FINANCE

BOOK
2024-25

Prepared by:
Finance and Investment Cell,
Kirori Mal College
 ACKNOWLEDGEMENT
We are elated to present the inaugural edition of the Finance Book — a project born out of ambition, sustained by
collaboration, and completed with immense dedication by the members of the Finance and Investment Cell, Kirori Mal
College. Over the past 7–8 months, this endeavour has evolved into a cornerstone of our Cell’s vision — to make finance
more accessible, insightful, and engaging for students and young professionals.

This publication is the result of countless brainstorming sessions, nights filled with research and analysis, and a collective
will to produce something of enduring academic value. From exploring foundational concepts in finance and statistics to
decoding real-world applications across industries, every page of this book reflects the sincere efforts of our team.

We owe a debt of gratitude to our Principal, Prof. Dinesh Khattar, whose constant encouragement has always empowered
us to pursue excellence. Our heartfelt appreciation extends to our Convenor, Dr. Sakshi Soni, whose timely advice, patient
mentorship, and consistent belief in the Cell’s capabilities have been pivotal to this initiative’s success.

To all of our members — thank you for your remarkable synergy, perseverance, and attention to detail. This book stands
not just as a publication, but as a legacy that we hope future members will carry forward and build upon.

FINANCE AND INVESTMENT CELL, KMC

 PRINCIPAL’S ADDRESS
“It gives me great pride to commend the Finance and Investment Cell of Kirori Mal
College on the successful publication of the first edition of the Finance Book. In today’s
dynamic financial landscape, this student-led initiative stands as a remarkable
testament to academic excellence, collaborative spirit, and innovative thought.

This book goes beyond definitions and theoretical concepts — it reflects months of
meticulous research, analytical rigor, and genuine intellectual curiosity. It offers readers
a comprehensive understanding of modern finance through sectoral insights, regulatory
frameworks, and real-world case studies.

Initiatives like these highlight the transformative role educational institutions play —
not just in imparting knowledge, but in shaping thinkers, leaders, and changemakers.
The dedication and vision displayed by the team behind this project are truly
commendable.
I extend my heartfelt congratulations to the entire team at the Finance and Investment
Cell. May this Finance Book serve as a valuable academic resource and stand as a
symbol of the Cell’s commitment to excellence and its growing legacy.”

– Prof. Dinesh Khattar

Principal, Kirori Mal College

FINANCE AND INVESTMENT CELL, KMC

 CONVENOR’S ADDRESS
“The launch of the Finance Book is a proud milestone in the journey of the Finance
and Investment Cell at Kirori Mal College. As the Convener, I’ve had the privilege of
witnessing this initiative evolve from an idea to a well-executed publication, and it
truly reflects the highest standards of student-led scholarship.

More than just an academic resource, this book embodies the Cell’s core values —
research, innovation, and clarity of thought. Covering diverse themes like the time
value of money, financial modelling, industry primers, and regulatory frameworks, it
showcases the team’s deep understanding of the financial world.

What distinguishes this effort is the team’s commitment to excellence — balancing

foundational clarity with advanced insights to cater to a wide range of readers.
To every member who contributed: your dedication, collaboration, and intellectual
passion are truly admirable. This book not only marks an achievement but sets the
tone for future endeavours. May it continue to inspire and elevate the standards of
student-driven work in the field of finance.”

– Dr. Sakshi Soni

Convenor, Finance and Investment Cell
FINANCE AND INVESTMENT CELL, KMC
 MEET THE TEAM
CORE TEAM

Naitik Jain Utsav Bansal Bhavya Agrawal Dhruv Gupta Yash Jain
President Vice President General Secretary General Secretary General Secretary

RESEARCH & EDITORIAL HEADS TECHNICAL HEADS

Gauri Goel Nishaant Chaturvedi Ishika Agarwal Parth Jogi

CONTRIBUTORS CONTRIBUTORS CONTRIBUTORS

CONTRIBUTORS

Aaban Tufail Devika Pillai Kartik Aggarwal Sameeksha Anant Agarwal Aashmin Monga
Aadit Gupta Diksha Nath Rahul Bhavnani Sakhi Aryan Arora Pravit Rathi
Aditya Tiwari Dipayan Dey Kisha Gupta Sana Bagga Devansh Srivastava Rohit
Akshay Kumar Gaurav Aggarwal Manish Soni Sandipan Borah Ansh Rai Raghav Bansal
Bani Kaur Jiya Malhotra Naman Kumar Siddharth Jha Suhani
Daksh Rastogi Kaashvi Suri Paanav Singhla Yash Goel Akriti Saxena
Deepti Gola Kartik Gupta Prakshi Dhall
 ABOUT THE FINANCE BOOK

The Finance Book is a flagship publication of the Finance and Investment Cell, Kirori Mal College — envisioned as a
comprehensive guide that bridges the gap between theoretical frameworks and practical financial knowledge.
Conceived, curated, and compiled entirely by the student members of the Cell, this book is a culmination of extensive
research, collaboration, and a shared vision to simplify finance for the larger student community.

This volume covers a wide array of topics, carefully segmented into beginner, intermediate, and advanced levels —
starting from basic financial ratios and statistical tools, progressing into models like CAPM and APT, and culminating
with detailed discussions on regulatory bodies, case studies, sectoral overviews, and applications of financial laws.

Whether you are a first-year student discovering finance or a senior preparing for placements and internships, this book
serves as both an academic guide and a real-world reference. It is not just a collection of information, but a celebration
of curiosity, discipline, and the Cell’s mission to foster financial literacy and empowerment.

FINANCE AND INVESTMENT CELL, KMC

 PHASE 1 - TABLE OF CONTENTS
TOPICS (PG NO. 1-24) TOPICS (PG NO. 25-42) TOPICS (PG NO. 43-59)

Section 1: Basic Finance Terms Section 3: Intermediate Concepts Section 5: Acts and Laws
Introduction to Finance Capital Asset Pricing Model Companies Act
Concept of Time Value of Money (CAPM) RBI Act
Financial Ratios Arbitrage Pricing Theory SEBI Act
(APT) Banking Regulation Act
Liquidity Ratios
Corporate Social Pension Fund Regulations
Profitability Ratios
Leverage Ratios Responsibility (CSR)
Efficiency Ratios Economic Indicators Section 6: Regulatory Bodies
Taxation in Finance
Market Ratios
Risk Measures Securities and Exchange Board of India
Case Study (SEBI)
Crisis Management
CAGR (Compound Annual Growth Rate) Reserve Bank of India (RBI)
Dividends Insurance Regulatory and Development
Capital Budgeting Techniques Section 4: Advanced Finance Topics Authority
Bonds Pension Fund Regulatory and
Financial Statement / Financial
Modeling Basics Development Authority (PFRDA)
Section 2: Statistics in Finance
M&A
Portfolio Management Section 7: Applications and Trends
Introduction to Statistics
Basic Statistical Tools Insurance in Finance
Case Studies
Probability Distributions Emerging Trends
Hypothesis Testing Future of Finance
Regression Analysis
SECTION 1
BASIC FINANCE TERMS
 Introduction to Finance
Finance is the study and management of money, assets, liabilities, and currency. It involves the creation, use, and study of investments, credit, debt, and securities.

Personal Finance Corporate Finance Public Finance

It involves managing individual or household It involves handling financial activities of businesses, It involves government-related financial activities,
financial activities such as budgeting, saving, including capital investment decisions, funding such as taxation, expenditure, budgeting, and
investing, and planning for future expenses like strategies, risk management, and profit managing public debt to meet societal and economic
education, retirement, or emergencies. maximization. goals.

Importance in Decision Making

Resource Allocation: Finance Economic Growth: Risk Management: Capital Formation:

ensures funds are directed to the It drives development by Finance provides tools like It channels savings into
most productive and beneficial facilitating investments in insurance and diversification to investments that fuel business
uses. businesses, infrastructure, reduce uncertainties. expansion and economic activity.
innovation.

Finance and Investment Cell, KMC 1

 Concept of Time Value of Money
A dollar today is worth more than a dollar in the future because money can grow over time if you save or invest it. For example, putting $100 in a bank today can earn interest, so in a year,
you'll have more than $100.

