Interview Questionnaire

Subject Question:

1. Tell us about your project?2. Related question in project?3. Your favourite topic in finance?4. Related question in favourite finance topic?5. What the company’s share prices reflect?6. What is shareholders value maximisation?7. What is your opinion on Indian economy?8. Give some example of composite ratio –

RETRUN ON EQUITY CAPITAL (ROE): Net Profit after Taxes / Tangible Net Worth

EARNING PER SHARE (EPS): EPS indicates quantum of net profit of the year that would be ranking for dividend for each share of the company being held by the equity share holders.

- Net profit after Taxes and Preference Dividend/ No. of Equity Shares

PRICE EARNING RATIO: PE Ratio indicates the number of times the Earning Per Share is covered by its market price.- Market Price Per Equity Share/Earning Per Share

DEBT SERVICE COVERAGE RATIO: This ratio is one of the most important one which indicates the ability of an enterprise to meet its liabilities by way of payment of installments of Term Loans and Interest thereon from out of the cash accruals and forms the basis for fixation of the repayment schedule in respect of the Term Loans raised for a project. The Ideal DSCR Ratio is considered to be 2.

PAT + Depr. + Annual Interest on Long Term Loans & Liabilities -----------------------------------------------------------------------------------------------------------------------------------Annual interest on Long Term Loans & Liabilities + Annual Ins. payable on Long Term Loans & Liabilities

9. Important Ratios?

Balance Sheet Ratio P&L Ratio or Income/Revenue Statement Ratio

Balance Sheet and Profit & Loss Ratio

Financial Ratio Operating Ratio Composite RatioCurrent RatioQuick Asset RatioProprietary RatioDebt Equity Ratio

Gross Profit RatioOperating RatioExpense RatioNet profit Ratio

Fixed Asset Turnover Ratio, Return on Total Resources Ratio,Return on Own Funds Ratio,

Stock Turnover Ratio

Earning per Share Ratio, Debtors’ Turnover Ratio,

10. Format of balance sheet for ratio analysis

LIABILITIES ASSETSNET WORTH/EQUITY/OWNED FUNDSShare Capital/Partner’s Capital/Paid up Capital/ Owners FundsReserves ( General, Capital, Revaluation & Other Reserves)Credit Balance in P&L A/c

FIXED ASSETS : LAND & BUILDING, PLANT & MACHINERIESOriginal Value Less DepreciationNet Value or Book Value or Written down value

LONG TERM LIABILITIES/BORROWED FUNDS : Term Loans (Banks & Institutions)Debentures/Bonds, Unsecured Loans, Fixed Deposits, Other Long Term Liabilities

NON CURRENT ASSETSInvestments in quoted shares & securitiesOld stocks or old/disputed book debtsLong Term Security DepositsOther Misc. assets which are not current or fixed in nature

CURRENT LIABILTIESBank Working Capital Limits such as CC/OD/Bills/Export CreditSundry /Trade Creditors/Creditors/Bills Payable, Short duration loans or depositsExpenses payable & provisions against various items

CURRENT ASSETS : Cash & Bank Balance, Marketable/quoted Govt. or other securities, Book Debts/Sundry Debtors, Bills Receivables, Stocks & inventory (RM,SIP,FG) Stores & Spares, Advance Payment of Taxes, Prepaid expenses, Loans and Advances recoverable within 12 monthsINTANGIBLE ASSETSPatent, Goodwill, Debit balance in P&L A/c, Preliminary or Preoperative expenses

11. Basics of options? Call option & Put option?

Options are a type of derivative, which simply means that their value depends on the value of an underlying investment. In most cases, the underlying investment is a stock, but it can also be an index, a currency, a commodity, or any number of other securities. A stock option is a contract that guarantees the investor who has purchased it the right, but not the obligation, to buy or sell 100 shares of the underlying stock at a fixed price prior to a certain date. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to

the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash.

