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Financial, Treasury and Forex Management For CS – Professional [Contains Past exam Descriptive questions and Formulae at a Glance]

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Financial, Treasury and Forex Management © Tharun Raj

1. Write a short note on Profit Maximization Vs. wealth Maximization Goal Profit Max.

Objective Large amount of profits

Wealth Max.

Highest market value of common stock

Advantages 1. Easy to calculate profits 2. Easy to determine the link between financial decisions and profits 1. Emphasizes the long term 2. Recognizes risk or uncertainty 3. Recognizes the timing of returns 4. Considers return

2. What is capital rationing?


Disadvantages 1. Emphasizes the short term 2. Ignores risk or uncertainty 3. Ignores the timing of returns 4. Requires immediate resources 1. Offers no clear relationship between financial decisions and stock price 2. Can lead to management anxiety and frustation

J 07, J10

It refers to a situation where a company cannot undertake all positive NPV projects it has identified because of shortage of capital. Here, Capital Investment outlay = LIMITING FACTOR. Different Situations under Capital Rationing

Single Period Capital Rationing

Multi Period Capital Rationing

Limitation of Funds only for one year and thereafter no Financial Constraints.

Limitation of Funds for more than one year

Divisible Projects

Indivisible Projects

These projects can be accepted fully as well as in fractions. NPV is also adjusted to the same fraction as cash outflows.

These projects can be accepted only fully but not in fractions

External Factors – Company doesn’t have funds and it also cannot raise from financial Markets. Reasons may be:  Imperfections in capital markets  Non – availability of market information  Investors attitude  Firms lack of credibility in market  High Flotation costs – High issue cost involved to raise capital. Internal Factors – Due to self imposed restrictions imposed by management. Though funds can be arranged but company itself impose restrictions on investment expenditure. Reasons may be:  Not to take additional burden of debt funds  Laying down a specified minimum rate of return on each project  No further equity issue to prevent dilution of control  Divisional budget used to prevent any inefficiency or wastage of funds by them.

3. “The cash Flow approach of measuring future benefits of a project is superior to the accounting approach”- Discuss. J 06

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Reasons for capital Rationing:

Financial, Treasury and Forex Management © Tharun Raj The capital budgeting decision can be taken by analyzing the future benefits accruing from selecting an investment alternative. The future benefits for analysis can be either accounting profit (or) Cash Flows. Accounting Approach It considers Profit in decision making Non cash items viz. Depreciation shall be deducted while calculating the accounting profit. More chance of manipulating profit by increasing the credit sales with dummy invoices.

Under Accounting approach we will not consider Time value of Money

Cash Flow Approach It considers Cash flows in decision making. No cash expenditure is not treated as Cash outflow (i.e. Depreciation should be added back to the profit) and non cash income is not treated as Cash Inflow Cash flows shows a correct picture of cash received on sales, expenditure paid and balance cash available. This balance cash before Investment decisions or Financing decisions shall be treated as Realized Profit Time value of Money is Considered as Cash flow approach

4. Differentiate between NPV and IRR methods of capital Budgeting

D 05

1. Evaluation of Non conventional Investments – Both are not equivalent as regards the acceptance/ rejection of non conventional investments if the projects differ in their a) Expected lives b) Estimated cash outflows and c) Timings of cash flows. 2. Reinvestment rate – IRR assumes that intermediate cash inflows are reinvested at IRR while NPV assumes that intermediate cash inflows are reinvested at required rate of return (i.e. firms cost of capital) 3. Multiple/Negative rates – IRR can yield negative rates/ multiple rates under certain circumstances while there is no such possibility under NPV method.

5. Distinguish between Business Risk and Financial Risk

Financial Risk 1. Financial Risk can be defined as the variability in EBT 2. It results because of use of financial leverage (i.e. sources of funds bearing fixed financial payments like debt). 3. It is avoidable risk since the firm can avoid it by not using financial leverage in the capital structure. 4. It is associated with capital structure decisions 5. It is measured by calculating financial leverage

6. Distinguish between Financial Distress and Insolvency

J 07, J 08, J 09, D 10

Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy. Financial distress is usually associated with some costs to the company; these are known as costs of financial distress. A common example of a cost of financial distress is bankruptcy costs. These direct costs include auditors' fees, legal fees, management fees and other payments. Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts. Business insolvency is defined in two different ways: Page 3 of 20

Business Risk 1. Business risk can be defined as the variability of EBIT 2. It results because of Internal and External Environment (for example business cycle, technological obsolescence) in which the form has to operate. 3. It is an unavoidable risk so long as environment is given. 4. It is associated with capital budgeting decisions 5. It is measured by calculating operating leverage

D 07, D 09

Financial, Treasury and Forex Management Š Tharun Raj Cash flow insolvency - Unable to pay debts as they fall due. Balance sheet insolvency - Having negative net assets – in other words, liabilities exceed assets.

7. Distinguish between capital structure and financial structure

D 06, D 07, J 09

Capital structure refers to the combination of debt and equity which a company uses to finance its long term operations. It is the permanent financing of the company representing long term sources of capital i.e. owners equity and long term dents but excludes current liabilities. On the other hand, financial structure is the entire left hand side of the balance sheet which represents all the long term and short term sources of capital. Thus, capital structure is only a part of financial structure. Capital Structure 1. It relates to deployment of funds for creation of long term asset 2. It is the main source of financial structure 3. It is a narrower concept

Financial Structure 1. It relates to deployment of funds for creation of both long term assets and short term assets. 2. Financial structure = Capital structure + Current liabilities 3. It is a broader concept

8. Horizontal capital structure Vs. Vertical capital structure

D 08

In a Horizontal capital structure, the firm has zero debt components in the structure mix. The structure is quite stable. Expansion of firm takes in a lateral manner i.e. through equity or retained earnings only. The absence of debt results in the lack of financial leverage. Probability of disturbance of the structure is remote. In a vertical capital structure, the base of the structure is formed by a small amount of equity share capital. This base serves as the foundation on which the super structure of pref. share capital and debt is built. The cost of equity is usually higher than cost of debt. The company because of lesser component of equity capital is vulnerable to hostile takeovers.

9. Pyramid shaped Vs. Inverted pyramid shaped capital structure

(Probable question)

A pyramid shaped capital structure has a large proportion consisting of equity capital and retained earnings which have been ploughed back into the firm over a considerably large period of time. The cost of share capital and the retained earnings of the firm is usually lower than the cost of debt.

