1. What is meant by operating leverage? In Business, operating leverage serves a similar purpose.

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage increase in sales can produce a much larger percentage increase in net operating income. It is high near the break even point and decreases as the sales and profit increase. The degree of operating leverage (DOL) is a measure, at a given level of sales of how a percentage change in sales volume will effect profits. Degree of operating leverage (DOL) = Contribution margin Net operating income 2. how do you determine the financial brak even point? Level of earnings before interest and tax (EBIT) at which a firm's earnings per share equal zero. The higher this point, the higher the financial risk of investment in the firm's stock (shares).
2. what is difference between ADR and IDR?

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction. An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets.[1] The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders in India.

4.what do you mean IRR? The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as "economic rate of return (ERR)". 5.what is sustable growth in the earnings? The sustainable growth rate (SGR) of a firm is the maximum rate of growth in sales that can be achieved, given the firm's profitability, asset utilization, and desired dividend payout and debt (financial leverage) ratios. Variables typically include the net profit margin on new and existing revenues; the asset turnover ratio, which is the ratio of sales revenues to total assets; the assets to beginning of period equity ratio; and the retention rate, which is defined as the fraction of earnings retained in the business. 6.how do you acertain the operating cycle of a manufacturing concern?

7. Difference between In-the-money (ITM), out-of-the-money (OTM), or at-the-money (ATM). An option can be described by its strike prices proximity to the stocks price. An option can either be in-the-money (ITM), out-of-the-money (OTM), or at-the-money (ATM). An at-the-money option is described as an option whose exercise or strike price is approximately equal to the present price of the underlying stock. An in-the-money call option is described as a call whose strike (exercise) price is lower than the present price of the underlying. An in-the-money put is a put whose strike (exercise) price is higher than the present price of the underlying, i.e. an option which could be exercised immediately for a cash credit should the option buyer wish to exercise the option An out-of-the-money call is described as a call whose exercise price (strike price) is higher than the present price of the underlying. Thus, an out-ofthe-money call options entire premium consists of only extrinsic value. There is no intrinsic value in an out-of-the-money call because the options strike price is higher than the current stock price. For example, if you chose to exercise the MSFT January 70 call while the stock was trading at $65.00, you would essentially be choosing to buy the stock for $70.00 when the stock is trading at $65.00 in the open market. This action would result in a $5.00 loss. Obviously, you wouldnt do that. 8. what are strategies of cash management? Cash management strategies are intended to minimize the operating cash balance requirement. The basic strategies that can be employed to effectively manage cash are: 1. 2. 3. 4. Delaying and stretching Accounts Payables Speeding up collection of Accounts Receivables Efficient Inventory-Production Management and Combined cash management strategies.

9.what is adjusted present value? djusted Present Value (APV) is a business valuation method. APV is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing. It was first studied by Stewart Myers, a professor at the MIT Sloan School of Management and later theorized by Lorenzo Peccati, professor at the Bocconi University, in 1973. The method is to calculate the NPV of the project as if it is all-equity financed (so called base case). Then the base-case NPV is adjusted for the benefits of financing. Usually, the main benefit is a tax shield resulted from tax deductibility of interest payments. Another benefit can be a subsidized borrowing at sub-market rates. The APV method is especially effective when a leveraged buyout case is considered since the company is loaded with an extreme amount of debt, so the tax shield is substantial. APV = Base-case NPV + PV of financing effect

An arbitrage opportunity is the opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price. Stock price difference between BSE & NSE at the end of the day. 11.Explain brief nature of Financial management? Financial management is concern with the management of all matters associ ated with the cash flow of an organisation both shortterm and long term. Ho w the company uses its funds typically by buying noncurrent assets and fun ding its working capital and where the funds came from typically from the s hareholders (equity) or by borrowing money from third parties (loans/debt). A decision to invest in capital assets should be considered against: Return Risk Shortterm profitability Liquidity Return