Key Concepts

Present Value (PV) Future Value (FV) Perpetuity Annuity

This is how much money is worth today. This is what your money will grow to in the future. A perpetuity is a stream of equal cash flows that An annuity is a series of equal cash flows paid or
Example: If someone promises to give you $110 in Example: If you save $100 today at a 10% interest continues forever. received over a fixed period
a year and the interest rate is 10%, the present rate, in one year, it will grow to $110 Common in financial instruments like preferred Formula for present value (Ordinary Annuity):
value of that $110 is $100 stocks or endowments.

Formula : FV = PV/(1+r)^(1/n) Formula : FV = PV/(1+r)^n Formula : PV = C / r Formula : P(1-(1+r)^-n)/r

Everyday Examples Why is TVM important?

Perpetuity Annuity
1. Loan Repayments: Imagine borrowing $1,000 to buy something. The bank charges interest, so you'll
pay back more than $1,000. The bank uses TVM to calculate your monthly payments. TVM helps us make smart financial decisions, like:

2. Investments: 1) Knowing how much money to save now for future goals.
You're deciding between two options:
2) Comparing loans, savings, or investments.
Option 1: Save $500 today in an account that grows 10% per year.
Option 2: Wait and invest $500 in two years. 3) Understanding how interest affects money over time.
TVM helps you compare which choice makes you more money over time.

Finance and Investment Cell, KMC 2

 Financial Ratios
Financial ratios are critical tools in the world of finance, providing a quantitative method for analyzing an organization’s financial health and performance. By condensing complex
financial data into comprehensible metrics, these ratios facilitate informed decision-making for investors, management, and stakeholders.

Why are Financial Ratios Important?

Acts as a bridge Performance Evaluation Decision Making
Financial ratios transform raw financial data into Ratios help assess how well a company utilizes its resources, Ratios provide the quantitative basis for decisions, such as
meaningful insights, enabling stakeholders to assess manages liabilities, and generates profits. For example, investing in a company, extending credit, or improving
performance, identify trends, evaluate risks, and make profitability ratios like Return on Equity (ROE) reveal the operational efficiency. They offer benchmarks that can be
informed strategic decisions efficiently. efficiency with which shareholder capital is employed. compared across periods, industries, or competitors.

Types of Ratios

Liquidity Efficiency Profitability Leverage Market Ratios

Measure a company’s ability to Evaluate a company’s financial Assess a company’s stock

Assess a company's ability to Analyze how well a company uses its
generate profit relative to revenue, structure and its ability to meet long- performance and market
meet short term obligations. assets and manages operations.
assets, or equity. term obligations. perception.

Eg. Current Ratio, Quick Eg. Inventory Turnover Ratio, Asset Eg. Net profit margin, Eg. Debt to equity, Interest Eg. Earning per share, Price
Ratio Turnover Ratio Return on Assets Coverage ratio to earnings ratio

Finance and Investment Cell, KMC 3

 Liquidity Ratios
Liquidity ratios measure a company’s ability to meet its short term obligations.These are vital for creditors and investors who need to ensure the company can sustain
operations without financial strain.

Purpose

Liquidity ratios assess the company’s ability to manage immediate liabilities. A strong liquidity position ensures the company can handle unexpected expenses or
downturns in revenue.

Formula Current Ratio: Current Assets / Current Liabilities

Quick Ratio: (Current Assets – Inventory) / Current Liabilities

Interpretation Example

A Current Ratio above 1 suggests that a company has more assets than If a company’s current assets are ₹15,00,000 and its current liabilities are
liabilities to cover short-term debts. However, a very high ratio may ₹10,00,000,
indicate inefficient use of resources. The Current Ratio is calculated as:
Current Ratio = ₹15,00,000 / ₹10,00,000 = 1.5
A Quick Ratio provides a stricter measure by excluding inventory and For the Quick Ratio, assume inventory is ₹3,00,000.
prepaid expenses, which might not be easily converted to cash. A ratio Then: Quick Ratio = (₹15,00,000 – ₹3,00,000) / ₹10,00,000 = 1.2 Both ratios
close to or above 1 is often considered healthy. indicate the company has sufficient liquidity to cover its short-term
obligations.

Finance and Investment Cell, KMC 4

 Profitability Ratios
Profitability ratios are financial metrics used to evaluate a company's ability to generate profit relative to its revenue, assets, equity, or other financial benchmarks.
They provide insight into a company's operational efficiency and its ability to turn resources into profit. Here’s an overview of the key profitability ratios:

Gross Profit Margin Net Profit Margin

Formula: Formula:
Purpose Purpose
Indicates how efficiently a company produces goods or services relative to the cost of production. A Reflects the percentage of revenue that remains as profit after all expenses, including taxes and
higher margin means better efficiency in managing production costs. interest, are deducted.
Example Example
Company A: Revenue = $1,000,000, Gross Profit = $600,000 Company A: Revenue = $1,000,000, Net Profit = $150,000
Gross Profit Margin = (600,000 / 1,000,000) × 100 = 60% Net Profit Margin = (150,000 / 1,000,000) × 100 = 15%
Company B: Revenue = $1,000,000, Gross Profit = $500,000 Company B: Revenue = $1,000,000, Net Profit = $200,000
Gross Profit Margin = (500,000 / 1,000,000) × 100 = 50% Net Profit Margin = (200,000 / 1,000,000) × 100 = 20%

Operating Profit Margin Return On Equity

Formula: Formula:
Purpose Purpose
Measures the percentage of revenue left after covering operational costs. This excludes financing and Indicates how effectively a company uses shareholders' equity to generate profit. Higher ROE is
tax expenses, offering insight into core operational efficiency. generally favorable.
Example Example:
Company A: Revenue = $1,000,000, Operating Profit = $300,000 Company A: Net Income = $150,000, Shareholders’ Equity = $500,000
Operating Profit Margin = (300,000 / 1,000,000) × 100 = 30% ROE = (150,000 / 500,000) × 100 = 30%
Company B: Revenue = $1,000,000, Operating Profit = $250,000 Company B: Net Income = $200,000, Shareholders’ Equity = $800,000
Operating Profit Margin = (250,000 / 1,000,000) × 100 = 25% ROE = (200,000 / 800,000) × 100 = 25%

Finance and Investment Cell, KMC 5

 Leverage Ratios
Leverage ratios are financial metrics used to assess the degree to which a company utilizes borrowed funds to finance its operations and growth. These ratios help evaluate the financial risk
associated with the company's level of debt. Here’s an overview of the key leverage ratios:

Debt-to-Equity Ratio Interest Coverage Ratio

Formula: Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity Formula: Interest Coverage Ratio = EBIT / Interest Expense
Purpose:
Purpose:
Evaluates the company’s ability to pay interest expenses using its earnings before interest and taxes
Measures the proportion of debt financing relative to shareholders' equity. A higher ratio
(EBIT). A higher ratio indicates better capacity to meet interest obligations.
indicates greater reliance on debt, implying higher financial risk.
Example:
Example:
Company A: EBIT = $200,000, Interest Expense = $50,000
Company A: Total Liabilities = $500,000, Shareholders' Equity = $1,000,000
Interest Coverage Ratio = 200,000 / 50,000 = 4.0
Debt-to-Equity Ratio = 500,000 / 1,000,000 = 0.5
Company B: EBIT = $150,000, Interest Expense = $75,000
Company B: Total Liabilities = $800,000, Shareholders' Equity = $800,000
Interest Coverage Ratio = 150,000 / 75,000 = 2.0
Debt-to-Equity Ratio = 800,000 / 800,000 = 1.0

Equity Multiplier Comparison

Formula: Equity Multiplier = Total Assets / Shareholders' Equity Debt-to-Equity Ratio: Company A has a lower debt-to-equity ratio, indicating lower
financial risk compared to Company B.
Purpose: Indicates the proportion of a company's assets that are financed by shareholders'
equity. A higher multiplier suggests more assets are financed through debt. Interest Coverage Ratio: Company A is better positioned to cover its interest
Example: expenses.
Company A: Total Assets = $1,500,000, Shareholders' Equity = $1,000,000
Equity Multiplier = 1,500,000 / 1,000,000 = 1.5
Company B: Total Assets = $2,400,000, Shareholders' Equity = $800,000
Equity Multiplier: Company B has a higher equity multiplier, reflecting greater
Equity Multiplier = 2,400,000 / 800,000 = 3.0 reliance on debt financing.

Finance and Investment Cell, KMC 6

 Efficiency Ratios
Efficiency ratios help us understand how well a company uses its resources, like assets and inventory, to generate revenue and manage
operations effectively.

Asset Turnover Ratio Inventory Turnover ratio

This ratio shows how efficiently a company uses its assets to generate sales.
This ratio measures how efficiently a company manages its stock of products.