There are two basic forms of options. A call option provides the holder with the right to buy 100 shares of the underlying stock at the strike price, and a put option provides the holder with the right to sell 100 shares of the underlying stock at the strike price. If the price of a stock is going to rise, a call option allows the holder to buy stock at the price before the increase occurs. Similarly, if the price of a stock is falling, a put option allows the holder to sell at the earlier, higher price.

For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. The upside, however, is unlimited. Options, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option.

Options are most frequently used by individual investors as either leverage or insurance. As leverage, options allow the holder to control equity in a limited capacity without paying the full price of buying shares up front. The difference can be invested elsewhere until the option is exercised. As insurance, options can protect against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time.

Stock options also form the basis for more complicated trading strategies that will be discussed only briefly here.

It is important to remember that options can be an extremely risky investment, and they are certainly not appropriate for beginning investors. Only the most experienced investors should include options in their investment strategy, and even the most knowledgeable investors should prepare for the possibility of substantial losses.

Advantages and Disadvantages of Options

Advantages:• An investor can gain leverage in a stock without committing to a trade.• Option premiums are significantly cheaper on a per-share basis than the full price of the underlying stock. • Risk is limited to the option premium (except when writing options for a security that is not already owned). • Options allow investors to protect their positions against price fluctuations.

Disadvantages:• The costs of trading options (including both commissions and the bid/ask spread) is significantly higher on a

percentage basis than trading the underlying stock, and these costs can drastically eat into any profits.• Options are very complex and require a great deal of observation and maintenance.• The time-sensitive nature of options leads to the result that most options expire worthless. Making money

by trading options is extremely difficult, and the average investor will fail.• Some option positions, such as writing uncovered options, are accompanied by unlimited risk.

Option Components -An option for a given stock has three main components: an expiration date, a strike price and a premium. The expiration date tells the month in which the option will expire. Options expire one day after the third Friday of the expiration month. The strike price is the price at which the holder is allowed to buy or sell the underlying stock at a later date. The premium is amount that the holder must pay for the right to exercise the option. Because the holder acquires the right to trade 100 shares, the total cost of the option, if exercised, is 100 times the premium.

In order to relate them to the price of the underlying stock at any given time, options are classified as in-the-money, out-of-the-money or at-the-money. A call option is in-the-money when the stock price is above the strike price and out-of-the-money when the stock price is below the strike price. For put options, the reverse is true. When the stock price and strike price are equal, both types of options are considered at-the-money.

Of course, when calculating profit and loss, the premium, as well as taxes and commissions must be factored in. Therefore, an option must be far enough in-the-money to cover these costs in order to be profitable.

Valuing and Pricing Options

The price of an option is primarily affected by:

• The difference between the stock price and the strike price• The time remaining for the option to be exercised• The volatility of the underlying stock

Affecting the premium to a lesser degree are factors such as interest rates, market conditions, and the dividend rate of the underlying stock. Because the value of an option decreases as its expiration date approaches and becomes worthless after that date, options are considered “wasting assets”. The total value consists of intrinsic value, which is simply how far in-the-money an option is, and time value, which is the difference between the price paid and the intrinsic value. Understandably, time value approaches zero as the expiration date nears. The Black-Scholes model, based on wave equations from physics, is used to calculate the theoretical value of options. The formula reveals the time value remaining in an option and take into account the pricing factors listed above. Over time, option prices approach their theoretical values. In general, premiums should increase as the volatility of the underlying stock increases because the greater fluctuation makes the right to buy in the future at the current price more valuable. Volatility can be historical or implied. Historical volatility is based on the past performance of the stock. Implied volatility is a reflection of the way options are being priced in general.

Exercising OptionsExercising an option consists of buying (in the case of a call option) or selling (in the case of a put option) 100 shares of the underlying stock at the strike price. Options are classified as American or European depending on the way in which the holder may exercise them. The holder may exercise an American style option at any point between the time of purchase and the expiration date. A European style option, on the other hand, cannot be exercised until expiration. Most stock options are American style, but some index options are European style.

