Capital Market Interview Questions And Answers

Net present value (NPV) is a financing term which shows the cash flow worth for both inflow and outflow and it is been defined as the sum of the present values of cash flow. NPV is formulated as future cash flow subtracted from the purchase price. It is also the tool to calculate discounted cash flow and is a standardized method for the analysis of capital budgeting. The advantages and disadvantages of it are as follows:-

The advantage of NPV is needed for long term projects and it measures the excess or shortfall of cash flows as it is used for the reinvestment at the discount rate which is used for this.

The advantage is that the adjustment for this is a bit risky and it adds a bit of difficulty in making the cost higher.

Steps which are taken to control the capital budgeting process are as follows:-

1) Indentify the proposals which are already involved in capital budgeting.

2) Do the screening of the proposal for future estimation.

3) Evaluate the different type of proposals

4) Fix the priorities of the proposals

5) Final approval and planning of the capital expenditure

6) Implement the proposal

7) Review the proposal.

Profitability index (PI) is also known as profit investment ratio (PIR) and also termed as value investment ratio(VIR) which tells that a proposed project will have the ratio of payoff to investment. It is like a tool which is used for ranking projects and it allows quantifying the amount of value created per unit of investment. If the value of profitability index is less than 1 then accept the project and if it is greater than one then reject the project. Another way to calculate the profitability index is future cash flows divided by the initial investment.

Internal rate of return is used to calculate the even break point which is also an alternative way to calculate the cost of capital and it includes the risk premium. It is the rate of return which is used in capital budgeting which gives the indication of the profitablility of investments. This is also called as discounted cash flow rate of return. This can't be used for mutually exclusive projects where the selection can be done to only one project rather than both the projects.

Capital budgeting limitations are as follows:-

1) It has long term implementations which can't be used in short term and it is used as operations of the business. A wrong decision in the early stages can affect the long-term survival of the company. The operating cost gets increased when the investment of fixed assets is more than required.

2) Inadequate investment makes it difficult for the company to increase it budget and the capital.

3) Capital budgeting involves large number of funds so the decision has to be taken carefully.

4) Decisions in capital budgeting are not modifiable as it is hard to locate the market for capital goods.

5) The estimation can be in respect of cash outflow and the revenues/saving and costs attached which are with projects.

Accounting rate of return is also know as Average rate of return which gives the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the net income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:

ARR= Average profit/average investment

Period is not involved with the time value of money and it doesn't even get considered whereas discounted pay back period is another form which involves this and have the real value of cash inflows which are measured in current amount of money which are given as a discount amount. The rate with which they are given at any interest rate are called as Discount rate.

Payback period= year before recovery+ unrecovered cost at the start of year/ cash flow during the year

The techniques which are available for the evaluation of capital expenditure proposal depend on the management which has to select and have the profitable proposal out of different proposal under study. The technique which is used are as follows:-

1) Degree of urgency method

2) Pay back method

3) Rate of return method which is not adjusted properly

4) Present value method which is adjusted through time and it also includes net present value method.

In the case of pay back period technique which is used for evaluation of capital expenditure proposal in which the cash inflows are even and constant and the period can be computed by dividing the original investment to the annual cash-inflow. This can be also represented in number of years which are required to recover the original cash which has been invested in the project. This the method which is used to measure the period of time as it takes for the original cost of the project which has to be re3covered from the earning which are additional to the project.

Time value of money is the value which is earned over a given amount of time in terms of interest. For example if Rs. 200 money will be invested for about 1 year then the earning will be of 5% interest which will be worth 205 after one year. So using this time value of money terminology the future value can be predicted.

Calculation of the present value :- in this the worth of the future sum is given and the specified rate of return is been shown. It has lots of variations in this is that the future cash flow are discounted at the discount rate and it also represents the low present value of future cash flow.

Discounted cash flow:- in finance it is the analysis of a method which talks about the value of the project, company and the asset which is being used using the time value of money. In this all estimation has been taken and discounted for the present value as it shows both incoming and outgoing. This kind is used for investment of the finance and used for financial management.

Cash flow is the movement of the money in and out of the business which results in high availability of the cash. The cash flow calculation is simple and it is calculated by adding the after tax income and bookkeeping expenses that result in deduction of the items which has not be paid out in cash. The cash flow in few months will be negative only which should not be taken as a negative sign as it won't effect the business much. The cash balance should not go below zero as it will be same as negative balance in the account.

The factors which has to be taken into consideration while computing the cash outflows and cash inflows are as follows:-

1) Net income which is provided by the operations.

2) Non-cash expenses

3) Loss and gain on sales on assets.

4) Non-cash current assets and liabilities except payable notes and dividends payable.

5) Cash collection which is the major principle component of the cash flow and it is the actual cash which is
being received during accounting period which has to be taken from the customers

6) Financing which result in the change in size and composition of the equity capital and it also show the activities result of the borrowings of the enterprise.

7) It also includes issue shares and equity instruments.

The acceptance rule is the rule which is used for the communication purpose and it is used in unilateral contracts which makes an offer and will be accepted by some act. This rule also determines whether the agreement is from both sides or not. The offer may only be accepted if the offerer is the person for whom the offer is made. If the offer is accepted then the offer can be accepted without any modification.