Formula: Asset Turnover Ratio = Net Sales / Average total assets

Formula: Inventory Turnover Ratio = Cost of Goods Sold (COGS)/ Average Inventory

Importance: Importance:
• It helps us see if the company is making good use of its resources to drive sales. • A high ratio means the company is selling its products quickly, which is great for reducing storage costs and
• A higher ratio means assets are being used well, while a lower ratio suggests there might be room avoiding outdated stock.
for improvement. • A low ratio might mean the company has too much stock or slow-moving products.
Example: Example:

Observations 3.0
Observations 5

Company A (denoted as black) shows a consistent growth in its asset 2.5

Company A (denoted as blue) shows a fluctuating Inventory 4

turnover ratio. This shows that they are utilizing their assets more 2.0
Turnover Ratio with ranging around to 4-5. 3
efficiently over time. 1.5
Company B (denoted as black) shows a lower and gradually 2
Company B (denoted as blue) shows a gradually declining asset 1.0
declining Inventory Turnover Ratio. It’s a sign of overstocking. 1
turnover ratio. It may be a sign of declining efficiency of assets. 0.5

0.0 0
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023

Finance and Investment Cell, KMC 7

 Market Ratios
Market ratios evaluate a company’s stock performance by comparing its market value to earnings, book value, or other indicators.

Price-to-Book Ratio Price-to-Earning Ratio

It compares a company’s market value (price) to its book value (net asset value). It measures the price of a company’s stock relative to its earnings per share (EPS).

Formula: P/B ratio= Market Price per share / Book Value per share Formula: Market Price per share / Earning price per share (EPS)

Importance:
Importance:
• The P/B ratio helps investors assess whether a stock is undervalued or overvalued by comparing its
• The primary goal of the P/E ratio is to evaluate if a stock is overvalued or undervalued compared
market price to its book value.
to its earnings potential.
• A ratio of less than 1 could mean the stock is undervalued, indicating a potential buying opportunity.
• A higher P/E ratio suggests that investors expect higher growth in the future.
• A ratio greater than 1 suggests that the stock is trading at a premium compared to the company's book
• A lower P/E ratio may indicate that the stock is undervalued or that the company is facing
value.
challenges.
Example: Example:

5
8
Observations: Observations:
4
1. Company A (denoted as blue) shows a consistent growth in its price- 6

to-book ratio. This suggests increasing investor confidence in the 3 1. Company A (denoted as black) shows a constant downfall,
company. 2
indicating a worse market sentiment. 4

2. Company B (denoted as black) fluctuates more drastically, reflecting 1

2. Company B (denoted as blue) shows a fluctuating price-to- 2

market uncertainty or operational instability. earnings ratio.

0 0
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023

Finance and Investment Cell, KMC 8

 Case Study: Efficiency in Retail vs Manufacturing
Efficiency is crucial in both retail and manufacturing, but the way it’s achieved and measured differs between the two. While both industries aim to get the most
out of their resources and reduce waste, each has its focus based on the specific challenges they face.

Efficiency in Retail Balancing Retail & Manufacturing Efficiency in Manufacturing

Retail efficiency focuses on optimizing inventory Aligning retail and manufacturing relies on shared Manufacturing efficiency focuses on faster
turnover, meeting real-time customer demand, demand forecasting, ensuring production matches production, less waste, and high quality.
and reducing operational waste. Technologies like customer needs while avoiding stockouts or excess Techniques like lean production and
AI and data analytics enable accurate demand inventory. Collaborative planning and systems like automation reduce material and energy use
forecasting, while effective supply chain ERP streamline operations, improve visibility, and while ensuring product standards. Priorities
management ensures faster replenishment cycles enhance decision-making, enabling both sectors to include minimizing machine downtime and
and better stock availability. work cohesively and efficiently. enhancing worker training to optimize
processes and resources.

Way Forward & Conclusion

Embracing digital tools like AI and IoT, along with agile systems, can enhance adaptability and efficiency across retail and manufacturing. Sustainable practices reduce waste
and environmental impact, while a feedback loop between the two sectors ensures continuous process improvement and alignment with customer needs.

An integrated approach to efficiency in retail and manufacturing aligns operations, reduces waste, and enhances customer satisfaction. This synergy drives profitability,
supports sustainable growth, and ensures long-term competitiveness in dynamic market conditions.

Finance and Investment Cell, KMC 9

 CAGR
CAGR (Compound Annual Growth Rate) measures the average annual growth rate of an investment over a specified period, assuming consistent
compounding.

Why do we use CAGR ? The formula to find CAGR is:

Imagine you saved $100 and invested it. After 5 years, it became
$200. You’d want to know:
1. How much did it grow overall?
2. How much did it grow every year on average? where:
CAGR helps answer the second question by showing the “average Beginning value = how much money you started with.
growth rate” per year, as if the growth were smooth and steady. Ending Value = How much money you have at the end
n = number of years it grew.

Why is CAGR useful?

CAGR is like finding the average speed of a car during a trip. Even if you stopped for gas or drove at different speeds, it tells you how fast you went on
average.
Similarly, CAGR shows the average growth rate of your investment, even if the growth wasn't the same every year.
In Real Life: If a company’s profits grew from $1 million to $2 million in 5 years, CAGR tells you how quickly it grew annually on average.
It helps compare investments to see which one grew faster over the years.

Finance and Investment Cell, KMC 10

 Dividends
Dividends are payments made by a company to its shareholders from its earnings. They are an important part of a company’s financial policy and serve as a signal of its
financial health and future prospects. For investors, dividends are not only a source of regular income but also help in valuing the company. A company's dividend
decisions directly impact its share price and, therefore, the wealth of its shareholders

Dividends Types of Dividends

1. Interim Dividend: Paid before the financial year ends, showing the company’s
confidence in its profitability.

2. Final Dividend: Declared after the financial year ends, based on audited
Interim Final financial statements, with shareholder approval.

3. Special Dividend: A one-time dividend payment made from surplus funds after
Special extraordinary earnings or significant events.

Dividend Decisions and Capital Budgeting

Capital budgeting plays a crucial role in deciding how much profit to retain and how much to distribute as dividends. It involves evaluating long-term investment
opportunities to ensure the company utilizes its resources effectively. By assessing potential projects, companies aim to invest in those that maximize shareholder value
while balancing the need for dividend payments.

Finance and Investment Cell, KMC 11

 Dividend Distribution in a Growing V/S Mature Company
GROWING COMPANY MATURE COMPANY

Scenario: A tech startup named Innovate X focuses on expanding its market share Scenario: An established utility company, Stable Energy Ltd., operates in a low-
by reinvesting profits into R&D and business growth. It generates ₹10 crore in growth industry. It generates ₹10 crore in annual profits but has limited
annual profits but pays no dividends as it retains earnings to fuel expansion. reinvestment opportunities. It distributes 70% of its profits as dividends to
shareholders.

Key Points: Key Points:

High growth opportunities mean funds are required for R&D, marketing, Stable cash flows and low growth opportunities allow the company to
and scaling operations. prioritize shareholder returns.
Shareholders accept little or no dividends in anticipation of higher capital Dividends are used as a consistent income source for shareholders.
gains as the company grows. Dividend Distribution: ₹7 crore (70% of profits paid out as dividends)
Dividend Distribution: ₹0 (Profits are fully reinvested).

Comparison:

Finance and Investment Cell, KMC 12

 Capital Budgeting Techniques
These are methods used by businesses to evaluate and decide on long-term investment opportunities. Below are the main capital budgeting techniques, each explained
with a detailed example:

NPV calculates the difference between the present value of cash inflows and outflows of a project. It determines
1. Net Present Value (NPV):
whether a project will add value to the company.

Formula : Example
A company is considering a project requiring an initial investment of ₹10,00,000. It expects cash inflows of ₹3,00,000, ₹4,00,000, and
PV of inflows - PV of outflows
₹5,00,000 over the next three years. The discount rate is 10%

Σ (Cash flows / (1 + r)^t) – Initial Investment

where r is the discount rate and t is the time

period
Since NPV is positive , the project is financially viable and will add value.

IRR is the discount rate at which the NPV of a project becomes zero. It is compared with a predetermined rate (hurdle rate)
2. Internal Rate of Return (IRR):
to assess the attractiveness of the project.