12. Financial appraisal of a project – - Calculation of Internal Rate of Return (IRR) on the basis of projected profitability

- Calculation of Debt Service Coverage Ratio (DSCR)- Details of assumptions made to prepare projected financials- Sensitivity Analysis – It is done to check the profitability if any projected targets not achieved.

13. Brief any recent M&A deal (Nokia & Microsodt deal)The sale of Nokia's phone business marks the exit of a 150-year-old company that once dominated the global cell phone market. Two years after joining Microsoft's Windows Phone software, a weakened Nokia finally landed into the arms of the U.S. software giant, agreeing to sell its main handset business for 5.44 billion euros. Of the total price of 5.44 billion euros, 3.79 billion relates to the purchase of Nokia's Devices & Services business, and 1.65 billion relates to the mutual patent agreement and future option. Nokia remains one of Europe's premier technology brands, even though Apple and Samsung Electronics' ascendancy reduced it to near irrelevancy in Asia and North America in recent years.

Nokia was long the global leader in making mobile phones but has been overtaken by rivals Samsung and Apple as it struggled to establish winning business models & mobile devices and consistently lost in sales and operating profit.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2008 2009 2010 2011 2012

Sales (Eurbn)

Group Devices & Services -3.0

-2.0-1.0

0.0

1.0

2.03.0

4.05.0

6.0

7.0

2008 2009 2010 2011 2012

Operating Profit (Eurbn)

Group Devices & Services

Devices & Services

51%

Location & Commerce

4%

Nokia Seimens Network

45%

Sales(2012) - Segment

2010 2011 2012 2013Nokia Nokia Samsung Samsung

Samsung Samsung Nokia NokiaLG LG iPhone iPhone

Sony-Erricson iPhone ZTE ZTE

Ranking - Mobile Brands

The phone business of Nokia acquired by Microsoft at about one-quarter of its sales in Year 2012, the sale price represented a "fire sale level,”. Nokia - reduced to its networks business, navigation offerings and patent portfolio after the sale - is still the world's No. 2 mobile phone maker behind Samsung, but it is not in the top five in the more lucrative and faster-growing smartphone market. Nokia, which had a 40% share of the handset market in 2007, now has a mere 15% market share, with an even smaller 3% share in smartphones.

General Question:

14. Tell us about yourself?15. Walk me through your resume?16. Any actual work experience?17. Why did you choose this career?18. What goals do you have in your career and plan to achieve?19. Are you a team player?20. Why should I hire you?21. What do you see yourself doing five years from now?22. Have you ever had a conflict with a boss or professor? How did you resolve it?23. What is your greatest strength?24. What is your greatest weakness?25. Do you enjoy doing independent research?26. How much training do you think you'll need to become a productive employee?27. What do you know about our company?

Net Present ValueNPV and IRR are two methods for making capital-budget decisions, or choosing between alternate projects and investments when the goal is to increase the value of the enterprise and maximize shareholder wealth. Defining the NPV method is simple: the present value of cash inflows minus the present value of cash outflows, which arrives at a dollar amount that is the net benefit to the organization. 

To compute NPV and apply the NPV rule, the authors of the reference textbook define a five-step process to be used in solving problems:

1.Identify all cash inflows and cash outflows.2.Determine an appropriate discount rate (r). 3.Use the discount rate to find the present value of all cash inflows and outflows. 4.Add together all present values. (From the section on cash flow additivity, we know that this action is appropriate since the cash flows have been indexed to t = 0.)5.Make a decision on the project or investment using the NPV rule: Say yes to a project if the NPV is positive; say no if NPV is negative. As a tool for choosing among alternates, the NPV rule would prefer the investment with the higher positive NPV.

