Investment Banking And Business Finance Quiz

The working capital of a company refers to the amount of money available to cover day-to-day operating expenses. It represents the company's short-term financial health and ability to meet its current obligations. Working capital is used to pay for inventory, salaries, rent, utilities, and other expenses required to keep the business running smoothly. It does not include marketing expenses, tax expenses, or interest expenses, as these are separate categories of expenses that are not directly related to the company's day-to-day operations.

A loan taken by a company is considered a liability because it represents a financial obligation that the company has to repay in the future. This means that the company has incurred a debt and is obligated to make payments towards the loan amount, typically with interest. The loan increases the company's financial obligations and impacts its financial position, making it a liability on the company's balance sheet.

Companies do an IPO, or Initial Public Offering, to raise money from public investors. This is a common method for companies to obtain funds for various purposes such as expanding their business, paying off debts, or funding research and development. By offering shares of their company to the public, companies can generate a significant amount of capital that can be used to support their growth and operations. Public investors are able to purchase these shares and become shareholders, potentially benefiting from any future increase in the company's value.

A secured loan is a type of loan where the borrower pledges some assets as collateral to the lender. This collateral acts as a security for the lender in case the borrower defaults on the loan. By backing up the loan with assets, the lender has a way to recover their money if the borrower fails to make the required payments. This makes secured loans less risky for lenders and often allows borrowers to access larger loan amounts or lower interest rates compared to unsecured loans.

Revenue refers to the cash that a company receives from its customers in exchange for the products or services it offers. It is an essential component of a company's financial performance and represents the income generated from its primary business activities. Revenue is not related to the cash that the promoters invested in the company, the cash borrowed from the bank, or the cash paid to suppliers.

A company having to pay off a loan this month is considered a current liability because it is a financial obligation that is expected to be settled within the next 12 months. Current liabilities are debts or obligations that are due in the short term and need to be paid off using current assets or by creating new current liabilities. Since the loan is due this month, it falls under the category of current liabilities.

The cost of pizza ingredients such as cheese and vegetables is considered a Cost of Goods Sold (COGS) for Dominos Pizza. COGS refers to the direct costs incurred in producing or purchasing the goods that a company sells. In the case of Dominos Pizza, the pizza ingredients are directly related to the production and sale of their main product, which is pizza. Therefore, the cost of these ingredients is considered a COGS for Dominos Pizza.

Working capital is used to fund the day-to-day operations of a company. It represents the amount of money available to cover the company's short-term expenses such as purchasing inventory, paying salaries, and covering utility bills. By having sufficient working capital, a company can ensure smooth operations and meet its financial obligations on time. It is different from long-term capital, which is used for expansion plans or paying back loans.

The income statement is used to determine the company's profitability. It provides a summary of the company's revenues, expenses, and net income or loss over a specific period of time. By analyzing the income statement, stakeholders can assess the company's financial performance and its ability to generate profits. It helps in evaluating the company's efficiency, identifying areas of improvement, and making informed decisions regarding investments or lending.

Goldman Sachs is an investment bank because it is a global financial institution that provides a wide range of financial services to clients, including investment banking, asset management, securities trading, and mergers and acquisitions advisory. It is known for its expertise in capital markets activities, such as underwriting stocks and bonds, assisting companies in raising capital, and providing financial advice to corporations, governments, and institutional investors. Goldman Sachs is well-regarded in the investment banking industry and has a strong presence in global financial markets.

Reserves refer to the money that a company sets aside for future uses or contingencies. It is a portion of the company's profits that is not distributed as dividends to shareholders but is retained for various purposes such as expansion, investment, or to cover potential losses. Reserves act as a financial cushion for the company and provide stability and flexibility in managing its operations.

Yahoo is the most comparable company to Google for a comparable trading valuation because both companies operate in the technology industry and offer similar services such as search engines, email services, and online advertising. Additionally, both Yahoo and Google have a large user base and generate significant revenue from advertising. This makes Yahoo a suitable comparison for evaluating Google's financial performance and market value.

The Income Statement is also known as the Profit or Loss Statement because it provides a summary of a company's revenues, expenses, and net profit or loss over a specific period of time. It shows the financial performance of a business by detailing the income generated and the expenses incurred, ultimately determining whether the company has made a profit or incurred a loss during the specified period.