10. What are the various factors affecting the working capital requirement of a company J 06 1. Nature of Business: Size may be measured in terms of the scale of operations. Firm with larger scale of operations will need more working capital than a small firm. Similarly, the nature of the business - influence the working capital decisions. Public Utilities Least requirement of Working capital Trading and Financial Enterprises Amount of Working capital in the form of Debtors, Inventory, Cash is required. Manufacturing Fairly large amount of working capital is required. 2. Production cycle: Page 4 of 20

A Inverted pyramid shaped capital structure has a small component of equity capital, reasonable level of retained earnings but an ever increasing component of debt. All the increases in capital structure in the recent past have been made through debt only. Such a capital structure is highly vulnerable to collapse.

Financial, Treasury and Forex Management Š Tharun Raj

Production Cycle Longer Shorter

Investment in Working capital High Investment in Working Capital Low Investment in Working Capital

3. Business Cycle:

4. Production Policy: Demand for the Products


Working Capital Required throughout

Option (i)

Option (ii)

Production during the period of Demand

Steady Production throughout the year

Working capital requirement in the form of inventories will be less but is prone to risk of not meeting demand

Working Capital requirement in the form of inventories will be high.

5. Dividend Policy: A high net profit margin contributes towards the working capital pool. To the extent the net profit has been earned in cash, it becomes a source of working capital. This depends upon the dividend policy of the firm. Distribution of high proportion of profits in the form of cash dividends results in a drain on cash resources and thus reduces company’s working capital to that extent. The working capital position of the firm is strengthened if the management follows conservative dividend policy 6. Credit Policy:

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Financial, Treasury and Forex Management © Tharun Raj Credit Policy

Credit granted to Customers

Credit available from Creditors





Working capital requirement is less in the form of debtors

Working capital requirement is more in the form of debtors

Working capital requirement is more in the form of Inventory

Working capital requirement is less in the form of Inventory

11. Write a short note on ABC analysis?

J 10

ABC analysis is a system of inventory control. It exercises discriminating control over different items of stores classified on the basis of investment involved. It is based on the principle of management by exception i.e. concentrate more on critical areas than others. It is a method which controls expensive inventory items more closely than less expensive items.

Review “A” items most frequently Review “B” and “C” items less rigorously and/or less frequently.

12. Write a short note on technical appraisal of projects

J 10

1. Feasibility of the selected technical process and its suitability under Indian conditions 2. Scale of Operations 3. Location of the Project 4. Plant and equipment in the project and their specifications 5. Plant layout 6. Facilities for supply of water, power and Fuel 7. Facilities for disposal of effluents and also of by products, if any 8. Availability and economies of means of transport in the region should be examined and ensured 9. Construction schedule 10. Cost estimates Page 6 of 20

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Financial, Treasury and Forex Management Š Tharun Raj

13. Distinguish between financial aspects and economic aspects of project appraisal J 10 Write a short note on Domestic resource cost J 09, D 10 Financial Appraisal: 1. Amount of resources required to bring the project into operation and the sources from which finance is obtained. 2. Debt – Equity Ratio 3. Profitability and Cash flow 4. Security – Information regarding first charge and second charge, pari passu clause in debentures. Economic Appraisal: Important measures which are widely applicable for projects of national importance Economic Rate of Return (ERR) In computation of ERR, world prices are considered for all inputs and outputs other than labour. For all tradable goods, international prices will be considered with C.I.F prices for Inputs and FOB prices for output. For Non-tradable goods, Social Conversion Factor (SCF) is essential to convert actual rupee value into the social cost or benefit derived. đ?‘†đ??śđ??š đ??¸đ?‘Ľđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘ + đ??źđ?‘šđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘  = đ??¸đ?‘Ľđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘  1 − đ?‘‡đ?‘Žđ?‘Ľđ?‘&#x;đ?‘Žđ?‘Ąđ?‘’ + đ??źđ?‘šđ?‘?đ?‘œđ?‘&#x;đ?‘Ąđ?‘  1 + đ?‘‡đ?‘Žđ?‘Ľ đ?‘&#x;đ?‘Žđ?‘Ąđ?‘’ The ratio which translates the domestic price for any non – tradable into its border price value so that the goods can be expressed in terms of its real domestic price equivalent.

Effective Rate of Protection (ERP) ERP is the Incremental Value added due to the tariff divided by the value added at CIF prices. đ??¸đ?‘…đ?‘ƒ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘Žđ?‘‘đ?‘‘đ?‘’đ?‘‘ đ?‘Žđ?‘Ą đ?‘šđ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ?‘?đ?‘&#x;đ?‘–đ?‘?đ?‘’đ?‘ − đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘Žđ?‘‘đ?‘‘đ?‘’đ?‘‘ đ?‘Žđ?‘Ą đ?‘¤đ?‘œđ?‘&#x;đ?‘™đ?‘‘ đ?‘?đ?‘&#x;đ?‘–đ?‘?đ?‘’đ?‘  = đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘Žđ?‘‘đ?‘‘đ?‘’đ?‘‘ đ?‘Žđ?‘Ą đ?‘¤đ?‘œđ?‘&#x;đ?‘™đ?‘‘ đ?‘?đ?‘&#x;đ?‘–đ?‘?đ?‘’đ?‘ 

Shadow Exchange Rate (SER) SER can be defined as that rate of exchange which accurately reflects the consumption worth of an extra unit of foreign exchange in terms of domestic currency.

ERP = DRC – 1, Where DRC (Domestic Resource Cost) = đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘Žđ?‘‘đ?‘‘đ?‘’đ?‘‘ đ?‘Žđ?‘Ą đ?‘šđ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ?‘?đ?‘&#x;đ?‘–đ?‘?đ?‘’đ?‘ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘Žđ?‘‘đ?‘‘đ?‘’đ?‘‘ đ?‘Žđ?‘Ą đ?‘¤đ?‘œđ?‘&#x;đ?‘™đ?‘‘ đ?‘?đ?‘&#x;đ?‘–đ?‘?đ?‘’đ?‘ 

14. Write a short note on Social Cost Benefit analysis of Project

J 07

SCBA is identification and determination of the best project among various project alternatives from country’s social and economic point of view. The socio-economic appraisal of a project mainly focuses on the following objectives:  To contribute effectively to GDP of an economy.  To aid in economic development  To justify the utilization of economy’s scarce resources  To be compatible with national policies and parameters of growth Page 7 of 20

Domestic Resources Cost (DRC) It refers to the resource cost involved in manufacturing a particular product rather than importing the same. It helps in maintaining favorable balance of payment. By calculating DRC a judicious decision can be taken as to production of a goods or to purchase (or Import) the goods under consideration. It reflects the competitive edge the country has in producing the good.

Financial, Treasury and Forex Management © Tharun Raj To maintain and protect environment from pollution To benefit rural poor and reduce regional imbalances To justify the risks undertaken to implement the project and sacrifices made in that process.