The Internal Rate of ReturnThe IRR, or internal rate of return, is defined as the discount rate that makes NPV = 0. Like the NPV process, it starts by identifying all cash inflows and outflows. However, instead of relying on external data (i.e. a discount rate), the IRR is purely a function of the inflows and outflows of that project. The IRR rule states that projects or investments are accepted when the project's IRR exceeds a hurdle rate. Depending on the application, the hurdle rate may be defined as the weighted average cost of capital.

Which is a better measure for capital budgeting, IRR or NPV?

In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages.

All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings. However, there are a number of projects for which using IRR is not as effective as using NPV to discount cash flows. IRR's major limitation is also its greatest strength: it uses one single discount rate to evaluate every investment. 

Although using one discount rate simplifies matters, there are a number of situations that cause problems for IRR. If an analyst is evaluating two projects, both of which share a common discount rate, predictable cash flows, equal risk, and a shorter time horizon, IRR will probably work. The catch is that discount rates usually change substantially over time. For example, think about using the rate of return on a T-bill in the last 20 years as a discount rate. One-year T-bills returned between 1% and 12% in the last 20 years, so clearly the discount rate is changing. 

Without modification, IRR does not account for changing discount rates, so it's just not adequate for

longer-term projects with discount rates that are expected to vary. (To learn more, read Taking Stock Of Discounted Cash Flow, Anything But Ordinary: Calculating The Present And Future Value Of Annuities and Investors Need A Good WACC.) 

Another type of project for which a basic IRR calculation is ineffective is a project with a mixture of multiple positive and negative cash flows. For example, consider a project for which marketers must reinvent the style every couple of years to stay current in a fickle, trendy niche market. If the project has cash flows of -$50,000 in year one (initial capital outlay), returns of $115,000 in year two and costs of $66,000 in year three because the marketing department needed to revise the look of the project, a single IRR can't be used. Recall that IRR is the discount rate that makes a project break even. If market conditions change over the years, this project can have two or more IRRs, as seen below.

Thus, there are at least two solutions for IRR that make the equation equal to zero, so there are multiple rates of return for the project that produce multiple IRRs. The advantage to using the NPV method here is that NPV can handle multiple discount rates without any problems. Each cash flow can be discounted separately from the others.

Another situation that causes problems for users of the IRR method is when the discount rate of a project is not known. In order for the IRR to be considered a valid way to evaluate a project, it must be compared to a discount rate. If the IRR is above the discount rate, the project is feasible; if it is below, the project is considered infeasible. If a discount rate is not known, or cannot be applied to a specific project for whatever reason, the IRR is of limited value. In cases like this, the NPV method is superior. If a project's NPV is above zero, then it is considered to be financially worthwhile.

So, why is the IRR method still commonly used in capital budgeting? Its popularity is probably a direct result of its reporting simplicity. The NPV method is inherently complex and requires assumptions at each stage - discount rate, likelihood of receiving the cash payment, etc. The IRR method simplifies projects to a single number that management can use to determine whether or not a project is economically viable. The result is simple, but for any project that is long-term, that has multiple cash flows at different discount rates, or that has uncertain cash flows - in fact, for almost any project at all - simple IRR isn't good for much more than presentation value.

For more information on capital budgeting, see Spotting Profitability With ROCE.

Balance Sheet Ratios

Ratio How to Calculate What it Means In Dollars and Cents

Current Current Assets Measures solvency:Current Liabilities

Quick Cash + Accounts Receivable Measures liquidity:Current Liabilities

Debt-to-Worth Total Liabilities Measures financial risk:Net Worth

Income Statement Ratios

Gross Margin Gross Profit Measures profitability at the Gross Profit level:Sales

Net Margin Net Profit Before Tax Measures profitability at the Net Profit level:Sales

Overall Efficiency Ratios

Sales-To-Assets Sales Measures the efficiency of Total Assets in generatingTotal Assets sales

Return On Net Profit Before Tax Measures the efficiency of Total Assets in generating NetAssets Total Assets Profit:

Return On Net Profit Before Tax Measures the efficiency of Net Worth in generating NetInvestment Net Worth Profit:

Specific Efficiency Ratios

Inventory Cost of Goods Sold Measures the rate at which Inventory is being used on anTurnover Inventory annual basis.