The advantages and disadvantages are as follows :-

Until the offer is accepted the offer can't be said as complete so it provides a security which brings the attention of the contract into existence at the moment of acceptance.

Advantage of it is that when the offer of acceptance is being made and the receiving party sends the confirmation to the party which sent the offer than the offer will be considered as valid.

The disadvantage of it is that the offer can be terminated or rejected on the part of the person who is offering the offer. So it is totally dependent on the offerer rather than the the person who is involved in it.

Another disadvantage of this is that if the offeree rejects the offer then offerer can't be accepted at future time

Capital budgeting is a process making system which is used to select and evaluate long term investments that is fixed assets investigation. It requires initial outlay and it also expect to produce the benefits and result over a period of over a year. The importance of capital budgeting is that the proper decision can be made after seeing the capital budget increases the firm's value and also the shareholders' wealth. It is a critical measuring tool for a company which helps the firm to stay in competition as the expansion of the business takes place for example purchasing of equipments to produce additional and new products.

The process of capital budgeting involves long term investment generation where they are more consistent with the long term objectives. It estimates the incremental cash flow which has been a proposals given to the project which is been considered after taking tax. After this the cash flows estimations takes place and then selection of the project takes place which maximize the shareholders' wealth.

The exit routs of VCF are as follows:-

1) Trade sale it is a sale of shares and business assets which has been invested by the investors and the assets are of the investee. Company uses by the way of private sale agreement.

2) IPO (Initial public offering) is used to publicly share the offering which will be followed by the listing of shares on stock exchange.

3) Recycling- it is a sale to the sub-investors which are working under the investors or other equity houses.

4) Company buying-back the shares.

The different types of venture capital financing depends on the investment of specific purpose within the life of target company as the high return rate of the company remains constant and it has no effect on it. There are three types of venture capital financing:-

Early Stage Financing which is divided into three parts of its own they are as follows:-

1) Seed financing- in this small amount is required for the purpose of starting up the loan. The amount which is been used in this is received by the entrepreneur.

2) Start up financing- in this finished developed products and services are given to the companies as this can also be used under the initial marketing where the development of products and services takes place.

3) First stage financing- in this companies which has spent all their starting capital and which are requiring further finance to begin their business activities at full scale are used.

Expansion Financing is also subdivided into three parts namely as:-

1) Second stage financing- in this companies begin their expansion this is also termed as mezzanine financing as it is used for the purpose of providing the assistance to a particular company to expand the company.

2) Bridge financing

3) Third stage financing

Acquisition or Buyout Financing- in this acquisition and management finance are used which assist the company to have certain parts or entire company under themselves. It is also termed as leveraged buyout financing. This also helps in the management group to obtain a particular product from another company by collaboration.

Venture capital is a capital which provides high potential interest generating returns from the growing companies at very early stages. The return which will be generated is through the sale of the company. This term usually generated from the institutional investors and high net worth individuals which has been working together on a dedicated investment firms. The main importance of it is that it generates high interest returns at very early stages and at a growing pace. It also has high-end companies which supports it in reaching the peak.

The provision of buy back of shares as per Companies Act, 1956 the shares must be bought by the company due to following reasons they are as follows:-

1) Promoters hold increment and increment in earning per share
2) Support of share value and to pay surplus cash won't be required by the business

The resources which have to be used in buy back can be purchased from:-

1) Free reserves :- in this company purchase its own shares out of the left out, then by doing this sum equal to nominal value of share which has been purchased gets transferred to the capital redemption reserve.

2) Security premium account :- in this company can't buy back its own shares or other security related issues.

The buy back period by which it has to be finished is within 12 months from the date of passing the case. In this also the company is not liable to directly or indirectly purchase its own shares or other securities issue.

Secured premium notes are issued with the warrant which is kind of detached. This can be redeemed after a notice period of 4-7 years. This way it ensures the holder right to apply and get the allotted equity shares. Secured premium notes has lock-in periods during which the interest is not necessarily to be paid for the invested amount. It also has many options to do the sell back to the holders at par or face value after the lock-in period. As in this only it contains lots of risks as the holder gets one equity share after a fixed period of time.

The advantage and limitation of credit rating are as follows:-

1) People with good credit will have their ability enhanced for the borrowing. Lenders will be able to rewarded or punished by the people with their reports on the habits of their credit responsibility

2) The limitation can occur when the credit information which is been reported or when the identity of the consumer's is stolen. It is really difficult for the lenders to get the information if it is lost or it is very difficult and exhausting process.

Credit rating is the rating which gives the estimate of the individual company, corporation of country's worth. Credit bureau makes an evaluation of borrower's credit history and then according to that the actions on it take place. Credit rating shows the ability of the borrower to pay the debt to the lender on request to the credit bureau. The calculation of it depends on the financial history, current assets and liabilities. The probability of a borrower to pay back of its loan can be seen by this which tells a lender or investor about it.

The main features which are involved with the credit ratings are as follows:-

1) It is used to estimate the worthiness of the credit for the company, country or any individual company.

2) Credit rating is been done after considering various factors such as finacncial, non-financial parameters, and past credit history.

3) The rating which gets done is simple and it facilitates universal understanding. Credit rating also makes it widely accepted as the symbols which are used are generalized and made common for all.

4) The process of credit rating is very detailed and it involves lots of information such as financial information, client's office and works information and other management information. It involves in-depth study.