Formula : Example
A project requires an investment of ₹10,000 and generates cash flows of ₹4,000 each year for 3 years.
The formula used for IRR is essentially derived from
the NPV equation but is solved for the rate (IRR) that
makes NPV=0

Using a trial-and-error approach or Excel, the IRR is found to be approximately 10.99%.

Finance and Investment Cell, KMC 13

 Capital Budgeting Techniques
3. Payback Period: This method calculates the time required to recover the initial investment from the cash inflows.

Formula : Example
Initial Investment = ₹10,00,000
Cash Inflows = ₹3,00,000 (Year 1), ₹4,00,000 (Year 2), ₹5,00,000 (Year 3).
Cumulative inflows:

Year1: ₹3,00,000
Year2: ₹7,00,000 (₹3,00,000 + ₹4,00,000) 5,00,000
Year3: ₹12,00,000 (₹7,00,000 + ₹5,00,000)
The payback period is between Year 2 and Year 3. The time as calculated is 2.6 years

4. Profitability Index (PI) PI is the ratio of the present value of cash inflows to the PV of outflows. A PI > 1 indicates profitability

Formula : Example
If the present value of cash inflows is ₹11,00,000 and the initial investment is ₹10,00,000

Since PI > 1, the project is acceptable.

Finance and Investment Cell, KMC 14

 Bonds
What are Bonds?

A bond is a fixed-income instrument where individuals lend money to a government or company at a certain interest rate for an amount of time. The entity
repays individuals with interest in addition to the original face value of the bond.

Types of Bonds

1) Government Bonds 2) Corporate Bonds 3) Municipal Bonds

A Government Bond is a debt security Corporate bonds are debt securities Municipal Bonds refer to a type of
issued by the government to support issued by a corporation in order to debt security issued by local, county,
its spending and obligations. raise money for diverse business and state governments, commonly
Investors essentially lend their needs. Investors are offered a pre- offered to pay for capital
money to the government and in established number of interest expenditures.
return, receive periodic interest payments at either a fixed or variable Municipal bonds act like loans,
payments called ‘coupons’. interest rate. investors are promised interest on
their principal balance—the latter
being repaid by the maturity date.

Finance and Investment Cell, KMC 15

 Bonds
Key Terms

1. Coupon Rate: A coupon rate is the rate of interest paid by a Bond.

2. Yield: A bond yield is the return on the capital invested by an investor. It can be calculated as -
3. Maturity: A bond's term to maturity is the length of time during which the owner will receive interest payments on the investment, when the bond reaches maturity and the
principal is repaid.
4. Yield to maturity (YTM): is the long-term bond yield expressed as an annual rate. It is the internal rate of return of an investment if the investor holds the bond until maturity
5. Yield Curve: A yield curve is a line that plots the yields of bonds that have equal credit quality but different maturity dates.

Comparing Returns

The bar graph illustrates the returns of two investors over five years (2019-2023).
Investor A invests in the Indian stock market, which shows higher but volatile
returns, while Investor B invests in bonds, offering stable yet comparatively lower
returns.
Investor A would achieve a return of 77.6% over the course of 5 years, whereas
Investor B would achieve a return of 33.7% in the same amount of time.

Finance and Investment Cell, KMC 16

SECTION 2
STATISTICS IN FINANCE
 Introduction to Statistics in Finance
Why statistics matter: Risk Analysis, Portfolio Optimization

Statistics is essential in finance, helping professionals analyse data, measure market trends, assess risks, and evaluate financial performance. It plays a key role in risk
management, portfolio optimization, and market analysis. In the financial services industry, statistics help process vast amounts of data, identify patterns, and solve
problems.

Risk Analysis Portfolio Optimization

Statistics is essential for risk analysis in finance, as it helps quantify, measure, Statistics is key to portfolio optimization, helping investors balance risk and
and manage uncertainties. Risk analysis involves evaluating the likelihood of return. It estimates expected returns based on past data and measures risk to
adverse events, measuring potential losses, and determining strategies to make investment decisions more informed and effective. Here's how statistics
mitigate those risks. Here's how statistics contribute: contribute:

Statistical measures (e.g., standard deviation, beta) to assess volatility. Mean (Expected Return): Estimates average return based on historical data.
Probability distributions to model outcomes. Variance and Standard Deviation: Measures asset volatility.
Value-at-Risk (VaR) is used to estimate potential portfolio losses. Covariance and Correlation: Assesses relationships between asset returns for
Monte Carlo simulations to evaluate different risk scenarios. better diversification.
Correlation analysis to guide diversification. Modern Portfolio Theory (MPT): Builds efficient portfolios by balancing risk
and return.
Thus, statistics helps investors and institutions make informed decisions to Sharpe Ratio: Evaluates portfolio performance by comparing excess returns
manage financial risks effectively. to risk.

Finance and Investment Cell, KMC 18

 Basic Statistical Tools
Basic statistical tools provide the foundation for analysing data and interpreting patterns in various fields. Here's an overview of the key concepts listed and how they
apply, particularly in financial contexts:

1. Mean (Average) 2. Median

Median is the middle value of a dataset when it is ordered from smallest to largest. If
The mean is the sum of all data points divided by the number of data points. It provides
the dataset has an even number of observations, the median is the average of the two
a central value around which the data is distributed.
central numbers.
Formula:
Mean = Median =

Financial Example Financial Example

The mean can be used to calculate the average return of a stock or portfolio over a In evaluating household incomes, the median income is often a better indicator of the
specified period. For instance, if the monthly returns of a stock are 2, the mean return is = "typical" income than the mean, especially if the dataset contains outliers (e.g., a few
2% very high-income households).

3. Variance 4. Standard Deviation

Variance measures the spread of data points around the mean. A higher variance Standard deviation is the square root of variance. It represents the average distance of
indicates that the data points are more dispersed. each data point from the mean.
Formula: Formula:

Variance = Standard Deviation =

Financial Example Financial Example
Variance is used in portfolio management to measure the variability of asset returns. For Standard deviation is a critical metric for assessing market volatility. If a stock's monthly
example, in assessing stock returns over time, a higher variance indicates greater volatility returns have a standard deviation of 5%, it indicates that the returns typically deviate by 5%
and risk. from the mean.

Finance and Investment Cell, KMC 19

 Discrete Probability Distributions
Types of distribution Definition PMF Mean and Graph
Variance
A binomial random variable X with parameters n and p is the sum
BINOMIAL DISTRIBUTION of n independent Bernoulli random variables:
Parameters: n, p (0 ≤p≤1, n=1,2,....) X=X1+X2+⋯+Xn
Each Xi represents a success (with probability p) in a single trial. Mean: np
Denoted by: X-Bin(n, p)
Thus, X gives the total number of successes in n independent Variance: np(1 - p)
trials—like counting heads in n coin tosses with success
probability p.

A Bernoulli random variable X with parameter p has two outcomes:

BERNOULLI X=1(success) with probability p, and X = 0 (failure) with probability Mean: p
DISTRIBUTION 1 - p.
Variance: p(1-p)
For example, in a coin toss,X = 1 could represent heads, X = 0 tails,
Parameters: p (0≤p≤1) and p the probability of getting heads.
Denoted by: X - Bern(p)

Suppose that we have a sequence of Bernoulli trials with the

NEGATIVE BINOMIAL parameter p. A random variable X with a negative binomial
Mean: r(1 – p)/p
DISTRIBUTION distribution with the parameters r and p, represents the number
Variance: r(1-p)/p^2
of failures that occur before the rth success
Parameters: r, p (0≤p≤1, r=1,2,...)
Denoted by: X-NBin(r, p)

The Poisson distribution is a limit of the binomial distribution

POISSON when the number of trials is very large and the chance of
success is very small, but their product stays fixed.
Mean: λ
DISTRIBUTION Variance: λ
This fixed value, called lambda or A, is the average number of
Parameters: λ (λ > 0)
events and can also be seen as the rate multiplied by time.
Denoted by: X-Pois(λ)

Finance and Investment Cell, KMC 20

 Continuous Probability Distributions
Types of distribution Definition PDF Mean and Graph
Variance
A continuous random variable X is normally distributed with
NORMAL
mean μ and variance σ². It has a symmetric, bell-shaped curve
DISTRIBUTION centered at the mean. The normal distribution is the only
Mean: μ
distribution that allows us to choose the mean and variance of
Parameters: μ, σ² the distribution as the parameters of the distribution. Hence, Variance: σ²
Denoted by: X ~ N(μ, σ²) they do not depend on each other.