The easiest way to find a company's Income Statement is by accessing the Investor Relations section of the company's website. This section typically provides financial information, including the Income Statement, to keep investors and stakeholders informed about the company's financial performance. It is a reliable and convenient source as it allows easy access to the required information without the need for external sources or communication with the company.

Net Income is the line item that connects the Balance Sheet to the Income Statement. Net Income represents the total profit or loss generated by a company during a specific period. This amount is then transferred to the Balance Sheet as retained earnings, which is a component of the owner's equity. Therefore, Net Income directly impacts the Balance Sheet and serves as a link between the two financial statements.

The earnings per share can be calculated by dividing the price per share by the P/E ratio. In this case, the price per share is Rs. 200 and the P/E ratio is 15x. Dividing Rs. 200 by 15 gives us Rs. 13.33, which is the earnings per share.

If a company reports a loss this year, it means that its expenses exceed its revenue, resulting in a negative net income. In such cases, the company is not required to pay any income tax because it does not have any taxable income. Therefore, the correct answer is 0%.

A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It presents a summary of what the company owns (assets) and what it owes to others (liabilities). By having a balance sheet, a company can keep track of its assets and liabilities, which is crucial for understanding its financial health and making informed decisions. It helps in evaluating the company's liquidity, solvency, and overall financial performance.

Marketing Expense is classified as an Operating Expense. Operating expenses are the costs incurred by a company to maintain its daily operations and generate revenue. Marketing expenses refer to the costs associated with promoting and advertising a company's products or services to attract customers and increase sales. These expenses include advertising campaigns, public relations activities, market research, and other promotional activities. As marketing expenses are necessary for the ongoing operation and growth of a business, they are considered part of the company's operating expenses.

In an IPO, a company raises money mostly from the public. This means that the company offers its shares to individual investors, who can purchase them through the stock market. By doing so, the company can generate a large amount of capital from a wide range of investors. This allows the company to fund its operations, invest in growth opportunities, and potentially increase its market value. Public investors have the opportunity to become shareholders and potentially benefit from any future profits or increase in the company's stock price.

As a restaurant company grows in size, it can benefit from economies of scale. This means that the company can take advantage of cost savings and efficiencies that come with increased production and operations. For example, the company can negotiate better deals with suppliers, purchase ingredients in bulk at lower prices, and spread fixed costs over a larger number of sales. These cost savings ultimately lead to improved profitability for the company.

The correct answer is "Revenue – Operating Expenses – Taxes + Depreciation – Capex + Change in working Capital". This formula calculates the Free Cash Flow of a company by subtracting operating expenses and taxes from revenue, and then adding depreciation, capital expenditures, and changes in working capital. Free Cash Flow is an important measure of a company's financial health and represents the amount of cash it generates after accounting for all expenses and investments.

When a company borrows money, it incurs interest expense. Interest expense is the cost of borrowing funds from lenders or financial institutions. It represents the interest payments that the company must make on its outstanding debts. As a result, borrowing money directly affects the company's income statement by increasing its interest expense. This expense is deducted from the company's revenue to calculate its net income. Therefore, the correct answer is Interest Expense.

The company had a loss of Rs.5 lakh in 2010 and Rs.11 lakh in 2011. This means that it has accumulated losses of Rs.16 lakh over the two years. According to tax laws, a company can carry forward its losses for a maximum of 8 years and set them off against future profits. Since the company has accumulated losses, it can set off the profit of Rs.2 lakh in 2012 against these losses. As a result, it will not have to pay any income tax on the profit of Rs.2 lakh in 2012. Therefore, the correct answer is Rs.0.

The raw materials and ingredients used by Dominos to make pizzas are considered as assets. Assets are the resources owned by a company that have economic value and can be used to generate future benefits. In this case, the raw materials and ingredients are essential resources for Dominos to produce and sell pizzas, contributing to the company's revenue and profitability.

