Short Answers of Finance Essay

1037 Words Feb 10th, 2013 5 Pages
On the balance sheet under Fixed Assets, you find Gross Block, Accumulated Depreciation and Net Block. Net Block is simply Gross Block minus Accumulated Depreciation. Also, there is a depreciation expense entry in the income statement. Using these, can you think of a ratio which would tell the average age of the company’s fixed assets? Average age of the company’s fixed assets = Accumulated Depreciation / Depreciation Expense

From a valuation standpoint, a very widely used ratio is the price to earnings ratio (P/E). This is the ratio of the market cap to the last year’s reported earnings of the company. There is another very widely used ratio called Enterprise Value by EBITDA. The Enterprise Value (EV) of a company is total
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228,760 Cr.
Net Earning = Rs. 10413 Cr.
Debt (2) = Rs. 791.48 Cr.
Cash and Equivalents = Rs. 6003.47 Cr.
EBITDA (4) = Rs. 14841 Cr.

E/P = 228750/10413
EV/EBITDA = = (Market Cap. + Debt – cash)/ EBITAD = 15

• Does EV/EBITDA change if a company raises equity at the current market price and uses the money to pay off debt at book value? Does P/E change? Assume the stock price does not change with this event.

EV/EBIDTA = (Market Cap + Debt-Cash)/EBITAD

If we raise equity the market capital will increase and debt will be reduced by same amount, so net effect will be zero. Hence, EV/EBIDTA will remain unchanged

Price  no change
Earning  no change
So there will be no change in P/E

• After you buy an insurance policy, you are very unlikely to stop paying the premiums later in the policy term. This is because you would normally think of the premiums you have already paid in the past and how those will go to waste if you stopped paying now (once bought the churn is close to zero). Therefore, if you are in an insurance company, which ONE key metric would, you track?

Number of insurance policies sold per year. And claims against the policies

• If you wish to maintain your Sustainable Growth Rate, to double your sales, by how much should you increase your assets?

SGR = b x (1 + Debt/Equity) x

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