15. Distinguish between cash market and Derivative Market Cash Market Full payment for the asset purchased is required No mark to market system This market is for users or investors Transactions are generally delivery based The underlying assets are tangible assets Both payment capacity and risk bearing capacity has to be considered

(Probable question)

Derivative Market Either margin or option premium is to be paid Market to market is required in case of futures This market is for hedgers, speculators and arbitragers Transactions are generally cash settled In some cases, the underlying assets are intangible viz. share Index Mainly risk bearing capacity has to be considered

16. Distinguish between Future contract and Forward contract

D 05

Future Contract It is a standardized contract that is traded in future exchange The delivery date is range of delivery date because contract can be settled prior to maturity

Forward Contract It is a non standardized contract that is traded over the counter (OTC) The delivery date is one specific date and contract can be settled only on maturity

Future contract have no liquidity problem because it is traded through exchange. Future contract have fixed contract size Price of future contracts are publically disclosed

Forward contract have liquidity problem because it is private contract (i.e. OTC) Forward contract have no fixed contract size. Price of forward contracts is not publically disclosed.

17. Write a short note on Mark to market settlement  

J 05

Buyer and seller of future contracts are required to deposit the initial margin in a margin account which is fixed by exchange on the basis of contract value If buyer/seller gains then margin account will be credited (i.e. Increased) and when they suffer loss the margin account will be debited (i.e. decreased)

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  

Financial, Treasury and Forex Management Š Tharun Raj 

If margin account goes below minimum maintenance balance then buyer/seller has to add money in margin account.

18. How Index is constructed and Distinguish between NIFTY and SENSEX

D 06

There are three methods – Market capitalization Method, Market value Method, Equal Weightage. Amongst all Market capitalization is the widely used method. Two popular Index in India are SENSEX (of BSE) and NIFTY (of NSE). ďƒž ďƒž ďƒž ďƒž

SENSEX (BSE) ďƒ 30 companies will be taken from various Industries (or Sectors) for constructing index. NIFTY (NSE) ďƒ  50 companies will be taken from various Industries (or sectors) for constructing index. Movements of the Index represent the average return obtained by investors in the market. The shares included in the Index are those shares which are traded regularly in high volume. In case the trading in any shares stops or comes down then it gets excluded and another company’s share will be replaced. ďƒž No. of shares X Market price = Market Capitalization ďƒ  Base = 100. ďƒž It is calculated for every trading day. ďƒž Current day Index =

đ??śđ?‘˘đ?‘&#x;đ?‘&#x;đ?‘’đ?‘›đ?‘Ą đ?‘€đ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ??śđ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Žđ?‘™đ?‘–đ?‘§đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘ƒđ?‘&#x;đ?‘’đ?‘Łđ?‘–đ?‘œđ?‘˘đ?‘ đ?‘šđ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ?‘?đ?‘Žđ?‘?đ?‘–đ?‘Ąđ?‘Žđ?‘™đ?‘–đ?‘§đ?‘Žđ?‘Ąđ?‘–đ?‘œđ?‘›

đ?‘‹ đ?‘ƒđ?‘&#x;đ?‘’đ?‘Łđ?‘–đ?‘œđ?‘˘đ?‘ đ?‘‘đ?‘Žđ?‘Śđ?‘  đ??źđ?‘›đ?‘‘đ?‘’đ?‘Ľ

19. Distinguish Between Futures and Options Futures Both the parties are obliged to perform the contract No premium is paid by either party The holder of the contract is exposed to the entire spectrum of downside risk and has potential for all the upside return The parties of the contract must perform at the settlement date. They are not obligated to perform before the date.

D 06 Options Only the seller (writer) is obligated to perform the contract The buyer pays the seller (writer) a premium The buyer’s loss is restricted to downside risk to the premium paid, but retains upward indefinite potentials. The buyer can exercise his option anytime prior to the expiry date.

20. Distinguish between Interest rate SWAP and Currency SWAP

J 08

Swaps are private agreements between two parties to exchange cash flows in future according to a predetermined formula. These are generally arranged by the intermediaries like banks. Two commonly used swaps are –

Currency Swap: These contain swapping both principal and interest between the parties, with cash flows in one direction being in a different currency than those in opposite direction. Currency swaps are regarded as combination of forward contracts.

21. What is the impact of taxation on Financial Management? Or “Taxation Provisions have significant effect on financial planning of a company� comment D 07 Taxation affects the financial management in various ways. Some of the most significant effects are as follows: Page 9 of 20

Interest rate Swap: Two parties agree to pay each other’s interest obligation for their mutual benefits.

Financial, Treasury and Forex Management © Tharun Raj 1. Impact on Profits 2. Impact on dividends 3. Impact on WACC 4. Impact on cash Inflows

5. Set off of losses 6. Unabsorbed depreciation 7. Carry forward and set off of losses in case of amalgamation

Tax on profit represents cash outflow from business Tax on dividend distributed to share holders represent cash outflow from business WACC is reduced if debt is used since interest on debt is a tax deductible expense Cash Inflows increase since depreciation does not involve any cash outflow and at the same time it is tax deductible expense under sec. 32 of Income tax Act, 1961 Loss of loss making segment can be set off against the profits of another segment of the company Unabsorbed depreciation can be carried forward indefinitely and can be set off against the profits of another segment of company This provision helps the growth of companies and rehabilitation of sick units.

22. Distinguish between systematic risk and unsystematic risk Systematic risk 1. It represents the fluctuations in return of every security due to factors affecting the market as a whole. It arises due to tendency of every security to move together with changes in the market. 2. These risks are beyond the control of management 3. It will affect all companies 4. It cannot be eliminated through diversification. Investors are exposed to market risk even if they hold well diversified portfolio of securities. 5. Taxation policies, inflation, interest rates are examples of systematic risk.

23. Write a short note on Sharpe Index model


Unsystematic risk 1. It represents the fluctuations in return of a specific security due to factors affecting a particular firm only.

2. Such risks are within the purview and control of the management. 3. Only a particular security is affected by it. 4. It can be eliminated through diversification (i.e. By investing in large number of well diversified securities) 6. Increase in competition, industrial dispute, changes in management are illustrations of unsystematic risk.

J 05

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to

The Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken, the higher the Sharpe ratio number the better. When comparing two assets each with the expected return E[R] against the same benchmark with return Rf, the asset with the higher Sharpe ratio gives more return for the same risk. Investors are often advised to pick investments with high Sharpe ratios. Example: An asset has an expected return of 15% in excess of the risk free rate. We typically do not know if the asset will have this return; suppose we assess the risk of the asset, defined as standard deviation of the asset's excess return, as 10%. The risk-free return is constant. Then the Sharpe ratio will be 1.5 (R − Rf = 0.15 and σ = 0.10).