The return of an investment is the profit that is derived from the acquired ass et. Profit may be calculated in several ways; financial accounting profit or ne t present value (which is a measure of the surplus cash received less the cash paid out over the life of the product, expressed in terms of the current value of the cash flow). Risk Risk is the probability that an event will occur. It is n ot based on a hunch that an event might occur it is a quantified assessment o f what might occur. Shortterm profitability The shortterm profitability of a n investment is important because if too little profit is made during the early stages of the project th organisation may struggle to keep financing the proje ct for the longer term. Liquidity Liquidity has to do with the additional strai n on cash that the new project requires. The investment in the project must i nclude an amount for the increased working capital requirement that the orga nisation will eed. The additional cost must be included in the decision criteri a. 11.what are the factors on which cost of equity depends under DDM? The cost of equity is the opportunity cost of raising funds through equity. Whether you use retained earnings or issue new shares for financing, you will have in mind that you face competition. Your shareholders always have the opportunity to sell their existing shares and invest in another company. The return they require from investments in your company is, at the same time, the companys cost of equity, that is, the opportunity cost of raising funds through equity. Therefore, in fact, it is the valuation process for shares in which we are really interested while calculating the cost of equity. Estimates based on the dividend discount model Investors know that the value of any asset is related to the cash flows expected from that asset. In this case we are interested in the value of ordinary shares, and the value of a share today is the sum of the value of all the future dividends expected from the share. We know that money today is more valuable than that money tomorrow, and we must discount each forecast dividend

properly. We divide each expected dividend by 1 plus the required rate of return (r) raised to the power t, the number of periods ahead from today when the dividend will actually be received. Then, the share price P0 today is the sum of the present value of the future dividends. This is the dividend discount model: P0 5= D1 (1 1 r)1+ D2 (1 1 r)2 + Dt (1 1 r)t 1 1 ... 1 1 ... . 12.write a brief note on the role of payback period (PBP) in evaluating the capital project? Evaluating Capital Projects The following are useful measures to evaluate capital projects: 1. 2. 3. 4. Payback period Discounted payback period Net present value Internal rate of return
1. Payback Period

Payback period (PP) is the number of years it takes for a company to recover its original investment in a project, when net cash flow equals zero. In the calculation of the payback period, the cash flows of the project must first be estimated. The payback period is then a simple calculation. Formula 11.10 PP = years full recovery + unrecovered cost at

beginning of last year cash flow in last year

The shorter the payback period of a project, the more attractive the project will be to management. In addition, management typically establishes a maximum payback period that a potential project must meet. When two projects are compared, the project that meets the maximum payback period and has the shortest payback period is the project to be accepted. It is a simplistic measure, not taking into account the time value of money, but it is a good measure of a projects riskiness. 13.Critically examine the Net operating income theory of capital Structure? The theory of capital structure is closely related to the company`s cost of capital. Capital structure is the mix of the long-term sources of funds used by the company. The primary objective of capital structure decisions is to maximize the market value of the company through an appropriate mix of long-term sources of funds. This mix, called the optimal capital structure, minimizes the overall cost of capital; however, there is disagreement about whether an optimal capital structure actually exists. Approaches to the theory of capital structure: traditional, andnet income, 3.net operating income, 2.1. Miller-Modigliani. All four of these approaches use the following4. simplifying assumptions:

No income taxes are included The company`s dividend payout is 100% No transaction costs are incurred The company has constant earnings before interest and taxes (EBIT) There is a constant operating risk.

The net operating income (NOI) approach: suggests that there is no one optimal capital structure and that the firm`s overall cost of capital, k0, and the value of the firm`s market value of debt and stock outstanding, V, are both independent of the degree to which the company uses leverage.

14.What is meant by option? What are the different types of options? An option is part of a class of securities called derivatives. The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option. Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date. Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security, a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date. Several individual investors find options useful tools because they can be used either as: A) A type of leverage or B) A type of insurance. Trading in options lets you benefit from a change in the price of the share without having to pay the full price of the share. They provide you with limited control over the shares of a stock with substantially less capital than would be required to buy the shares outright. When used as insurance, options can partially protect you from the specific security's price fluctuations by granting you the right to buy or sell shares at a fixed price for a limited amount of time. Options are inherently risky investment vehicles and are suitable only for experienced and knowledgeable investors who are prepared to closely monitor market conditions and are financially prepared to assume potentially substantial losses.

What are the different types of Options? How can Options be used as a strategic measure to make profits/reduce losses? Options may be classified into the following types: a) Call Option b) Put Option As mentioned before, there are two types of options, calls and puts. A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally Call options increase in value as the value of the underlying instrument increases. By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid.