Finance Primer 2014-15

8/18/2019 Finance Primer 2014-15

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Presented by


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Presented by


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About Equit-I, Finance Club

• Equit-I focuses on creating an enthusiasm about finance in the campus and bracing

up the student community for the industry rigor. The club strives to be an importantpartner in a participant's career development by creating learning opportunities andproviding industry interface.

• We assist participants in exploring financial career opportunities, by organizingworkshops and interactive sessions on various financial topics and career panelsspecifically for finance roles.

• We also help the participants in preparing for their summer placements by publishingmaterial and taking lectures on fundamentals of finance.

• Club publishes a weekly newsletter “Week That Was”, which includes business news

on the different sectors of the economy.


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Name Designation Description

Manjot Singh Bedi Secretary • Previously worked with Evalueserve and UBS Verity Knowledge Solutions for3 years as Associate in the Investment Banking space.

• Undergraduate college:- B.Com(Hons.) from SRCC, Delhi University• Internship:- Indxx Capital

Trina Chowdhury SeniorMember

• Been one of the state toppers in board examinations and has earlier internedwith electrical utilities companies as well.

• Undergraduate college:- B.E, Electrical Engineering, Jadavpur University• Internship:- Johnson & Johnson

GyaneshPhulambrikar

SeniorMember

• Previously worked with Goldman Sachs as an analyst developer for 2 years.• Undergraduate college:- B Tech(Hons) in Electronics and communication

from NIT Calicut.• Internship:- Philips India

Devang Jain SeniorMember

• Has worked with Oracle for 2 years and earlier interned at CEERI, Pilani andNetApp

• Undergraduate College – Dual Degree in B.E.(Hons.) Computer Science

and M.Sc.(Hons.) Mathematics, BITS Pilani• Internship - Infrastructure Leasing & Financial Services

Nirmal M S SeniorMember

• Has worked with South Indian Bank for 1 year as Prob. Assistant Manager• Undergraduate College – B.Tech in Electronics and Communication from

Govt. Model Engineering College, CUSAT• Internship - Innovative Ideators, developing Crowdfunding platform

Equit-I Core Team 2014-15

Profiles


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CONTENTS1. Corporate structures2. Role of finance manager3. Time Value of Money4. Corporate Budgeting

5. Accounting Basics6. Financial Ratios7. Basics of Stock Markets (by Voyage Capital – IIM Indore Mutual Fund)


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Corporate Structures

Proprietorships

Partnerships

Corporations

Unlimited liability Personal tax on profits

Limited Liability Corporate tax on profits Personal tax on dividends

Proprietorships & Partnerships: Owned and runby one or more individual and in which there is nolegal distinction between the owner and thebusiness. The owner receives all profits (subject totaxation specific to the business) and has unlimitedresponsibility for all losses and debts. Every asset ofthe business is owned by the proprietor, so are theresponsibility for the debts.

Corporations: Also called limited companies, herethe liability of the members or subscribers of thecompany is limited to what they have invested or

guaranteed to the company. Limited companies maybe limited by shares or by guarantee. And the formerof these, a limited company limited by shares, may befurther divided into public companies and privatecompanies.


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Role of a Finance Manager

Firm’soperations FinancialmarketsFinancialmanager

Cash raised from

investorsCash invested in

firm

Cash generated

by operations

Cash

reinvested

Cash returned

to investors


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Time Value of Money (TVM)

TVM is based on the concept that one rupee that you have today is worth more than the

promise or expectation that you will receive a rupee in the future. Money that you holdtoday is worth more because you can invest it and earn interest. You are compensated bythe bank or financial institution for depositing money with them and not spendingotherwise.

For example, you can invest 1$ for one year at a 7% annual interest rate and accumulate1.07$ at the end of the year. You can say that the future value of the rupee is 1.07$ givena 7% interest rate and a one-year period. It follows that the present value of the 1.07$you expect to receive in one year is only 1$. Thus, it is evident that 1$ held today isequivalent to 1.07$ held after 1 year.