Inventory 360 Converts the Inventory Turnover ratio into an average "daysTurn-Days Inventory Turnover inventory on hand" figure.

Accounts Sales Measures the rate at which Accounts Receivable are beingReceivable Accounts Receivable collected on an annual basis.Turnover

Average 360 Converts the Accounts Receivable Turnover ratio into theCollection A/RTurnover average number of days the company must wait for itsPeriod Accounts Receivable to be paid.

Accounts Cost of Goods Sold Measures the rate at which Accounts Payable are beingPayable Accounts Payable paid on an annual basis.Turnover

Average 360 Converts the Accounts Payable Turnover ratio into thePayment Accounts Payable Turnover average number of days that a company takes to pay itsPeriod Accounts Payable.

TIME VALUE MONEY

Numb

Time Value

of

Annual Compounding

Compounded (m) Times per Year

ContinuousCompounding

er

Money

Formula For:

1

Future Value of a Lump Sum. ( FVIFi,n )

F V = P V ( 1+ i )n FV=PV (1+ im )

nm

FV=PV (e )in

2

Present Value of a Lump Sum. ( PVIFi,n )

PV = FV ( 1+ i )−n PV = FV (1+ im )

−nm

PV= FV (e )−in

3

Future Value of an Annuity. ( FVIFAi,n )

FVA = PMT [( 1+ i)n - 1i ]FVA=PMT [ (1+( i /m))nm−1

i /m ]

4

Present Value of an Annuity. ( PVIFAi,n )

PVA= PMT [1- ( 1+ i)−n

i ] PVA= PMT [1 - ( 1+ ( i /m))−nm

i / m ]

5

Present Value of a Perpetuity.

PV perpetuity = PMTi

PV perpetuity = PMT[(1+i)1/m−1 ]

6

Effective Annual Rate given the APR.

EAR = APR EAR =( 1+ im )

m- 1 EAR = e i−1

7

The length of time required for a PV to grow to a FV.

n = ln (FV/PV )ln (1+i )

n = ln ( FV/PV )

m* ln (1+ im

)

n = 1i

* ln ( FV/PV )

8The APR required for a PV

i=(FVPV )

1/ n−1 i= m * [(FV

PV )1/ (nm)

−1] i = 1n

to grow to a FV.

9

The length of time required for a series of PMT’s to grow to a future amount (FVA).

n = ln [( FVA )(i )

PMT+1]

ln (1+i )n=

ln [( im)(FVA

PMT+ m

i )]m * [ ln (1+ i

m )]

10

The length of time required for a series of PMT’s to exhaust a specific present amount (PVA).

n=−ln [1−

(PVA )( i)PMT ]

ln (1+i) ,

for PVA(i) < PMT

n=−ln [1−

(PVA )( i /m)PMT ]

m ∗ [ ln(1+ im )] ,

for PVA(i/m) < PMT

RISK AND RETURN

1) Rate of return = Amount received - Amount investedAmount invested

2) Expected rate of return ˆ nPi = Probability , ki = Rate of return

k = ∑k i Pi

i=1

Calculator 1) Selecting Mode LR : MODE 52) Clear Data : CST EXE AC3) Insert return before : -22 ALFHA Nj 0.1 MAR …… SHIFT 1 EXE

; DT x

3) Risk or Standard deviation σ = Variance = σ2 = ∑n(k i − kˆ )2 Pi

i =1

Calculator 1) Insert return before : -22 ALFHA Nj 0.1 MAR …… SHIFT 2 EXE; DT xσn

4) Coefficient of variation CV = Risk / Return = σ / x5) Beta coefficient ( β ) Calculator insert Mkt. before : 25.7 ALFHA CFj 40 MAR …… SHIFT 8 EXE

, DT β6) Correlation ( r ) Calculator insert Mkt. before : 25.7 ALFHA CFj 40 MAR …… SHIFT 9 EXE