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as risk (and is a deviation risk measure), named after William Forsyth Sharpe. It is defined as

Financial, Treasury and Forex Management Š Tharun Raj

24. Distinguish between SML and CML Capital Market Line (CML) 1. It is used to show the rates of return, which depends on risk-free rates of return and levels of risk for a specific portfolio. 2. standard deviation is the measure of risk in CML, 3. Capital Market Line graphs define efficient portfolios 4. The market portfolio and risk free assets are determined by the CML 5. CML determines the risk or return for efficient portfolios

(probable question) Security Market Line (SML) 1. SML, which is also called a Characteristic Line, is a graphical representation of the market’s risk and return at a given time. 2. Beta coefficient determines the risk factors of the SML. 3. The Security Market Line graphs define both efficient and non-efficient portfolios. 4. All security factors are determined by the SML. 5. SML demonstrates the risk or return for individual stocks.

25. Distinguish between Factoring and Securitization

D 08

Securitization is unlocking of illiquid assets with a classic example being receivables of a mortgage finance company whose funds are typically locked for long durations depending on the period over which EMIs are payable by borrowers. These receivables are sold to an SPV (special purpose vehicle) at a discount which in turn issues bonds on the security of the receivables. The buck therefore stops with the bond holders who are enticed by the high rate of interests carried by such bonds on the back of mortgage loans. Factoring, on the other hand, is outsourcing of receivables to the factoring company. Factoring may be with or without recourse and when it is without recourse, that is, the risk of bad debts is borne by the factoring agency, it resembles securitization. But there is a vital difference. Unlike in securitization where the SPV pays off the mortgage finance company with the proceeds of the bonds issue, a factoring agency does not resort to issue of bonds back to back but instead pay a portion of the receivables upfront with the remaining being paid at regular intervals as and when debts are collected. (Source: Business Line)


2.Depreciation 3.Magnitude



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Leasing The lessor is the owner of the asset and lessee is entitled to the use of the leased asset/equipment. The ownership is never transferred to the user. The depreciation on the asset is charged in the book of the lessor The magnitude of funds involved in the Lease financing is very large, For example the purchase of aircrafts, ships, machinery, air-conditioning plants Leasing is invariably 100% financing. It requires no margin money or immediate cash down payment by the lessee. In case of finance lease, the maintenance of the leased asset is the responsibility of the lessee. It is the

D 10 Hire purchase In contrast the ownership of assets passes on to the user, in case of hire-purchase finance, on payment of last installment. Until the payment of last installment, the ownership of the assets vests in the finance company. The hirer is entitled to the depreciation shield on the assets hired by him. The cost of acquisition in hire purchase is relatively low. Hence automobiles, office equipments, generators etc, are generally hire-purchased. In a hire-purchase transaction typically a margin equal to 20-25% of the cost of the equipments is required to be paid by the hirer. The cost of maintenance of hired asset is to be borne, typically by the hirer himself.

26. Distinguish between leasing and Hire purchase

Financial, Treasury and Forex Management © Tharun Raj

6.Tax benefit

lessor who has to bear the maintenance cost in an operating lease. The lessor is allowed to claim depreciation and the lessee is allowed to claim the rentals and maintenance cost against taxable income.

The hirer is allowed the depreciation claim and finance charge and the seller may claim any interest on borrowed funds to acquire the asset for tax purposes.

27. Distinguish Between Finance Lease and Operating Lease Finance Lease 1. Lease term is for the major part of the economic life of the assets 2. Under finance lease, the lessor transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee 3. The risk of obsolescence falls on the lessee. 4. Continuation of lease is reasonably certain 5. Finance leases are generally non cancellable unless contract provides otherwise. 6. Annual maintenance cost is generally borne by the lessee unless contract provides otherwise.

Operating Lease 1. Lease term is significantly less than the economic life of the assets. 2. Under operating lease, the lessor does not transfer substantially all the risks and rewards incident to ownership of asset to the lessee. 3. The risk of obsolescence falls on the lessor 4. Continuation of lease in not reasonably certain 5. Operating leases are generally cancellable unless contract provides otherwise. 6. Annual maintenance cost is borne by the lessor unless contract provides otherwise.

28. Distinguish between Factoring and Bill discounting Factoring 1. It is an arrangement under which the factor agrees to collect the book debts of supplier of goods/services for an agreed consideration known as factoring commission. 2. Parties involved – Client, Factor and Debtor 3. It is a sort of management of book debts 4. There is no specific Act. 5. Factoring commission is the consideration 6. Factor may assume the risk of bad debts under Non recourse factoring.

D 07, D 09

D 05, D 09

Bill Discounting 1. It is an agreement under which the bank credits the net proceeds to the customer’s account after charging discount in terms of interest for the unexpired term of the bill. 2. Parties Involved – Drawer, Drawee and Bank 3. It is a sort of short term borrowing from bank 4. Negotiable Instruments Act, 1881 is applicable 5. Discount charges is the consideration 6. Bank does not assume the risk of bad debts at all.

This is due to following two reasons: 1. Cost of capital is usually taken as cut off rate for evaluation of capital expenditure project and for this, the yield to share holders is the relevant figure, which can be paid only out of after tax profits. 2. The cost of capital serves the purpose of discounting rate for discounting of cash flows, which are ascertained after deducting tax liability.

30. Current account convertibility Vs. Capital account Convertibility

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D 04, D 08

29. Why the cost of capital is most appropriately measured on an “after tax’ basis (probable question)

Financial, Treasury and Forex Management © Tharun Raj Capital account convertibility (CAC) means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. In simple language CAC allows anyone to freely move from local currency into foreign currency and back. CAC is widely regarded as one of the hallmarks of a developed economy. It is also seen as a major comfort factor for overseas investors since they know that anytime they change their mind they will be able to re-convert local currency back into foreign currency and take out their money. Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. In other words, it allows residents to make and receive trade-related payments — receive dollars (or any other foreign currency) for export of goods and services and pay dollars for import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts etc.

31. What are the various risks/exposures in Forex market

J 03, D 09, J 09, J 07

Irrespective of the nature of overseas activities, organizations need to understand and where appropriate, control the degree of foreign exchange variability to which they are exposed. TRANSACTION EXPOSURE The risk that there will be a change in value for the organization caused by variation in relevant exchange rates is known as the foreign exchange risk. Transaction exposure arises from changes in cash flows that result from a firm’s existing contractual obligations Example: 1. An Indian company makes a sale denominated in euros to an Italian company. Until the Italian company pays for the sale, there is a risk that fluctuations in the INR/ EUR exchange rate will affect final amount that the Indian company receives. 2. Other types of transaction exposures are loans denominated in overseas currencies, purchases from overseas companies and dividends from overseas subsidiaries.