When a restaurant company's revenue is growing significantly, it is likely that the company will invest more in its infrastructure and assets to accommodate the increased demand. This investment will lead to an increase in the gross block, which represents the total value of the company's fixed assets. As the company expands its operations and acquires more assets, the gross block will naturally increase. Therefore, when revenue is growing, it is expected that the gross block will also increase.

Employee salaries are considered an operating expense (COGS) for Dominos Pizza because they are directly related to the production and delivery of pizzas. Salaries paid to employees involved in the day-to-day operations of the business, such as pizza makers and delivery drivers, are necessary for the company to generate revenue. These expenses are deducted from the company's revenue to calculate its gross profit and determine its operating performance.

Accrual accounting is used because it provides the best representation of the operations of a company. Unlike cash accounting, which only records transactions when cash is received or paid, accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when the cash is received or paid. This method provides a more accurate and comprehensive view of a company's financial performance and helps in matching revenues and expenses in the appropriate accounting period. It also enables better tracking of assets, liabilities, and equity, making it the preferred method for financial reporting and decision-making purposes.

Paying 90% of the revenue as salaries in a company is considered too much because it leaves very little or no profit for the company to reinvest or cover other expenses. It indicates that a significant portion of the revenue is being allocated to salaries, which may lead to financial instability and hinder the company's growth and sustainability.

The software technology/IT industry has the highest gross margin because it typically involves the creation and sale of software products or services, which have high profit margins. Additionally, the IT industry often benefits from economies of scale and low production costs, allowing for higher profit margins compared to other industries such as retail, manufacturing, and restaurants.

The market value of a company is calculated by multiplying the number of shares outstanding by the price per share. In this case, the company has 10 lakh shares outstanding and the price per share is Rs.550. Therefore, the market value of the company would be 10 lakh shares multiplied by Rs.550 per share, which equals Rs.55 Crores.

Operating income is calculated by subtracting the cost of goods sold and operating expenses from the revenue. This formula takes into account the direct costs of producing goods or services (cost of goods sold) as well as the indirect costs associated with running the business (operating expenses). By subtracting these expenses from the revenue, the calculation provides a measure of the company's profitability before interest and taxes are taken into account.

The highest rating possible for debt is AAA. This rating indicates that the issuer has a very low risk of defaulting on their debt payments. It signifies a high level of creditworthiness and financial stability. AAA-rated debt is considered to be of the highest quality and is typically issued by governments and large corporations with strong financial positions.

Synergy in a merger or acquisition refers to the cost savings that can be achieved when two companies are joined together. By combining their resources, operations, and eliminating duplications, the merged entity can benefit from economies of scale and reduce expenses. This can include streamlining processes, eliminating redundant positions, and consolidating facilities. The cost savings can lead to increased profitability and improved financial performance for the combined company.

The P/E ratio, or price-to-earnings ratio, is a crucial metric to consider when buying shares in a company. It indicates the price investors are willing to pay for each dollar of earnings generated by the company. A low P/E ratio suggests that the stock is undervalued, while a high P/E ratio may indicate that the stock is overvalued. Therefore, the P/E ratio helps investors assess the company's current valuation and potential for future growth.

The main reason for the 2008 financial crisis was that companies had too much debt. This excessive debt burdened the companies and made it difficult for them to meet their financial obligations. As a result, many companies faced financial difficulties and were unable to repay their debts, leading to a domino effect throughout the economy. This ultimately resulted in the collapse of several major financial institutions and triggered a global financial crisis.

When cash increases by Rs.1 Lakh in a balance sheet, the shareholders' equity will also increase. This is because shareholders' equity represents the residual interest in the assets of a company after deducting liabilities. As cash is considered an asset, an increase in cash will lead to an increase in the overall value of the company's assets. To maintain the balance in the balance sheet equation (Assets = Liabilities + Shareholders' Equity), shareholders' equity must also increase.

When loans increase in a balance sheet, it means that the company has borrowed more money. This increase in loans will result in an increase in cash because the borrowed money will be added to the company's cash reserves. Therefore, the correct answer is Cash.

During an Initial Public Offering (IPO), a company typically takes a dilution of 10-15%. This means that the company offers a portion of its ownership to the public in the form of shares, resulting in a decrease in the existing shareholders' ownership percentage. This dilution allows the company to raise capital by selling shares to investors, enabling them to fund their expansion plans, repay debts, or invest in new projects. A dilution of 10-15% strikes a balance between raising necessary funds and maintaining a significant stake for existing shareholders.