If the random variable X has a continuous uniform distribution with

UNIFORM the parameters a and b, then for every subinterval of [a, b], the
probability that X belongs to that subinterval is proportional to the
DISTRIBUTION
length of that subinterval, and all intervals of the same length are
Parameters: a, b (a < b) equally probable.
Denoted by: X ~ U(a, b)

A random variable X with exponential distribution with parameter λ

EXPONENTIAL
represents the waiting time until the first occurrence of a Poisson
DISTRIBUTION event (an event in a Poisson process) with the average rate of λ. It Mean: 1/λ
can also represent the waiting time between any two successive Variance: 1/λ^2
Parameter: λ (λ > 0)
events in a Poisson process with the average rate of λ
Denoted by: X ~ Exp(λ)

CHI-SQUARE A special case of the gamma distribution, used primarily in

DISTRIBUTION hypothesis testing and confidence intervals. Defined only for non- Mean: k
negative values. Variance: 2k
Parameter: k (degrees of freedom) It is positively skewed and becomes more symmetric as the
Denoted by: X ~ χ²(k) degrees of freedom increase.

Finance and Investment Cell, KMC 21

 Hypothesis Testing
Null Hypothesis (H₀) vs. Alternative Hypothesis (H₁) Example: Testing New Stock Performance

Represents the existing belief about a Contrasts H₀, suggesting a change or 1. Scenario 3. Procedure
parameter. Often assumes no effect or no effect exists. Determine if a new stock has a similar mean Collect a sample of stock returns.
difference between groups (always stated Calculate the test statistic (e.g., using a t-test if
return to the market average.
with ‘=’) Example: The new stock outperforms variance is unknown).
the market average 2. Hypothesis Compare the statistic to a critical value or derive
Example: The new stock performs the same a p-value.
H₀: μ = μ₀ ( return equals the market If the test statistic lies outside the critical value
as the market average.
average). range (eg: ±1.96), reject H₀.
H₁: μ ≠ μ₀ ( return is higher or lower than If p-value is below the significance level (e.g.,
the market average). 0.05), reject H₀​​.

Normal Distribution
Widely used in hypothesis testing and approximating other distributions
A normal distribution is a type of continuous probability distribution that
is symmetric about the mean, representing data where most values
cluster around the central peak and probabilities for values taper off
equally on both sides. It is often referred to as a bell curve because of its
characteristic shape.

Key Points :
.
.

Finance and Investment Cell, KMC 22

 Simple Linear Regression Analysis
LINEAR REGRESSION

Linear regression is a statistical method used to model the Application:

relationship between a dependent variable (Y) and Asset Price Prediction:
one or more independent variables (X). It predicts (Y) Linear regression predicts future asset prices by modeling relationships
using a straight-line equation: with market factors (e.g., interest rates, economic indicators).
Risk Analysis:
Beta Calculation: Measures asset volatility relative to the market, helping assess risk.

Assesses systematic risk (market-related) and unsystematic risk

(asset-specific).

The coefficients can be Use Cases of Linear Regression Example:

estimated using formula: in Finance

1. Stock price prediction. Goal: Model: Y= β0+ βX

2. Risk assessment Predict XYZ Corp’s stock Where β1 shows how XYZ's
price based on the S&P 500 index. stock moves with the S&P 500.
(e.g., CAPM beta calculation).
3. Portfolio optimization. Variables: Use:
4. Credit scoring and 1.Dependent: XYZ stock price. If β1=1.5, for every 1-point increase in the
2. Independent: S&P 500 index S&P 500, XYZ’s stock price rises by 1.5
risk analysis
values. points.

Finance and Investment Cell, KMC 23

 Multiple Linear Regression Analysis
Application and procedure for MLR

Multiple Linear Regression Application

MLR is an extension of simple linear regression. It models the relationship Insurance Claims Analysis Investment Risk Assessment
between a dependent variable and multiple explanatory variables.
MLR can predict the number or cost of claims By using market indicators, historical performance data, and
The general form is:
based on variables such as age, geographic economic factors, MLR helps in assessing the risk associated
location, and type of policy. with investment portfolios.
For instance, the number of car insurance
Y= β +0 β X1+ 1β X +⋯+
2 2
β X +ϵp p claims (Y) might be analyzed against the Customer Retention Models
driver’s age (X1​), annual mileage (X2​), and
Actuaries use MLR to evaluate variables affecting
Y is the dependent variable β ,β ,…,β are the coefficients previous claims history (X3​).
0 1 p customer churn, such as premium rates, service quality,
X 1,X ,…,X
2 are
p the explanatory variables
ϵ is the error term. and claim settlements.

Procedure

Model Specification Collection & Model Validation Interpretation

Preparation Model Estimation

Identify the dependent variable Ensure clean and sufficient data. Use software (e.g., R or Evaluate the model fit using R- Analyze the coefficients to
(e.g., claim amount) and relevant This includes handling missing Python) to compute squared, adjusted R-squared, and determine the impact of each
predictors (e.g., policyholder values and standardizing regression coefficients. residual analysis. Check for predictor.
attributes). variables. multicollinearity and
heteroscedasticity.

Finance and Investment Cell, KMC 24

SECTION 3
INTERMEDIATE FINANCE CONCEPTS
 Capital Asset Pricing Model (CAPM)
The capital asset pricing model (CAPM) was developed by William Sharpe and John Lintner in the 1960s. It builds on the ideas of modern portfolio theory and the CML in which
investors are assumed to hold some combination of the risk-free asset and the market portfolio.

A straightforward CAPM derivation recognizes that expected return - CAPM formula:

Depends on beta (systematic risk) E(Ri) = Rf+βi⋅(E(Rm)−Rf)
It is a linear function of beta.
We therefore obtain the following equation, where expected return is explained as a ​Where:
linear function of beta with an intercept equal to ‘a and slope equal to ‘m: Rf​: Risk-free rate
βi​: measure of sensitivity to market
E(Rp) = a+ m x ßp E(Rm): Expected return of the market
The graphical depiction of the above equation is known as the Security Market Line
(SML).
The expected returns of risky assets in the market portfolio are assumed to only
depend on their relative contributions to the market risk of the portfolio. The
systematic risk of each asset represents the sensitivity of asset returns to the
market return and is referred to as the asset’s beta.

Beta is computed as follows:

Finance and Investment Cell, KMC 26

 Arbitrage Pricing Theory
Arbitrage Pricing Theory is a multi-factor model that measures the linear relationship between a financial asset and multiple risk factors, which includes one or more financial indices (e.g.,
S&P 500 Index, bond index, or commodity index) and multiple macroeconomic variables (e.g., GDP, interest rate metrics, production measures, employment variables) In a classic sense, the
term arbitrage refers to the simultaneous buying and selling of two securities to capture a perceived abnormal price difference between the two assets. In the context of APT, this term
simply refers to a model that measures expected return relative to multiple risk factors.

Assumptions Formula Illustration

Every mathematical model is based on a series of The factors are as follows: As an example, the following four factors have been
assumptions. Arbitrage pricing theory has very identified as explaining a stock's return:
simplistic assumptions, including the following: E(R)i =E(R)z +(E(I)−E(R)z)×βn Gross domestic product (GDP) growth: ß = 0.6,
RP = 4%
1. Market participants are seeking to maximize their Where: Inflation rate: ß = 0.8, RP = 2%
profits. Gold prices: ß = -0.7, RP = 5%
2. Markets are frictionless (i.e., no barriers due to E(R)i = Expected return on the asset Standard and Poor's 500 index return: ß = 1.3,
transaction costs, taxes, or lack of access to short Rz = Risk Free rate of return RP = 9%
selling). βn = Sensitivity of the asset price to The risk-free rate is 3%
3. There are no arbitrage opportunities, and if any macroeconomic Using the APT formula, the expected return is
are uncovered, then they will be very quickly factor n calculated as: Expected return = 3% + (0.6 x 4%)
exploited by profit-maximizing investors Ei = Risk premium associated with factor i + (0.8 x 2%) + (-0.7 x 5%) + (1.3 x 9%) = 15.2

Finance and Investment Cell, KMC 27

 Corporate Social Responsibility
CSR stands for Corporate Social Responsibility, which is a business model that considers the social and environmental impacts of a company's actions in addition to its economic
profits.