ECONOMIC EXPOSURE It is also called operating or strategic exposure. It measures the change in the present value of the firm resulting from any change in the future operating cash flows of the firm caused by an unexpected change in exchange rates. The change in value depends on the effect of the exchange rate change on future sales volume, prices or costs. Example: A company manufacturing Luxury cars in India for sale to US will be exposed to transaction risk on all sales to the US denominated in USD when rupee strengthens. However, the Indian company will also be economically exposed. Over time, the Indian company will be exposed to shifts in the INR/USD exchange rate. If the competitors of the Indian based manufacturer area all based in US, any increase of the INR/USD exchange rate will increase sales prices in US, which may mean loss of market share to local US Luxury car manufacturers.

32. Write a short note on Euro Currency Market Page 13 of 20

D 98

TRANSLATION EXPOSURE This is also known as accounting exposure. This arises from the need to translate the foreign currency financial statements of overseas subsidiaries into the home currency in order to prepare a set of group financial statements in the home currency. Example: An Indian company with a US subsidiary, In order to prepare the full accounts for the Indian company, the accounts of the US subsidiary will need to be translated into INR. Every time the accounts are translated, a uniform INR/USD exchange rate will be used, usually year end or an average for the accounting period. Due to this translation, the reported values may be different, though there are no cash flow implications.

Financial, Treasury and Forex Management © Tharun Raj Eurocurrency market consists of banks that accept deposits and make loans in foreign currencies outside the country of issue. These deposits are commonly known as Eurocurrencies. Thus, US dollars deposited in London are called Eurodollars; British pounds deposited in New York are called Euro sterling, etc. Eurocurrency markets are very large, well organized and efficient. They serve a number of valuable purposes for multinational business operations. Eurocurrencies are a convenient money market device for MNCs to hold their excess liquidity. They are a major source of short term loans to finance corporate working capital needs and foreign trade.

33. Distinguish between Interest rate parity and Purchase power parity

J 09

INTEREST RATE PARITY The theory of interest rate parity states that the difference in the notional interest rates for securities of similar risk and maturity should be equal to the difference between forward and spot rates of exchange. i.e the forward premium or discount is equal to the interest rate differential. If the forward premium or discount is not equal to the interest differential, there are opportunities for risk free arbitrage. This parity condition means that a country with a lower interest rate than another should value its forward currency at a premium in terms of the other country’s currency. FR = (1 + r h) / (1 + r f) = F1 / E0 Where, r h = Home Country’s Interest rate r f = Foreign Country’s Interest rate F1 = Forward rate of the Foreign currency E0 = Spot rate of the Foreign currency.



Where, Inflation in Home Country



Inflation in Foreign Country



Forward rate of the Foreign currency



Spot rate of the Foreign currency.

34. “Depreciation is a part of cost of production and is at the same time an important source of internal finance” Comment D 03    

While calculating cost of production of an item, prime costs and factory overheads are considered. Under factory overheads depreciation on plants and machinery and other assets are included. Thus depreciation forms part of cost of production. Depreciation indicates the decrease in the value of assets due to wear and tear, lapse of time and accident and hence some funds are desired to be kept apart for replacement of worn-out assets.

Page 14 of 20

PURCHASE POWER PARITY This is based on the common sense idea that a product should cost the same wherever it is available in the world, otherwise opportunities for arbitrage will arise; that is people will try and buy the product in the cheaper market and sell it in the more expensive market to make a profit. Translated into a more general parity theory, this means that the general level of prices, when converted to a common currency, will be the same in each country, price changes due to inflation in one country are compensated by a change in exchange rate so that the real cost of products remain the same. (1 + lh) / (1 + lf) = F1 / E0

Financial, Treasury and Forex Management © Tharun Raj 

    

“ It’s a deduction out of profits of the company calculated as per accounting rules on the basis of estimated life of each asset each year over the life of the assets to an amount equal to original value of the assets”. The pool of funds generated due to accumulation of depreciation provides an opportunity to a firm to use it in the funding of its working capital requirements, acquisition of new assets or replacement of worn out plant and machinery. Those who consider dep. as a source of funds argue that dep. does not result into any cash outlay since it is a non-cash expense. Those who oppose considering dep. As a source of funds argue that funds are generated by operating profits and not by making provision for dep. Dep. is considered as a special amount set aside out of the revenue generated by the firm. If it would have been really a source of funds, any firm could have improved its position at its will, just by increasing the periodical depreciation charge. Hence in a strict sense, dep. should not be considered as a source of funds.

35. “Retained earnings (RE) have no cost” do you agree? Give reasons of your answer. D 03, D 04

       

Retained earnings are funds accumulated over the years, of the company, by keeping part of the funds generated without distribution as distribution as dividend amongst shareholders. The funds so generated become one of the major sources of funding for the company to finance its expansion and diversification programmes. The funds belong to equity shareholders and it is taken into account while calculating cost of equity. Considering retained earnings as cost free source of funds is not correct. The reason is that RE indicates the amount of profits not distributed among equity shareholders. Virtually, the company has deprived the equity holders of this earning by retaining a portion of profit with it. Therefore the cost of RE may be considered as equivalent to the earnings foregone by the shareholders. In other words, the opportunity cost of retained earnings may be considered as their cost, which is equal to the income that they would otherwise earn by placing these funds in alternative investment. Therefore, the statement that Retained Earnings has no cost is not correct. The cost of retained earnings shall be taken as the Cost of Equity (Except flotation cost)

36. “A high EPS may not always maximize the stock price.” Do you agree? Discuss.

J 04

The statement is true due to following reasons:  EPS may be high due to profit maximization, which itself is not a sure shot for a high stock price.  High EPS may be due to financial leverage effect, which increases a firm’s risk prospects of growth rate.  If the business prospectus of a company is not good the stock price may not go up in spite of high EPS.  The nature of business and the industry in which the company operates also affects the stock price and not the EPS alone.

37. If the use of financial leverage magnifies the earnings per share under the favorable economic conditions, why do companies not employ very large amount of debt in their capital structure? J04 Under favorable economic conditions a company may use financial leverage to magnify the shareholders return. The financial leverage magnifies shareholders return on the assumption that the debt funding can be had a cost lower than the firms rate of return on net assets.

Page 15 of 20

Financial, Treasury and Forex Management © Tharun Raj The difference of earnings generated on fixed cost funding and cost of such funding when distributed among equity shareholders magnifies their return and thus EPS or ROE increases. There is negative impact of financial leverage if a leverage if a firm fails to earn adequate returns on investment to finance the cost of debt funds. The difference of earnings and cost will have to be compensated by the equity shareholders by reducing their return. That is why, companies do not employ very large amount of debt in their capital structure despite the advantage of financial leverage.