A key concept of TVM is that a single sum of money or a series of equal, evenly-spacedpayments or receipts promised in the future can be converted to an equivalent valuetoday (present value of the cash flows). Conversely, you can determine the value towhich a single sum or a series of future payments will grow to at some future date (futurevalue of the cash flows).


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Time Value of Money (cont’d)

The basic equation for TVM is:

where,PV is value at time t=0,FV is value at time t=n,

‘i’ is discount rate or interest rate at which amount willbe compounded each period,‘n’ is number of periods.

Cumulative present value of future cash flows can be calculated by summing the

contributions of FVt, the value of cash flow at time t, with the following equation:


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Net Present Value(NPV)NPV is the difference between the present value of cash inflows and the present value ofcash outflows. The NPV equation is :

Where, CFt is the expected net cash flow at Period t, r is the project’s cost of capital, andn is its life. Cash outflows (expenditures such as the cost of buying equipment or buildingfactories) are treated as negative cash flows.NPV is used in capital budgeting to analyse

the profitability of an investment or project. For the project to be profitable the NPVshould be positive.

While comparing two projects:•If the projects are mutually exclusive, the one with the higher NPV should be acceptedand the other rejected. Mutually exclusive means that if one project is taken on, theother must be rejected. For example, a conveyor-belt system to move goods in a

warehouse and a fleet of forklifts for the same purpose illustrates mutually exclusiveprojects—accepting one implies rejecting the other.

•If the projects are independent, then both should be accepted if both have a positive NPVand thus add value to the firm. Independent projects are those whose cash flows areindependent of one another . If Wal-Mart were considering a new store in Boise andanother in Atlanta, those projects would be independent of one another.


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Internal Rate of Return (IRR)

IRR is one of the techniques used in capital budgeting. The IRR is defined as the

discount rate that forces the NPV to equal zero:

For example, let us say you invested $1,000,000 in a factory that earned $300,000,$400,000 and $500,000 in years one, two and three respectively. You then sold thefactory for $600,000 in year four. At a 24.89% discount rate, the NPV of this project wouldbe zero. Hence, the IRR of this project is 24.89%.

Generally speaking, the higher a project's internal rate of return, the more desirable it is toundertake the project. As such, IRR can be used to rank several prospective projects afirm is considering. Assuming all other factors are equal among the various projects, theproject with the highest IRR would probably be considered the best and undertaken first.


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Accounting Outline

Introduction to Accounting

Financial Accounting

Accounting Concepts

Financial Statements 1 – Balance Sheet

Financial Statements 2 – Income Statement

Financial Statements 3 – Cash Flow Statement


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• Formal Definition by the American Accounting Organization –

“The process of identifying, measuring and communicating economic information topermit informed judgments and decisions by users of the information

• Simply put, accounting is a system that provides information about an organization toall concerned parties

• Primary purpose of Accounting is to enable decision making by all stakeholders

• Types of Accounting Information –

– Operating Information : Details of day to day operations

– Management Accounting Information : Information presented for internalusage such as planning, implementation and control

– Financial Accounting Information : Used by both management as well asexternal parties to evaluate the firm’s performance

– Tax Accounting Information : Used to file tax returns with taxation authorities

Introduction to Accounting


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• Money Measurement : Financial Accounting records only that information which canbe expressed in monetary terms. The purpose of this is to provide a common unit tomeasure and operate on heterogeneous entities

• Entity : An entity is any organization or activity for which accounting reports areprepared. The entity concepts treats the accounts of businesses separately fromthose of the persons running them

• Going Concern : Accounting assumes that the organization is question will continueto operate for an indefinitely long period in the future

• Cost : The values of assets are generally recorded at the amount paid to acquirethem rather than at their current fair value

• Accounting period : This is the time between two successive presentations offinancial statements by an organization.