IMPORTANCE IN FINANCE EXAMPLES

Investor Confidence: CSR boosts socially responsible investment and shareholder trust.
ESG Investment Growth: Strong CSR enables access to lower-cost capital.
Green Bonds: Sustainable projects unlock favorable green bond terms.
p image and loyalty.
Customer Loyalty: Ethical practices enhance brand
Global Standards: Aligning with UN SDGs keeps companies competitive.
Patagonia TOMS Coca Cola

ESG INVESTING

ESG investing integrates Environmental, Social, and Governance factors into investment decisions, focusing on sustainability, ethics, and positive financial returns.

Environmental
ENVIRONMENTAL SOCIAL
SOCIAL GOVERNANCE

Company relationships with

Impact on the planet (e.g., climate Management practices and corporate
employees, customers, and
change, carbon emissions). transparency.
communities.
Example: Microsoft aims to be carbon- Example: Apple enforces supplier
Example: Johnson & Johnson focuses
negative by 2030. transparency.
on global health equity.

Finance and Investment Cell, KMC 28

 Economic Indicators
PURCHASING POWER PARITY

Purchasing power parity (PPP) is a popular metric used by macroeconomic analysis that compares different countries' currencies through a "basket of goods" approach.
That is, PPP is the exchange rate at which one nation's currency would be converted into another to purchase the same amounts of a large group of products.

FORMULA IMPACT ON TRADE

Cost of good X in currency 1

Purchasing Power Parity = Exports: Indian goods become cheaper for the US, boosting exports.
Cost of good X in currency 2
Imports: US goods become more expensive for India, reducing imports.
Trade Balance: This could improve India's trade balance by increasing exports and
Example
reducing imports.

If inflation in India is higher than in the US, the Indian Rupee (INR)
would depreciate against the US Dollar (USD) to maintain purchasing Example
power parity (PPP). For example, with 6% inflation in India and 2% in
the US, the INR could depreciate by around 4%. In 2013, high inflation in India led to a weaker Rupee, making exports more competitive but
raising import costs, contributing to inflation in India.

Finance and Investment Cell, KMC 29

 Economic Indicators
WHOLESALE PRICE INDEX CONSUMER PRICE INDEX
The Wholesale Price Index represents the price of a basket of wholesale goods. WPI focuses on the The Consumer Price Index measures the overall change in consumer prices based on a representative
price of goods that are traded between corporations. It does not concentrate on goods purchased by basket of goods and services over time.
the consumers.

Formula Formula
Price of Product in Current Year 100
Wholesale Price Index = Cost of market basket in a given year
Price of Product in Base Year Consumer Price Index = 100
Cost of market basket in base year
Example
Example
The Wholesale Price Index (WPI) tracks the price changes of goods at the wholesale level. A
CPI measures inflation. If India’s CPI rises, Indian goods become pricier, reducing exports. If the
rising WPI in India indicates higher production costs, which can lead to inflation and affect
US has lower inflation, US goods stay cheaper.
trade.

Impact on Trade Impact on Trade

Exports: Higher WPI in India makes goods more expensive, reducing export Exports: Higher CPI in India reduces export competitiveness.
competitiveness. Imports: India imports more from the US as its goods get costlier.
Imports: As production costs rise in India, demand for cheaper imported goods may Trade Balance: Higher inflation in India worsens the trade balance.
increase.
Example: In 2020, India’s higher CPI led to reduced exports and more imports from
Trade Balance: Higher WPI can worsen India's trade balance by decreasing exports and
the US.
increasing imports.

Example: In 2020, rising WPI in India led to more expensive exports and higher imports from
countries with lower production costs.

Finance and Investment Cell, KMC 30

 Taxation in Finance
DIRECT TAXES INDIRECT TAXES
Taxes directly imposed on income, wealth, or property, paid by the individual or Taxes on goods and services, collected from the consumer through
entity responsible. intermediaries like businesses.

Income Property Inheritance Capital Customs Excise Sales

VAT/GST
Tax Tax Tax Tax Duty Duty Duty

ADVANTAGES ADVANTAGES
Corporate
Tax Convenience: Collected at the point of sale, making compliance easier.
Equity: Wealthier individuals or corporations pay more for fairness.
Certainty: Clear rates ensure predictability for taxpayers. Revenue Efficiency: Ensures consistent revenue from broad consumption.
Redistributive: Reduces income inequality by taxing higher earners more. Encourages Savings: Targets consumption, potentially encouraging saving.

DISADVANTAGES DISADVANTAGES
Regressiveness: Affects lower-income individuals more, as they spend a
Complexity: Tax laws can be difficult to understand and comply with.
higher proportion of their income on taxed goods.
Evasion: Risk of individuals or companies avoiding taxes.
Hidden Costs: Consumers may not realize the full extent of taxes embedded
Disincentive: High taxes may discourage earning or investment.
in prices.
Inflationary Impact: Can raise the cost of goods and services, leading to
inflation.

Finance and Investment Cell, KMC 31

 Risk Measures
Qualitative Risk Assessment Quantitative Risk Measures
Scenario analysis: It is a process that considers potential future risk factors and VaR estimates potential loss with a given probability. A one-day VaR of
the associated alternative outcomes. The typical method is to compare a best- $2.5M at 95% confidence means a 5% chance of losing more than $2.5M in a
case scenario to a worst-case scenario. This exercise is an attempt to day.
understand the assumed full magnitude of potential losses even if the
probability of the loss is very small. To illustrate VaR, assume you analyze 1,000 monthly returns and set a 95%
confidence level. The lowest 5% of returns fall below −15.5%, representing
Stress testing: It is a form of scenario analysis that examines a financial potential extreme losses. This means there is a 5% chance of experiencing a loss
outcome based on a given “stress” on the entity. This technique adjusts one greater than this threshold. If you have $1M invested in this security, the one-
parameter at a time to estimate the impact on the firm. For example, it is month VaR is $ 155 K. This indicates that, with 95% confidence, your losses
plausible for interest rates to adjust severely in an economic crisis. Stress should not exceed $155K in a given month. However, there remains a 5%
probability of losing more than this amount.
testing will estimate the impact of this one parameter on the entity

Finance and Investment Cell, KMC 32

 Crisis Management
BAILOUTS QUANTITATIVE EASING

A bailout is when a business, an individual, or a government provides Quantitative easing (QE) is a form of monetary policy in which a central
money and/or resources (also known as a capital injection) to a failing bank purchases securities in the open market to reduce interest rates and
company. These actions help to prevent the consequences of that increase the money supply.
business's potential downfall, which may include bankruptcy and default With QE, the central bank purchases government bonds and other
on its financial obligations. financial instruments, such as mortgage-backed securities (MBS).
Bailouts can be in the form of loans, bonds, stocks, or cash. Quantitative easing is typically implemented when interest rates are near
Some loans require reimbursement—either with or without interest zero and economic growth is stalled.
payments. In India, the Reserve Bank of India implements quantitative easing
Bailouts typically go to companies or industries that directly impact the policies.
strength of the overall economy, rather than just one particular sector or
industry.

EXAMPLE EXAMPLE

During the 2008 financial crisis, Chrysler and General Motors (GM) faced Following the 1997 Asian Financial Crisis, Japan entered a recession, prompting
bankruptcy due to slumping sales, rising gas prices, and tighter lending the Bank of Japan to implement aggressive quantitative easing. While GDP rose
standards. They sought a taxpayer bailout and received $63.5 billion from TARP from $4.1 trillion in 1998 to $6.27 trillion in 2012, it fell back to $4.44 trillion by
to stay afloat, emerging from bankruptcy in 2009 and remaining major 2015, showing only temporary effects.
automakers today.

Finance and Investment Cell, KMC 33

SECTION 4
ADVANCED FINANCE TOPICS
 Financial Statements
A financial model is simply a spreadsheet, usually built in Microsoft Excel, that forecasts a business’s financial performance into the future. The
forecast is typically based on the company’s historical performance and assumptions about the future and requires preparing a three-statement
model, which includes

1. Income Statement: 2. Balance Sheet: 3. Cash Flow Statement:

An income statement is a financial report used A balance sheet is a financial statement A cash flow statement tracks cash inflows
by a business. It tracks the company's showing a company's financial position at a and outflows over a period, divided into:
revenue, expenses, gains, and losses during a specific time. It lists assets, liabilities, and Operating activities: Cash from core
set period. equity based on the equation: business operations.
Investing activities: Cash from buying or
How it works: Assets = Liabilities + Equity
selling assets.
The income statement gives an account of how Financing activities: Cash from investors,
the net revenue realized by the company is loans, or dividends.
transformed into net earnings (profit or loss). How it works:
This requires reporting four key items: The balance sheet evaluates financial health by
revenue, expenses, gains, and losses. An showing ownership (assets), obligations How it works:
income statement starts with the details of (liabilities), and ownership equity. It highlights It helps stakeholders assess cash generation,
sales and then works down to compute net liquidity, solvency, and capital structure and is liquidity management, and funding strategies,
income and eventually earnings per share typically updated at the end of each accounting complementing the income statement and
(EPS). period. balance sheet for a full financial overview.

