Q – 1 How we can do valuation of a company?
The most popular valuation methods are:
- Discounted Cash Flow Valuation (DCF – Intrinsic Value based)
- Relative Valuation (Comparable company analysis Market Based)
- Some of the part (SoTP)
Q – 2 Why EBITDA multiple better then EBIT multiple?
We use both EBIT and EBITDA for the multiples like EV / EBIT and EV / EBITDA
EBITDA multiple is better as it is free from accounting manipulation as D&A can be
manipulated to some extent. If D&A is subtracted then EBIT may be little questionable
Q – 3 For a growing company like: - Reliance; higher the P/E ratio better it is, how?
Ans – 3 For a value stock lesser P/E ratio is better and for a growth stock higher P/E ratio is better in
terms of pay back.
Also for a levered company (i.e. company with higher debt levels) also have higher P / E
multiple
Q – 4 Difference b/w Depreciation, Amortisation, and impairment?
Ans 4
Depreciation is decrease in the value of tangible assets
Amortisation is decrease in the value of intangible assets with finite life.
Impairment is decrease in the value of intangible assets with in-finite life like goodwill.
Impairment is for intangible assets with infinite life like Goodwill. Intangible assets with finite life
get amortized instead of impaired.
Q–5 Difference b/w Dividend rate, dividend yield and Dividend payout ?
Ans 5
Dividend rate - Announced by the company on the face value of share.
Div rate = Dividend per share / Face value per share
Dividend Yield - For Investor prospective or Dividend / Current market price
Div yield = Div per share / Current market price
Dividend Payout – Net Income or Dividend per share.
Div payout = Div per share / Earning per share
Q – 6 How can we find Enterprise value (EV) ?
EV = Market capitalization + Preferred equity + Non-controlling interest + Debt – Cash + Capital
leases
Q – 7 What is Minority Interest?
Ans – 7 A co. Has some stake in other co. Of suppose 90% but it takes in B/S as 100% thats why we
add Minority Interest.
Minority interest is the amount that is not acquired by parent company and that portion is recorded
as minority interest in parents’ financial statements.
Q – 8 What is Bonus Issue?
Ans 8 Company issues some shares instead of giving cash to the share holders in ratio 1:1
Bonus issue is a type of non-cash dividend which company pays to its shareholders’ based on certain
ratio (i.e. 1:1).
Effect:
No of shares increases; shares price gets reduced;
Total Equity will be same >>> (Within Equity, share capital par value increases and share premium
gets reduced)
Q – 9 What right issue?
Ans – 9 Shares will given only to existing share holders with the price less then market price
In Right issue, company seeks to increase its capital by issuing new securities only to existing
shareholders.
Effect: No of shares increases, Share capital and premium increase (if issued at premium)
If offering price = share price then, no change in price
If offering price < share price then, decrease in share price
If offering price > share price then, increase in share price
Q – 10 What is Stock Split?
In Stock Split of say 2:1, no of share increase to double and share price gets half
EPS decrease to half, Price increase to half, hence P/E ratio will be same
Reason: To increase liquidity and make the stock attractive to small investors
Q – 11 What is Treasury stock method?
Ans 11 Treasury Stock method –
See my video on Trading comps Option dilution and calculate incremental shares
Q – 12 What is sharpe ratio?
Formula: (Return on market – risk free rate) / Standard dev of market
Ans – It is a rate of return earned over risk free rate for per unit of risk; also told as market premium
per unit of risk
Q – 13 Why is Market value/EBITDA not a good comparable multiple?
Because Market value is attributable to equity holders and EBITDA is attributable to both equity and
debt holders.
When we calculate any multiple, we should take numerator and denominator for either equity
holders only or both equity and debt holders like below ratios:
Equity multiples – P/E, P/BV, P/TBV
Firm wide multiples: EV/ EBITDA, EV / Sales , EV / EBIT,
Q – 14 What is 1 major advantage of discounted cash flow analysis?
- It is highly sensitive to WACC, Growth rate and Exit Multiple used. This is the reason why we do
sensitivity analysis and Football field
Q – 15 What is beta?
Beta: Beta represents the sensitivity of a stock with respect to market. Examples: Stock with 1.1 of
beta means if market is up by 10% over a period, stock will be up by 11% = (1.1*10)
Alpha: Excess Return earned over the predicted or expected rate of return
Q – 16 From which all factors can we judge profitability of the company?
Profitability ratios:
- Gross profit margin
- Operating margin
- Net profit margin
- RoAE
- RoCE
- RoAA
- DU Pont
Q – 17 Tell me some leverage ratios?
- Debt / Equity
- Debt / Total Capital
- Debt / EBITDA
Q – 19 Tell me some Liquidity ratios?
- Current ratio
- Quick Ratio
- Cash Ratios
Q – 20 Tell me some Coverage ratios?
- Interest Coverage Ratio
- DSCR ratio
- Loan to Value ratio
Q – 21 Tell me some Solvency Ratios / How to do Credit Analysis using ratios?
- Do All leverage, liquidity and coverage ratio analysis using above
Q – 23 Active Investor vs Passive Investor
- Passive investing follows Index strategy, following stock market index like Nifty or Sensex
- Active Investing follows beating Index by further investing in outperforming stock and selling
underperforming stock