38. “Stability in payment of dividends has a marked bearing on the market price of the shares of a corporate firm.” Explain the statement. J 02, J 04, J 07, D 08  The dividend policy determines the division of earnings between the dividend distribution and reinvestment in the firm.  The distribution of earnings between the two depends upon the need of funds internally for reinvestment purposes and expectations of the shareholders.  An increase in the dividend leads to a stock price increase while a decreased in dividend results into a stock price decline (As per relevancy Theory).  An increase in dividend payout is considered by the investors as permanent or long term increase in firm’s expected earnings and considered as good news resulting in an increase in stock price.  Fluctuating dividend policy will not create the desired impact over the stock price.  Hence, it is said that stability in payment of dividends has a marked bearing on the market price of the shares of a corporate firm.

39. Distinguish between Financial Management and Treasury Management

2. It is the main function of business 3. The finance manager is concerned with creation of Fixed assets 4. The finance manager is concerned with long term and strategic investments. 5. Finance function fails to integrate with marketing and manufacturing functions 6. As financial management is concerned only with procurement and utilization of funds, it will not interact with all the departments within the organisation but interacts with external environment 7. Financial manager operates only in capital market and security market 8. Due to financial management it is possible that some segments of the firm may at times face strain upon their profitability because of macro view of organisation. 9. The strategy for financial management is long term in nature. 10. It is concerned with preparation of Profit and Loss A/c, Balance sheet, audit reports, Director reports etc., Page 16 of 20

Treasury Management/ Treasury Function 1. It is concerned with management of funds at micro level i.e. Once funds have been arranged; treasury function starts with monitoring the funds to carry out the operations smoothly. 2. It is the supplementary and complementary to finance function 3. The treasury manager is concerned with Net current assets. 4. The treasury manager is concerned with short term investments 5. Treasury function integrates better with manufacturing and marketing functions. 6. As treasury management is concerned with handling the funds, it is involved in more frequent interaction with other departments 7. Treasury manager operates in various financial markets including the inter corporate market, money market, Govt. sec market, forex market etc., 8. Treasury management takes care of even those areas which the finance function does not touch as treasury management operates at micro level. 9. The strategy for treasury management is short term in nature. 10. It is concerned with preparation of Income and expense budgets, Internal audit reports, variance analysis etc.,

Financial Management/Finance Function 1. It is concerned with procurement of funds (i.e. Financing decisions) and utilization of funds (i.e. Investment decisions)

D 08

Financial, Treasury and Forex Management Š Tharun Raj

40. What is treasury management and what are the various tools of treasury management? D 03, J 10 Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management. Treasury management is the science of managing treasury operations of a firm. The main function of treasury management is the management of funds. Treasury management has both macro and micro aspects. Some tools of treasury management are as follows: 1. Performance Budgeting: in treasury function, planning and budgeting are essential to achieve targets and to keep effective control on costs. Analysis of the data and information is necessary for planning and budgeting. The tool that cater these needs is Performance budgeting – It is referred to as setting physical targets for each line of activity and is made accountable for its targets. 2. Zero based Budgeting: Each manager establishes objectives for his function and gain agreement on them with top management. Then alternative ways for achieving these targets are defined and most practical way of achieving targets is selected. This alternative is then broken into incremental levels of effort required to achieve the objective. For each incremental level of activity, costs and benefits are assessed. The alternative with least cost is then selected. 3. Financial statement analysis: It is necessary to help the treasury manager to decide whether to invest in the company. Such analysis also helps the company in internal controls. The soundness and intrinsic worth of the company Is known only by such analysis.



1. đ??šđ?‘˘đ?‘Ąđ?‘˘đ?‘&#x;đ?‘’ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ??šđ?‘‰ = đ?‘ƒđ?‘&#x;đ?‘’đ?‘ đ?‘’đ?‘›đ?‘Ą đ?‘Łđ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘ƒđ?‘‰ (1 + đ?‘&#x;)đ?‘›

1. Kd = Interest (1- tax rate) ďƒ Normal debentures

2. Sum of Annuity = FVA= Annuity (A) X FVCFr,n

2. Kd 

Interest (1 - Tax rate) Net sale proceeds

ďƒ with flotation cost

Net sale proceeds = capital raised (-) Flotation costs 2

3. Kd 

Interest (1 - Tax rate) + RV  NSP 2

RV-NSP N Rv = Redeemable

value; NSP = Net sale proceeds, N = Maturity period đ?‘&#x;

4. đ?‘„đ?‘˘đ?‘Žđ?‘&#x;đ?‘Ąđ?‘’đ?‘&#x;đ?‘™đ?‘Ś đ??śđ?‘œđ?‘šđ?‘?đ?‘œđ?‘˘đ?‘›đ?‘‘đ?‘–đ?‘›đ?‘” = đ?‘ƒ(1 + )đ?‘› đ?‘‹ 4 4

5. Monthly compounding = đ?‘ƒ(1 +

Page 17 of 20

đ?‘&#x; đ?‘› đ?‘‹ 12 12



3. đ?‘†đ?‘’đ?‘šđ?‘– đ?‘Žđ?‘›đ?‘›đ?‘˘đ?‘Žđ?‘™ đ?‘?đ?‘œđ?‘šđ?‘?đ?‘œđ?‘˘đ?‘›đ?‘‘đ?‘–đ?‘›đ?‘” = đ?‘ƒ(1 + )đ?‘› đ?‘‹ 2

4. Kp = preference dividend + Dividend distribution tax on preference dividend. 5. Kp 

Pr ef. dividend Net sale proceeds

ďƒ with flotation cost

Financial, Treasury and Forex Management Š Tharun Raj Net sale proceeds = capital raised (-) Flotation costs 6. Continuous compounding = đ?‘’ đ?‘&#x;đ?‘Ą

Kp 


Pr ef. dividend+Dividend tax Net sale proceeds

ďƒ with Flotation cost

Net sale proceeds = capital raised (-) Flotation costs 7. Effective annual Interest rate = (1 + đ?‘&#x;)đ?‘› − 1 Kp 

RV - NSP N RV + NSP 2 ďƒ Redeemable Pref. S

Pr ef. dividend +


RV = Redeemable value of preference share NSP = Net sale proceeds 8. Present Value = �� =

đ?‘­đ?‘˝ (đ?&#x;?+đ?’“)đ?’?

= đ?‘­đ?‘˝ đ?‘ż đ?‘ˇđ?‘˝đ?‘­(đ?’“%,đ?’? đ?’šđ?’†đ?’‚đ?’“đ?’”)

9. Present value of Annuity = PVA = Annuity (A) X PVCFr,n

8. KL = Interest (1 – Tax rate) 9. Ke  Dividend per share (DPS) x100 Market price per share (MPS)


1. DOL 


2. DFL 

3. DFL 

Contribution EBIT

ďƒ Degree of operating Leverage

ďƒ Degree of Financial leverage

Contribution EBT

Ke 

Earnings per share (EPS) x100 MPS ďƒ Earnings Price

D1 g P0

Ke 

EBIT Pr ef.Dividend EBIT  Int  (1  T)

4. DCL 


ďƒ Dividend Price

11. 12. K e 

13. K e 

EPS g P0

D  PE  PB PB

ďƒ Dividend growth model

ďƒ Earnings growth model ďƒ  Realized Yield

ďƒ with pref. shares

ďƒ Degree of combined leverage

14. Growth rate = g = Retention ratio x Return on Investment (ROI) 15. Kr = Ke (except flotation cost)

1. Financial BEP ďƒž Interest +

Pref. dividend (1 - tax rate)

16. Ko  WE x KE + WD x KD  WP x KP


17. MPS = EPS x P/E ratio

2. Let, ‘X� be Indifference EBIT, then


EBIT (1-T) (EBIT-I) (1-T)-P , I= Int., T=tax, P=Pref. div.  N N

3. Converage ratio =

4. V = EBIT K0

EBIT Pref. div. Interest + (1 - T)


đ?‘€đ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ?‘ƒđ?‘&#x;đ?‘–đ?‘?đ?‘’ đ?‘ƒ0 =

ďƒ Value of company

Page 18 of 20


Walters model 2. đ?‘ƒ0 =


đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ (đ??ˇ)

3. đ?‘ƒ0 =

đ??ˇ1 đ??žđ?‘’ −đ?‘”

ďƒ Gordon’s model

đ??ˇ1 + đ?‘ƒ1 1+ đ??žđ?‘’

ďƒ Price under MM model


đ?‘&#x; (đ??¸âˆ’đ??ˇ) đ??žđ?‘’




Financial, Treasury and Forex Management Š Tharun Raj 1. đ?‘ƒđ?‘Žđ?‘Ś đ??ľđ?‘Žđ?‘?đ?‘˜ đ?‘ƒđ?‘’đ?‘&#x;đ?‘–đ?‘œđ?‘‘ =

đ??źđ?‘›đ?‘–đ?‘Ąđ?‘–đ?‘Žđ?‘™ đ??źđ?‘›đ?‘Łđ?‘’đ?‘ đ?‘Ąđ?‘šđ?‘’đ?‘›đ?‘Ą

đ?‘›+đ?œ&#x;đ?‘› đ?‘ƒ1 − đ??ź+đ??¸

4. đ?‘›đ?‘ƒ0 (đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘œđ?‘“ đ??śđ?‘œđ?‘šđ?‘?đ?‘Žđ?‘›đ?‘Ś) =

đ??´đ?‘›đ?‘›đ?‘˘đ?‘Žđ?‘™ đ??śđ?‘Žđ?‘ đ?‘• đ??źđ?‘›đ?‘“đ?‘™đ?‘œđ?‘¤đ?‘ 


1+ đ??žđ?‘’


model 2. đ??´đ?‘?đ?‘?đ?‘œđ?‘˘đ?‘›đ?‘Ąđ?‘–đ?‘›đ?‘” đ?‘…đ?‘Žđ?‘Ąđ?‘’ đ?‘œđ?‘“ đ?‘…đ?‘’đ?‘Ąđ?‘˘đ?‘&#x;đ?‘› =

đ??´đ?‘Łđ?‘’đ?‘&#x;đ?‘Žđ?‘”đ?‘’ đ?‘ƒđ??´đ?‘‡ đ??źđ?‘›đ?‘–đ?‘Ąđ?‘–đ?‘Žđ?‘™ đ??źđ?‘›đ?‘Łđ?‘’đ?‘ đ?‘Ąđ?‘šđ?‘’đ?‘›đ?‘Ą

đ?‘‹ 100

5. đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ đ?‘…đ?‘Žđ?‘Ąđ?‘’ =


6. đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ đ?‘Œđ?‘–đ?‘’đ?‘™đ?‘‘ =

4. đ?‘ƒđ?‘&#x;đ?‘œđ?‘“đ?‘–đ?‘Ąđ?‘Žđ?‘?đ?‘–đ?‘™đ?‘–đ?‘Ąđ?‘Ś đ??źđ?‘›đ?‘‘đ?‘’đ?‘Ľ =

đ?‘ƒđ?‘‰ đ?‘œđ?‘“ đ??śđ?‘Žđ?‘• đ??źđ?‘›đ?‘“đ?‘™đ?‘œđ?‘¤đ?‘

đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ đ?‘ƒđ?‘’đ?‘&#x; đ?‘†đ?‘•đ?‘Žđ?‘&#x;đ?‘’ (đ??ˇđ?‘ƒđ?‘† ) đ??šđ?‘Žđ?‘?đ?‘’ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’

đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ đ?‘ƒđ?‘’đ?‘&#x; đ?‘†đ?‘•đ?‘Žđ?‘&#x;đ?‘’ (đ??ˇđ?‘ƒđ?‘† ) đ?‘€đ?‘Žđ?‘&#x;đ?‘˜đ?‘’đ?‘Ą đ?‘ƒđ?‘&#x;đ?‘–đ?‘?đ?‘’ đ?‘?đ?‘’đ?‘&#x; đ?‘†đ?‘•đ?‘Žđ?‘&#x;đ?‘’ (đ?‘€đ?‘ƒđ?‘† )

8. đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’đ?‘›đ?‘‘ đ?‘ƒđ?‘Žđ?‘Śđ?‘œđ?‘˘đ?‘Ą =

đ?‘ƒđ?‘‰ đ?‘œđ?‘“ đ??śđ?‘Žđ?‘ đ?‘• đ?‘‚đ?‘˘đ?‘Ąđ?‘“đ?‘™đ?‘œđ?‘¤đ?‘ 

WORKING CAPITAL MANAGEMENT 1. 75% (CA – CL other than Bank Borrowings)ďƒ MPBF (1 method)

đ??ˇđ?‘–đ?‘Łđ?‘–đ?‘‘đ?‘’ đ?‘›đ?‘‘ đ?‘ƒđ?‘’đ?‘&#x; đ?‘†đ?‘•đ?‘Žđ?‘&#x;đ?‘’ (đ??ˇđ?‘ƒđ?‘† ) đ??¸đ?‘Žđ?‘&#x;đ?‘›đ?‘–đ?‘›đ?‘”đ?‘ đ?‘?đ?‘’đ?‘&#x; đ?‘†đ?‘•đ?‘Žđ?‘&#x;đ?‘’ (đ??¸đ?‘ƒđ?‘† )


1. Present Value of Stock (i.e. Fair Price today) = D2



D3 (1+K)3

đ?‘‹ 100

2. P0 =

3. 75% of (CA – Core CA) – CL other than bank borrowingsďƒ rd MPBF (3 method)