Finance and Investment Cell, KMC 35

 Financial Modeling
Financial modeling is the practice of constructing a mathematical framework to represent a company's financial status. This involves
creating detailed projections of future performance based on past data and certain assumptions. It plays a vital role in business by aiding
in forecasting and decision-making. By offering a quantitative evaluation of a company's financial condition, financial modeling supports
strategic planning, budgeting, and analyzing investment prospects. Moreover, it is valuable for risk assessment, helping businesses
identify possible challenges and devise backup strategies.

Types of Financial Modeling

1. Budget Model: A budget model estimates a company's future revenues and expenses, serving as a foundation for financial
planning by predicting financial needs.
2. Forecasting Model: A forecasting model uses historical data and trends to predict future financial outcomes, enabling businesses
to make informed decisions based on potential scenarios.
3. Valuation Model: This model calculates the economic value of an asset or business, often using methods like Discounted Cash Flow
(DCF) analysis to determine the present value of future cash flows.
4. Scenario Analysis Model: Designed to evaluate the effects of various scenarios on a company’s financial performance, this model
helps identify risks, assess their impact, and develop strategies to minimize potential losses and maintain financial stability.

Finance and Investment Cell, KMC 36

 Uses of Financial Modelling
Strategic Planning: Assesses Budgeting and Forecasting: Valuation: Determines business Investment Analysis: Projects Mergers and Acquisitions
financial impacts of decisions to Projects revenues, expenses, value for sales, acquisitions, or future performance to assess (M&A): Analyzes financial
guide business direction. and cash flows to set realistic investments using methods like risks and returns for informed viability and combined
goals and anticipate challenges. DCF analysis. investment decisions. performance in M&A deals.

Risk Management: Conducts Resource Allocation: Optimizes Performance Monitoring: Stakeholder Communication: Scenario Analysis: Explores
sensitivity analyses and resource usage for achieving Benchmarks actual Simplifies complex financial outcomes under different
scenario planning to mitigate financial objectives efficiently. performance, identifies data for effective scenarios to prepare for
financial risks. variances, and ensures communication with uncertainties.
corrective actions. stakeholders.

Finance and Investment Cell, KMC 37

 Mergers and Acquisition
Mergers Acquisitions Purpose of M&A
Merger is the process by which two companies come Acquisition is defined as the process in which one company 1. Market Expansion: Entering new geographic markets or industries.
together to become one group for pursuing the acquires another company, whether through asset 2. Diversification: Reducing business risk by expanding into new
common pursuit of improved efficiencies, market acquisition or purchase of shares from a controlling sectors.
share, and/or a reduced competitive landscape. It is ownership. The acquired company may maintain its 3. Increased Market Share: Gaining a competitive edge in the industry.
4. Tax Benefits: Utilizing tax advantages available through acquisitions.
usually a mutual agreement between the companies. corporate identity or be fully merged into the acquiring
company.

Successful M&A Examples Failed M&A Examples

1. Disney & Pixar (2006): 1. AOL & Time Warner (2000):

Disney acquired Pixar for $7.4 billion. AOL merged with Time Warner for $165 billion.
Success: Activated Disney to control the animation market with such blockbusters as Toy Failure: Cultural clashes, bad integration, and the dot-com bubble resulted in a debacle that
Story and Frozen. encompasses the greatest losses among M&A deals in history.

2. Facebook & Instagram (2012): 2. eBay & Skype (2005):

Facebook acquired Instagram for $1 billion. eBay acquired Skype for $2.6 billion.
Success: Instagram became a social media giant, contributing significantly to Meta’s Failure: The business model mismatches and the lack of synergies resulted in Skype being
revenue. sold at a loss.

3. Amazon & Whole Foods (2017): 3. Daimler-Benz & Chrysler (1998):

Amazon acquired Whole Foods for $13.7 billion. Daimler-Benz merged with Chrysler for $36 billion.
Success: Expanded Amazon's footprint in physical retail and its grocery delivery offerings Failure: Cultural barriers and goals misalignment led Daimler to sell Chrysler in 2007 at a small
fraction of its original price.

Finance and Investment Cell, KMC 38

 Portfolio Management
Asset Allocation Strategies & Diversification

What is Portfolio Management? Asset Allocation Process

Portfolio management is about strategically managing 1. Assess Financial Goals

investments to balance risk and return. It helps investors achieve
their financial goals by selecting the right mix of assets while ↓
adapting to changing market conditions. 2. Determine Risk Tolerance
↓
3. Choose Asset Classes
Asset Allocation Strategies
↓
Asset allocation divides your investment across different asset classes 4. Allocate Proportionately
(like equities, bonds, and cash) to suit your financial goals and risk
tolerance. Here's a breakdown of popular strategies: ↓
5. Monitor & Rebalance

A diversified portfolio ensures your financial journey stays on track, even in uncertain markets.

Finance and Investment Cell, KMC 39

 Portfolio Management
Risk and Return Measures for Portfolio Management

Risk-return management involves balancing potential returns against the level of risk an investor is willing to
take to achieve their financial goals.

The risk-return relationship reflects the principle that higher potential returns typically require accepting
higher levels of risk. Safer investments like government bonds offer low returns, while riskier assets like
private equity provide the opportunity for higher returns but come with greater uncertainties, including
liquidity risks. Diversification can mitigate some risks without sacrificing returns, but its effectiveness
diminishes as portfolios become overly large.

Unsystematic risk refers to company-specific risks that can disrupt business operations but can be mitigated
through diversification. Here are a few examples:
Management Inefficiency: A poorly executed strategy by a firm's management leads to declining profits and
stock performance.
Labour Strikes: Workers at a manufacturing plant go on strike, halting production and impacting revenues.
Liquidity Crunch: A company struggles to pay its short-term obligations, causing investor confidence to drop.
Product Flaws: A defective product recall leads to reputational damage and financial loss.

Finance and Investment Cell, KMC 40

 Portfolio Management
Risk and Return Measures for Portfolio Management

Treynor Ratio Sharpe Ratio

Portfolio Return − Risk-Free Rate Portfolio Return − Risk-Free Rate

Treynor Ratio = Sharpe Ratio =
Beta of Portfolio Standard Deviation of Portfolio

Measures excess return per unit of systematic risk (Beta). Measures excess return per unit of total risk (Standard
Suitable for diversified portfolios where unsystematic risk is Deviation).
negligible. Suitable for all types of portfolios, especially those with
Higher Treynor Ratio = better risk-adjusted performance. unsystematic risk.
Higher Sharpe Ratio = better overall performance per unit of
risk.

Expected Return of the Portfolio E(Rp) = Σ (Weight of each asset × Expected Return of each asset)

Expected Return = Risk-Free Rate (Rf) + (Beta (β) × Equity Risk Premium (ERP))

Finance and Investment Cell, KMC 41

 Insurance
What is Insurance ? Types Of Insurance

Insurance is a contract between you (or a business) and an insurance company to Life Insurance
help protect you and your loved ones from financial loss due to an unexpected
Life insurance policies provide protection against unforeseen circumstances such as
event, like an accident, illness, natural disaster, or other unexpected circumstances.
the policyholder's death or incapacity. Many life insurance policies provide
In the case of medical, dental, or vision insurance, it can also help keep you or your
investment opportunities for savings growth.
family healthy by offsetting —and sometimes covering — the cost of routine care.

The insurance contract itself is called a policy. The policy outlines who or what will
be covered under the contract, the circumstances under which payment will be
issued by the insurance company, who will receive the payment, and how much they
will receive. Health Insurance
Health insurance helps you pay for medical expenses. It covers a wide range of costs,
from hospital stays to surgeries and even aftercare. This protects you from financial
burden in case of illness or injury.
Role Of Insurance In Financial Planning

Financial planning is a crucial aspect of securing one’s future and achieving long-
term financial goals. In the Indian context, where economic growth and
uncertainties coexist, insurance plays a vital role in financial planning. It acts as a
General Insurance
protective shield, offering financial security and stability in the face of unforeseen General insurance covers losses beyond death, such as damage to property (like
events. Here, we will explore the role of insurance in financial planning from an cars, homes) or health issues. It includes a wide range of policies, including health,
Indian perspective, supported by real-life examples. auto, home, fire, and travel insurance, offering financial protection against various
risks.