Accounting Concepts


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• Dual Aspect : Every transaction has a dual affect and impacts at least two items. Itpreserves the fundamental accounting equation

Assets = Liabilities + Owners’ Equity

• Matching : When a given event affects both revenues and expenses, the effect on

each should be recognized in the same accounting period

• Conservatism : Revenues are recognized only when they are reasonably certain andexpenses are recognized as soon as they are reasonably possible

• Materiality : Accounting should involve disclosure of all important and relevantinformation

Accounting Concepts


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• Financial Accounting presents information relevant to both management as well asexternal stakeholders

• The end product of Financial Accounting process is a set of reports called FinancialStatements

• Financial Statements –

– Help management evaluate the performance of the firm with respect to pastperformance and take relevant decisions

– Help shareholders judge how well the firm is doing and value the worth of theirinvestment

– Help lenders evaluate the ability of the firm to repay its debt

– Help prospective investors in evaluating the viability of investing in the firm

– Help other interested parties such as investment advisors, media and the generalpublic understand the financial position of the firm



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• Financial Statements generally are of two types –

– Stock or Status reports – Provide information about a firm at a specific instantof time

– Flow reports – Provide information about a firm over a specified period of time

• There are three main Financial Statements

– Balance Sheet – Stock report

– Income Statement – Flow report

– Cash flow statement – Flow report

• Financial statements are prepared using a set of rules/principles

• Characteristics of accounting principles – relevance, objectivity and feasibility

• Popular Accounting Standards – Generally Accepted Accounting Principles (US),International Financial Reporting Standards (IFRS)



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• Balance Sheet gives the financial position of an accounting entity at a specified

moment in time. It is also known as “statement of financial position”

• Components of Balance Sheet –

– Assets : Assets are economic resources that are owned and controlled by the

entity and whose cost is objectively measurable. Economic resources are those

that provide future benefits to the entity

– Liabilities : Liabilities are obligations of the entity to transfer assets or provide

services to outside parties arising from events that have already happened

– Owners’ Equity : This represents the amount owners have invested in the entity. It

consists of paid-in capital(amount invested directly) and retained

earnings(earnings to the firm minus dividends paid out by the firm)

The Balance Sheet

Assets = Liabilities + Owners’ Equity


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• The income statement summarizes the revenues earned and the expenses incurred

by the entity over a specified period of time

• The primary purpose of income statement is to show whether the entity made or lost

money during the specified period

• The components of income statement are

– Revenues : Revenues primarily demonstrate cash inflows and enhancements inassets from the company’s ongoing operations during the period

– Expenses : Expenses involve cash outflows, depreciation in the values of assets

or incurrence of liabilities from the company’s ongoing operations during the

period

The Income Statement

Revenues – Expenses = Net Income


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• The cash flow statement provides information about the cash flows associated withthe period’s operations, and also about the entity’s investing and financing activities during the period

• It shows the impact of balance sheet accounts and income on cash and cashequivalents

• Cash flow statements are considered objective as they are not influenced by judgments and estimates that are made in arriving at revenues and expenses

• Change in Cash flows = Cash flows from operating + investing + financing activities

The Cash Flow Statement


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• Uses of Cash Flow statement –

– Determining the liquidity and solvency of the entity

– Determining how much cash was actually raised from the entity’s majoroperations

– Determining how the expansion activities of the entity are being financed

– Determining the amount, timing and probability of future cash flows

The Cash Flow Statement


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Financial Ratios

Looking at standalone figures for sales, profits, assets or anything don’t make muchsense when analysing a company. A company having a profit of Rs. 50,000 on sales ofRs. 100,000 is performing better than a company earning a profit of Rs. 100,000 on salesof Rs. 300,000.

Hence in order to evaluate a company, and to benchmark it against its peers, it is better tolook at ratios as a financial indicator.


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Liquidity Ratios – Short Term Solvency


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Capital structure ratios: Indicator offinancing techniques & long term solvency


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Coverage Ratios


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Turnover / activity / performance ratios


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Profitability ratios based on sales


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Profitability ratios owner's view point


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Presented By


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Contents

Equity Markets in India

Introduction

How to pick a stock?

Fundamental Analysis

Technical Analysis


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About Voyage Capital Investment Club

• Voyage Capital Investment Club is a student-run club, instituted in 2008.

• Since then the club has come a long way, both in terms of investment size andparticipants' involvement.

• Club comprises of trading enthusiasts from both the PGP batches, with each memberspecializing in particular sector(s) and trading style.

• Our major exposure is towards equities. Besides trading and investing, club membersalso hold knowledge-sharing sessions for the participants, wherein trading strategiesand the latest economic happenings are discussed.