3. Return of a security = R =


4. đ?‘‹ đ??´đ?‘Łđ?‘’đ?‘&#x;đ?‘Žđ?‘”đ?‘’ đ?‘?đ?‘œđ?‘™đ?‘™đ?‘’đ?‘?đ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘?đ?‘’đ?‘&#x;đ?‘–đ?‘œđ?‘‘

ďƒ Investment in debtors

D1 (K e −g)

D1+ PE − PB


∑ đ?‘? đ?‘‹ (đ?‘Ľ − đ?‘Ľ )2 (or)



X 100 single




of 2



∑ (đ?‘Ľâˆ’đ?‘Ľ )2

Risk 2


(Simplified Version of DDM)



D1 (1+K)

+ -------

2. (75% of CA) – (CL other than Bank borrowings) ďƒ MPBF (2 method)


đ?‘‹ 100



đ?‘†đ?‘Žđ?‘™đ?‘’đ?‘ đ?‘–đ?‘› đ?‘˘đ?‘›đ?‘–đ?‘Ąđ?‘  đ?‘‹ đ??´đ?‘Łđ?‘’đ?‘&#x;đ?‘Žđ?‘”đ?‘’ đ?‘?đ?‘œđ?‘ đ?‘Ą đ?‘?đ?‘’đ?‘&#x; đ?‘˘đ?‘›đ?‘–đ?‘Ą

đ?‘‹ 100




= đ?‘Š1 đ?œŽ1 + đ?‘Š2 đ?œŽ2 + 2đ?‘Š1 đ?‘Š2 đ?œŽ1 đ?œŽ2 đ?‘‹ đ?‘&#x;12 , Where Ďƒ1 and Ďƒ2 are the standard deviations of the securities and r = Correlation Coefficient.


(Please refer Box method as discussed in class) Covariance (1,2)

6. Order Point (OP) = Lead time X Daily usage

6. đ?‘&#x; =

7. Order Point = (Avg. lead time x Avg. daily usage) + Safety stock

7. Covariance (1,2), if Probabilities are not known =

Ďƒ1 X Ďƒ2

ďƒĽ ( R  R )( R 1



 R2 )

n 8. Optimum Level of Cash Balance (Q) =

2đ?‘˘đ?‘œ đ?‘?

ďƒ Baumol model

8. Covariance (1,2) if probability is known =

ďƒĽ P(R  R )(R 1

9. The Optimal Point of Cash balance 4 đ?‘‹ đ??źđ?‘›đ?‘Ąđ?‘’đ?‘&#x;đ?‘’đ?‘ đ?‘Ą đ?‘&#x;đ?‘Žđ?‘Ąđ?‘’ đ?‘?đ?‘’đ?‘&#x; đ?‘‘đ?‘Žđ?‘Ś

1. Fair value that expires in t days = Spot price of Index [1 + rt(t/365) – dt(t/365)], Where rt = Riskless rate of return for t days

Page 19 of 20

 R2 )

9. If r = -1, then ĎƒP (Risk) = WAĎƒA - WBĎƒB

ďƒ Miller orr cash model


dt = Dividend yield for t days


10. If r = +1, then ĎƒP (Risk) = WAĎƒA + WBĎƒB 11. coefficient of variation = ď ł X


3 3 đ?‘‹ đ?‘‡đ?‘&#x;đ?‘Ž đ?‘›đ?‘ đ?‘Žđ?‘? đ?‘Ąđ?‘–đ?‘œđ?‘› đ?‘?đ?‘œđ?‘ đ?‘Ą đ?‘‹ đ?‘Łđ?‘Žđ?‘&#x;đ?‘–đ?‘Žđ?‘›đ?‘?đ?‘’


Financial, Treasury and Forex Management Š Tharun Raj 2.









đ??¸đ?‘Ľđ?‘–đ?‘ đ?‘Ąđ?‘–đ?‘›đ?‘” đ?‘ƒđ?‘œđ?‘&#x;đ?‘Ąđ?‘“đ?‘œđ?‘™đ?‘–đ?‘œ đ?‘‰đ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘‹ đ??¸đ?‘Ľđ?‘–đ?‘ đ?‘Ąđ?‘–đ?‘›đ?‘” đ??ľđ?‘’đ?‘Ąđ?‘Ž


đ??śđ?‘˘đ?‘&#x;đ?‘&#x;đ?‘’đ?‘›đ?‘Ą đ?‘Łđ?‘Žđ?‘™đ?‘˘đ?‘’ đ?‘œđ?‘“ 1 đ??źđ?‘›đ?‘‘đ?‘’đ?‘Ľ đ?‘“đ?‘˘đ?‘Ąđ?‘˘đ?‘&#x;đ?‘’ đ?‘?đ?‘œđ?‘›đ?‘Ąđ?‘&#x;đ?‘Žđ?‘?đ?‘Ą

3. Value of Call Option ďƒ C = S + P – PV of Exercise price

ď ˘=

ď łs x cor (s, m) ď łm


Return of a security (CML) = R f 

ď łs  R  Rf ď łm m

4. Value of Put Option ďƒ P = C + PV of Exercise price – S


5. Difference Between Spot Price (MP) and Strike Price (SP) Known as Intrinsic value

15. Risk return trade off =

6. Time value of option = Total Value of Option - Intrinsic value

16. Equation Of Characteristics Line: Y = ι + β x X

[Known as Extrinsic value]

Îą = Average of difference in returns


Return of a security (SML) = R f  β  R m  R f  đ?‘…đ?‘š − đ?‘… đ?‘“ đ?œŽđ?‘š

= Actual return – Expected return 7. Black and scholes model:

FOREX MANAGEMENT 1. Indirect Quote = 1/ Direct Quote

5. Bid Swap = Difference between Forward Bid & Spot Bid Ask Swap = Difference between Forward Ask & Spot Ask

2. Spread: Difference between the bank’s buying rate (Bid rate) and the bank’s selling rate (Ask rate) is called the Spread.

6. (1 + r h) / (1 + r f) = Forward rate / Spot rate ďƒ Interest rate parity

3. Bid (Rs/$) = 1 / Ask ($/Rs.)

7. (1 + lh) / (1 + lf) = Forward rate / Spot rate ďƒ Purchase power parity

Ask (Rs/$) = 1 / Bid ($/Rs.) 4. Formula: % of Appreciation / Depreciation (F−S) S


12 m

X 100

Commodity =

Page 20 of 20

Financial Treasury & Forex Management for CS EXAMS  

[FTFM contains Past CS exam Descriptive questions, Theory aspects and Formulae at a Glance] FOR Company Secretary Professional Programme Exa...

Financial Treasury & Forex Management for CS EXAMS  

[FTFM contains Past CS exam Descriptive questions, Theory aspects and Formulae at a Glance] FOR Company Secretary Professional Programme Exa...