Ratio – Is the percentage of the after tax profits percentage of the after tax profits which a firm pays out as dividend to which a firm pays out as dividend to its shareholders.its shareholders.

Formula:Formula:

Total Dividend Paid/PATTotal Dividend Paid/PAT

PIYOOSH BAJORIA

Ratio Analysis – Return Ratio Analysis – Return on Assetson Assets

Return on Assets (ROA) – Is the Return on Assets (ROA) – Is the indicator of the earning ability of the indicator of the earning ability of the firm on a given asset base.firm on a given asset base.

Formula:Formula:

Net Profit/AssetsNet Profit/Assets

PIYOOSH BAJORIA

Ratio Analysis – Return on Ratio Analysis – Return on EquityEquity

Return on Equity – Is the indicator of Return on Equity – Is the indicator of the earning ability of the firm on the the earning ability of the firm on the shareholders funds.shareholders funds.

Formula:Formula:

Net Income/Average EquityNet Income/Average Equity

PIYOOSH BAJORIA

Ratio Analysis – Per Ratio Analysis – Per SharesShares

EPS = Net Profit/No of outstanding EPS = Net Profit/No of outstanding sharesshares

DPS = Total Dividend/No of DPS = Total Dividend/No of outstanding sharesoutstanding shares

BVPS = Total Equity/No of BVPS = Total Equity/No of outstanding shares outstanding shares

PIYOOSH BAJORIA

Ratio Analysis – Ratio Analysis – Valuation RatiosValuation Ratios

P/E Ratio – Is the indicator of how P/E Ratio – Is the indicator of how many times the market is willing to many times the market is willing to pay with respect to the earningspay with respect to the earnings

Formula:Formula:

Market Price per share/EPSMarket Price per share/EPS

PIYOOSH BAJORIA

Ratio Analysis – Ratio Analysis – Valuation RatiosValuation Ratios

Price/Book Ratio – Is the indicator of Price/Book Ratio – Is the indicator of how many times the market is how many times the market is willing to pay with respect to the willing to pay with respect to the intrinsic value of the firmintrinsic value of the firm

Formula:Formula:

Market Price per share/BVPSMarket Price per share/BVPS

PIYOOSH BAJORIA

DuPont ChartDuPont Chart

PIYOOSH BAJORIA

Extended DuPont ChartExtended DuPont Chart

PIYOOSH BAJORIA

Risk and ReturnRisk and Return Systematic Risk – Non-diversifiable RiskSystematic Risk – Non-diversifiable Risk

InflationInflation Interest Rate RiskInterest Rate Risk Political RiskPolitical Risk Natural CalamitiesNatural Calamities ScamsScams International EventsInternational Events

Unsystematic Risk – Diversifiable RiskUnsystematic Risk – Diversifiable Risk Business RiskBusiness Risk Financial RiskFinancial Risk Default or Insolvency RiskDefault or Insolvency Risk

PIYOOSH BAJORIA

BetaBeta Beta measures the relative risk associated Beta measures the relative risk associated

with any given stock or portfolio in with any given stock or portfolio in relation to the market portfolio.relation to the market portfolio.

The market portfolio represents the most The market portfolio represents the most diversified portfolio of risky assets an diversified portfolio of risky assets an investor could buy as it includes all the investor could buy as it includes all the risky assets.risky assets.

Beta = Non- diversifiable risk of an asset/Beta = Non- diversifiable risk of an asset/ Risk of market portfolioRisk of market portfolio

The beta co-efficient is a measure of non-The beta co-efficient is a measure of non-diversifiable or systematic riskdiversifiable or systematic risk

PIYOOSH BAJORIA

Beta (cont.)Beta (cont.)

A beta co-efficient of more than A beta co-efficient of more than “1.00” indicates above average risk. “1.00” indicates above average risk. Such stock are also called Such stock are also called aggressive stocks.aggressive stocks.

A beta co-efficient of less than A beta co-efficient of less than “1.00” indicates below average risk. “1.00” indicates below average risk. Such stocks are also called defensive Such stocks are also called defensive stocks.stocks.

PIYOOSH BAJORIA

CAPM and SMLCAPM and SML

RRii = R = Rff + + ββ (R (Rmm – R – Rff))

PIYOOSH BAJORIA