Restaurants typically have a higher Cost of Goods Sold compared to the technology industry. This is because restaurants need to purchase ingredients and raw materials to prepare their menu items, which directly contribute to their cost of goods sold. Additionally, restaurants often have higher labor costs due to the need for chefs, cooks, and servers. On the other hand, the technology industry primarily deals with the production and sale of software, hardware, and electronic devices, which generally have lower costs associated with their production compared to the food and labor costs in the restaurant industry.

The recommended way for the technology start-up to raise Rs.10 Crores from investors would be through issuing equity shares. This means that the company would sell ownership stakes in the form of shares to investors in exchange for the capital they need. By doing so, the start-up would not have to repay the money as they would with a loan, but instead, the investors would become shareholders and have a claim on the company's profits and assets. This method allows the start-up to raise funds without incurring debt and provides potential for future growth and value creation.

When a company buys assets such as laptops, it is considered a capital expenditure. Capital expenditures are investments made by a company to acquire or improve long-term assets, such as equipment or property, that will benefit the company over an extended period of time. In this case, purchasing 20 laptops for employee use at a cost of Rs. 20 lakhs would increase the company's capital expenditure by Rs. 20 lakhs.

The market value of a company is generally higher than its book value because the market takes into account intangible assets such as research and development, proprietary methods, and the quality of the team. These factors are not reflected in the book value, which only includes tangible assets and liabilities. The market recognizes the potential future earnings and growth prospects associated with these intangible assets, leading to a higher valuation. Additionally, market dynamics, investor sentiment, and supply and demand factors can also influence the market value of a company.

The Steel Industry is best suited to be valued using Discounted Cash Flow Analysis because it is a capital-intensive industry with long-term projects and significant cash flow fluctuations. Discounted Cash Flow Analysis takes into account the time value of money and provides a more accurate valuation of companies with unpredictable cash flows. The Steel Industry often requires substantial investments in infrastructure and equipment, and its profitability is closely tied to economic cycles. Therefore, Discounted Cash Flow Analysis can help assess the present value of future cash flows and determine the intrinsic value of steel companies.

When cash increases by Rs.1 Lakh in a Balance Sheet, the other line item that will also increase is Current Liabilities. This is because an increase in cash implies that the company has more funds available to pay off its short-term obligations, which are classified as current liabilities. Therefore, as the cash balance increases, the current liabilities will also increase to reflect the additional funds that need to be paid out in the near future.

The correct answer is 35%. This means that Dominos Pizza's annual revenue has been growing at a rate of 35% over a specific period of time. This indicates that the company has been experiencing significant growth in its revenue, which is a positive sign for its financial performance.

The venture capitalist invested Rs.10 crores in the company and has a 1x liquidation preference, which means they are entitled to receive their initial investment back before any other distributions are made. The company is sold for Rs.20 crores, so the venture capitalist receives their initial investment of Rs.10 crores plus 20% of the remaining Rs.10 crores (20% equity). Therefore, the venture capitalist makes Rs.12 crores.

When a startup raises Rs.50 lakhs from angel investors, it typically dilutes around 10-15% of its equity. This means that the angel investors will receive 10-15% ownership of the company in exchange for their investment. Dilution of equity is a common practice in startups, as it allows them to secure funding while giving investors a stake in the company's success.

Venture Capital investors typically prefer to see financial projections for a period of 3-5 years. This time frame allows them to assess the potential growth and profitability of the investment, as well as the ability of the company to generate returns within a reasonable timeframe. It provides a balance between short-term visibility and long-term potential, allowing investors to make informed decisions about the viability and scalability of the business.

Equity research is the department in a bank that is responsible for providing unbiased financial analysis reports on companies. This department conducts in-depth research and analysis on various companies, their financial performance, industry trends, and market conditions. The reports generated by equity research analysts are used by investors, fund managers, and other stakeholders to make informed investment decisions. This department plays a crucial role in providing valuable insights and recommendations based on their analysis, helping clients make well-informed investment choices.