• We also come out with regular reports and articles for our investors, in which weshare our analysis of the companies in which we have invested and the analysis ofhow the latest news affects the stock markets


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Voyage Capital Core Team 2014-15 Profiles

Name Designation DescriptionKunal Shah Secretary • Kunal is a CFA level 2 candidate and a gold medalist in his undergraduate studies.

He has been an active follower of equity markets in India for the past 7 years.• Undergraduate college:- PDPU, Gandhinagar• Internship:- Purplle.com

Munish Dureja SeniorMember

• Munish has 5 months of experience at Exevo, research arm of Moody's, where heworked on financial and market research projects. He has done internships withRBI, Avantha Power & Infrastructure and GAIL

• Undergraduate college:- Shaheed Sukhdev College Of Business Studies

(University of Delhi)• Internship:- Airtel (Finance)

Moses RajaRatnam

SeniorMember

• Moses has previously worked with Cognizant Technology Solutions in the BFSvertical for 3.5 years.

• Undergraduate college:-SSN College of Engineering, Anna University• Internship:- TCS

Ansari Mohammed Ashar

SeniorMember

• Ashar has worked as an Associate Software Engineer at MAQ Software for 3Months and as an Auditor at Deloitte

• Undergraduate College –

Ramrao Adik Institute of Technology, D.Y. Patil• Internship- Innoserv Solutions Pvt. Ltd

Ankur Shah SeniorMember

• Ankur has received several scholarships and certificates, based on academicexcellence. He has worked on projects based on Debt Markets, especially theIndian Central Government Bonds.

• Undergraduate College-Dwarkadas J. Sanghvi College of Engineering• Internship - IL&FS Securities Services Limited


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Name Designation Description

Dhruv KantGoswami

SeniorMember

• Dhruv has a number of scholarships to his credit including the prestigious OPJEMS(2012). He had represented DCE in the Formula (student chapter) championship atSilverstone (UK) and is currently developing business strategies for a number of SMEsnear Indore.

• Undergraduate college:- Delhi College of Engineering• Internship:- JP Morgan Chase

Ankita Nirola SeniorMember

• Ankita has worked with Deloitte Touche Tohmatsu in Gurgaon as an Audit Assistant for21 months. She has audited one of the biggest US mutual fund clients.

• Undergraduate college:- SRCC, Delhi University• Internship:- RBI

Voyage Capital Core Team 2014-15Profiles


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• Equity Share (Stock): A type of security that signifies ownership in a corporation andrepresents a claim on part of the corporation's assets and earnings.

Two types of markets exist for equity shares:

• Primary Market: A market wherein fresh stocks are issued. Here the seller is thecompany itself and buyer are the investors.

• Secondary Market: A market of buyers and sellers who trade in securities that havealready been issued in the primary market.

Firms issue stocks to raise capital. The capital is required to:I. To finance business ventures

II. To finance growth

• Advantages of Equity Funding

– Can raise more capital than it could borrow.

– Does not have to make principal payments. – Does not have to make periodic interest payments to creditors.

• Disadvantages:

– Have to share their ownership with other shareholders.

– Shareholders have a voice in policies that affect the company operations.

– The cost of equity capital is higher than the cost of debt.

Introduction


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Equity Markets in India

• SEBI (Securities and Exchange Board of India)

– Statutory body constituted by the Government of India to protect the rights of theinvestors.

– It promotes the development of securities market and regulates it for mattersconnected therewith.

• Bombay Stock Exchange(BSE) – Oldest Stock Exchange in Asia with a rich heritage.

– Around 4700 Indian companies listed with Stock Exchange.

• National Stock Exchange(NSE)

– It is the 11th largest stock exchange in the world by market capitalisation

– More than 1600 companies are listed with NSE

– It is a much bigger exchange than BSE with respect to the total value of sharestraded


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Key points to be considered

• Time horizon for investment: Equity markets tend to be volatileand hence time horizon or the amount of time for which an investoris willing to hold on to his investment is an important parameterwhile selecting stocks.

• Risk appetite: Certain stocks may give high returns but are equallyrisky if the markets turn the other way. Hence, the return a stockprovides must always be seen in concert with the amount of riskassumed .

How to pick the right company to invest in ?


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Based of these two factors, stocks can be divided into following

categories• Income Stocks: Stocks of corporations which give money back to

share holders in the form of dividends.

– Stocks that pay a regular dividend are less volatile.

– Dividends reduce the loss if the stock price goes down.

– Dividends are considered taxable income.Income stocks are generally suitably if risk appetite is low and investorwants a steady income for the long term

• Value Stocks: Stocks of profitable companies that are selling at areasonable price compared with their true worth, or value. The time

horizon of such investments is uncertain as it may take time for thevalue to unlock.

• Growth Stocks: Stocks of companies that consistently earn a lot ofmoney and are expected to grow faster than the competition.


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Analyzing a Stock

• Two types of Analysis Possible

– Fundamental analysis

– Technical Analysis


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Fundamental Analysis

• Fundamental analysis of a business involves analyzing its financial statements andhealth, its management and competitive advantages, and its competitors and markets.

• The entire analysis must keep the over all macroeconomic sentiment into theperspective.

• Fundamental analysis maintains that markets may misprice a security in the short run

but that the "correct" price will eventually be reached.

• Profits can be made by purchasing the mispriced security and then waiting for themarket to recognize its "mistake" and reprice the security


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An example of Fundamental Analysis

Let us take the example of a company by the name Texmaco Rail and Engineering

• Texmaco is the flagship company of the Adventz group.

• The main business of Texmaco is manufacturing of Freight wagons for railways.

• And the biggest client for the company is the Indian Railways. This makes the firm’s

business highly susceptible to government policies and tenders.

• On account of the policy paralysis in the government in the past few years, orders forthe company had practically dried up.

• As a result, even though it had a capacity to manufacture 10000 wagons a year, itended FY14 with a production of just 980 wagons (less than 10% of capacity).

• This slowdown in business is also evident in its share price.


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• Between Jan ‘13 to Aug ‘13 its share price fell from a high of Rs. 72 per share to Rs.

27 per share


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• A more detailed analysis reveals that the railways in the past few months is sufferingfrom a huge shortage of wagons.

• In fact, a major reason for the shortage of coal in India is lack of railway infrastructureavailable to Coal India, the flagship coal miner of the country.

• For investors expecting a pro business government in the 2014 General election, thiswould have made an ideal stock to invest in.

• Any government that would want to revive investments must first take care of India’s

power crisis.

• This would require a rapid increase in coal output and hence investments in railwayinfrastructure to transport the coal.

• The stock was clearly undervalued and provided a great opportunity for investors.


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• Let us look at the stock’s performance in the run up to the elections and after the BJP

received a thumping majority

• The stock gained massively from Rs. 39 to Rs. 110 a share. A jump of nearly 200%!!!

• This is how a proper analysis of fundamentals can help investors create value.


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1. You can lose money in a very short time, but it takes a long time to make money.

2. The stock market isn’t a gamble as long as you pick good companies that you thinkwill do well and not just because of the stock price.

3. You have to research the company before you put money into it.

4. When you invest in the stock market you should always diversify.

5. You should invest in several stocks and not bet on only one at a time.

6. Never fall in love with a stock, always have an open mind.

7. Analysis should be extensive and well grounded in facts.

8. Just because a stock goes down doesn’t mean it can’t go lower.

9. Over the long-term it is generally better to buy stocks in small companies

10. Never buy a stock because it is cheap, but because you know a lot about it.

Key points for fundamental analysis


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Technical analysts base their buy and sell decisions on the charts they prepare ofrecorded financial data

1. Market value is determined by the interaction of supply and demand.

2. Supply and demand are governed by numerous factors, both rational and irrational.

3. Security prices tend to move in trends that persist for an appreciable length of time,despite minor fluctuations in the market.

4. Changes in a trend are caused by shifts in supply and demand.

5. Shifts in supply and demand, no matter why they occur, can be detected sooner orlater in charts of market transactions

6. Some chart patterns tend to repeat themselves.

Technical Analysis


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Thank you!

Finance Primer 2014-15

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