( -1 < r < 1 ) , DT r

7) Expected return on a portfolio kˆ p = ∑n wi k

ˆi , Risk on a portfolio σ p = ∑n (k pi − k

ˆ p )2 Pii=1 i =1

8) Security Market Line (SML) : ki = kRF + (RPM)bi

Required return = Risk-free return + Premium for risk

Required return on stock i = Risk-free rate of return + (Market risk premium)(Stock i ‘ s beta)

Chapter 10 Stock and Their Valuationˆ

D1

D2

D3

D∞

1) Stock Value = PV of Dividends P0 = (1+k )1 + (1+k )2 + (1+k )3 +...+ (1+k )∞

ˆ D0 (1 + g ) sD1 s s sP = = ˆ D 1

0

2) If g is constant, then ks − g ks − g 3) k s = P0 + g

3) k s = Actual dividend yield + Actual capital gains yield

4)V

ps =

D ps

ork

ps =

D ps

k ps

V ps

5) Use the SML to calculate kS ; kS = kRF + (kM - kRF) bFirm

Chapter 11 The cost of Capital 1) After-tax component cost of debt = kd ( 1-T )

2) The cost of preferred stock ;

k ps =

D ps

Pn

3) Weighted Average Cost of Capital (WACC) ; WACC = wdkd (1-T) + wpskps + wceks

4) ks = kˆ

s = kRF + RP = D1 / P0 + expected g

5) ks = Bond yield + Risk premium6) g = (Retention rate)(ROE) = (1.0 – Payout rate)(ROE) = b(ROE)

Chapter 13 The Basics of Capital Budgeting : Evaluating Cash Flows

1) Payback period = Year before full recovery + Unrecovered cost at start of yearCash flow during year

2) Net Present Value (NPV) : Sum of PVs of inflows and Outflows = PV inflow – PV outflow

NPV = ∑n CF t or NPV = ∑n CFt − CF0t t

t = 0 (1 + k ) t=1 (1 + k )Calculator -100 CFj 10 CFj 60 CFj 80 10 i% COMP NPV EXE

nCF t3) Internal Rate of Return (IRR) : NPV =0 ; IRR = ∑ = 0

(1 + IRRt

t = 0 )Calculator -100 CFj 10 CFj 60 CFj 80 10 i% COMP IRR EXE

TV4) Modify Internal rate of return (MIRR) : PV costs = PV terminal value : PV costs = (1 + MIRR ) n

Chapter 8 Time Value of Moneyn

n FVn

11) FV = PV(1+i) or PV = = FV

(1 + i )nn

n 1 + i

FV n = PV + i Nom mn i mn2) 1 or Effective annual rate = 1 + Nom − 1 . 0

m m

Chapter 14 Cash Flow Estimate and Risk Analysis

1) Net Proceeds from sales (NP) = MV + Tax ; MV = Market value= MV + Tax rate ( MV-BV) ; BV = Book value

2) Net operating working capital (NOWC) = All current assets that _ All current liabilities thatdo not pay interest do not pay interest

= Operating current assets – operating current liabilities

3) Operating capital = (Net operating working capital) – (Net plant and equipment)

4) NOPAT = Net operating profit after taxes = EBIT(1-Tax rate)

5) Operating cash flow (OCF) = NOPAT + Depreciation = EBIT(1-Tax) + Depreciation

= (Sales – CGS – Operating Expense – depreciation)(1-Tax) + Depreciation

= (Sales – CGS – Operating Expense)(1-Tax) + (Depreciation x Tax)

6) Free cash flow (FCF) = Operating cash flow - Gross investment in operating capital

= NOPAT – Net investment in operating capital

7) Free cash flow (FCF) = EBIT(1-Tax) + Depreciation + ∆NWC + ∆CAPEX

8) EBIT = Sales – CGS – Operating Expense – depreciation

= Sales – Variable Cost – Fixed Cost