Finance and Investment Cell, KMC 42

SECTION 5
ACTS AND LAWS
 The Companies Act, 2013
The Companies Act 2013 regulates the formation and functioning of corporations or companies in India. The first Companies Act after independence was passed in 1956. This Act
was amended multiple times, and in 2013, major changes were introduced. By Section 135 of the 2013 Act, India became the first country to make corporate social responsibility
(CSR) spending mandatory by law.

Types of Companies Under Companies Act (2013) Types of Capital

Recognised under
Companies Act, 2013

Nominal/Authorized/Registered Capital
Basis of size or number of
Basis of ownership Basis of control Maximum capital authorized by Memorandum;
members determines stamp duty payment

Government Company Holding Company Issued Capital

Private company
≥ 51% owned by Central/State Part of authorized capital; offered for subscription,
Restricts share transfers; 2-200 Owns/controls subsidiaries;
Governments; includes subsidiaries Associate Company mandatory for companies to disclose its issued capital
members; governed by Articles. direct/indirect shares; parent-
Another Company has significant in the balance sheet
child relationship with its
influence; controls ≥ 20% shares; not a subsidiaries
Public company Non-Government Company subsidiary
Freely transferable shares; min. 7 All companies excluding government- Subscribed Capital
Subsidiary Company
members; no upper limit owned entities; diverse ownership It is the number of shares that the public takes, must be
Controlled by holding company via
structures disclosed with authorized capital
shares or Board composition
Foreign Company
Small company Dormant Company Incorporated outside India; conducts
Capital ≤ ₹50 lakh; turnover ≤ ₹2 crore Inactive; holds assets/intellectual property; business locally; includes online Called-Up Capital
status granted by Registrar operations Amount called-up by company for payment on
issued shares
One Person Company
Section 8 Company
Single member; nominee for
Non-profit; promotes arts, charity,
continuity Paid-Up Capital
education, environment, sports,
Part of called up capital actually paid or credited by
science
shareholders on the issued shares

Finance and Investment Cell, KMC 44

 Reserve Bank of India Act, 1934
The Reserve Bank of India (RBI), established on April 1, 1935, operates under the statutory framework of the RBI Act, 1934, based on recommendations from the Hilton Young
Commission. Initially, it took over functions like issuing banknotes, managing government accounts, and public debt from the Controller of Currency and the Imperial Bank of
India.

Key Features Development Role

From its inception, the RBI supported economic development, focusing on agriculture and institutional
The RBI designs, issues, and manages the currency with
growth. It played a key role in establishing entities like:
Issuance of approval from the central government. Worn-out notes
Banknotes are exchanged as a matter of grace, not as a legal right.

Deposit Insurance and Credit National Bank for Agriculture and Rural Industrial Development Bank of
Guarantee Corporation of India Development (NABARD) India (IDBI)

Scheduled banks, including cooperative and

Second
commercial banks, must maintain a capital of at
Schedule of the least ₹5 lakhs to be listed under this schedule. Section 31
RBI Act
Exception: Restriction on Issuance: Only the Reserve Bank of India
Cheques or drafts payable to the bearer on demand are (RBI) or, if explicitly authorized, the Central
allowed if drawn on a person's account with a banker, Government, can issue or accept demand instruments
Section 3: Incorporation of the RBI.
Section 17: RBI’s permissible businesses.
shroff, or agent. (bills of exchange, hundis, promissory notes, etc.)
Important Section 21A: Transaction of government business. Prohibition on Promissory Notes: No person other than payable to the bearer on demand. Others cannot
Section 24: Demonetization of notes. the RBI or the Central Government (if authorized) can
Sections of Section 26(2): Withdrawal of legal tender notes.
borrow or transact money through such instruments.
the RBI Act Section 27: Re-issuance of notes. issue promissory notes payable to the bearer, as per the
Section 45(u): Definitions of repo, reserve, derivatives, and Negotiable Instruments Act, 1881.
money market instruments.

Finance and Investment Cell, KMC 45

 Securities and Exchange Board of India Act, 1992
SEBI Act provides for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities
market and for matters connected therewith or incidental thereto.

SOME IMPORTANT SECTIONS

Investor Protection

Section 3 Establishes and incorporates the SEBI

Market Regulation

Defines the term of office and conditions of service for the Chairman
Section 5
and members of the Board Prohibition of fraudulent trade

Section 11B Gives the SEBI the power to issue directions and levy penalties
Securities market regulation
OBJECTIVES
Section 12 Registers stock brokers, sub-brokers, and share transfer agents
Encouraging self-regulation
Prohibits manipulative and deceptive devices, insider trading, and
Section 12A
substantial acquisition of securities or control
Training and Development of market
Section 12(3) Allows the SEBI to conduct enquiry proceedings intermediaries

Regulating takeovers and substantial

Section 15 Gives the SEBI adjudicatory powers to impose fines acquisition of shares

Section 15A Imposes penalties for failure to furnish information or returns Calling for information and records

Finance and Investment Cell, KMC 46

 The Banking Regulation Act, 1949
The Banking Regulation Act of 1949 is a crucial piece of legislation that provides a comprehensive framework for regulating the banking sector in India. Enacted on 16th March 1949,
the Act empowers the Reserve Bank of India (RBI) to supervise and control banking operations across the country.

CORE ELEMENTS OF THE ACT Key Provisions Objectives Notable Features Scope & Evolution

Key Provisions
Key Provisions Objectives Objectives
Notable Features
Licensing: RBI issues and inspects bank licenses Ensure the safety of depositors' funds.

Branch Control: Regulates branch openings and transfers Oversee banking operations and capital.

Management Oversight: Supervises boards appointments and directives. Safeguard broader public financial interests.

Notable Features Scope & Evolution

Prohibits non-banking companies from accepting demand deposits. 1949: Initially applied to all banking companies.

Restricts banks from trading and regulates credit control/shareholding. 1965: Extended to cooperative banks.

Empowers RBI to merge weaker banks. 2020: Covered 1,540 cooperative banks under RBI’s supervision.

Finance and Investment Cell, KMC 47

 Pension Fund Regulations
Pension fund regulations ensure secure retirement savings by setting guidelines for fund management, promoting long-term investments, and protecting the interests of
scheme members for future financial stability.

CORE ELEMENTS Investment Fund Management Contribution Pension

OF THE ACT Guidelines Limits Benefits

Key Provisions
Investment Guidelines Objectives Fund Management
Notable Features

Specifies the types of investments allowed. Regulates fund management practices.

Ensures diversification of assets. Ensures transparency in operations.

Promotes safe, long-term returns for pensioners. Mandates regular reporting and audits.

Contribution Limits Pension Benefits

Sets minimum and maximum contribution thresholds. Defines the payout structure upon retirement.

Encourages consistent savings behavior. Ensures timely and adequate pension disbursements.

Ensures fairness in contributions from both employers and employees. Protects against any abrupt changes in benefit schemes.
56

Finance and Investment Cell, KMC 48

SECTION 6
REGULATORY BODIES
 Securities and Exchange Board of India
SEBI is India’s regulatory body for the securities market, tasked with protecting investors, maintaining market fairness, and promoting transparency and efficiency in
trading and investments.

Core Elements Market Development Investor Market Supervision &

of the Act Protection Regulation Enforcement

Key Provisions
Market Development Objectives Investor Protection
Notable Features
Encourages innovation in financial products like ETFs and REITs. Ensures transparency in market operations.

Supports the growth of mutual funds and other investment avenues. Prevents fraudulent activities and malpractices.

Facilitates the entry of new technologies to improve market efficiency. Promotes fair treatment for all investors.

Market Regulation Supervision and Enforcement

Oversees the functioning of stock exchanges. Monitors compliance of market participants with SEBI regulations.

Regulates market intermediaries like brokers and mutual funds. Conducts inspections and audits of financial entities.

Implements measures to prevent market manipulation. Imposes penalties or bans on violators of market rules.
58

Finance and Investment Cell, KMC 50

 Reserve Bank of India
The Reserve Bank of India (RBI) is the central bank of India, which began operations on Apr. 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India
uses monetary policy to create financial stability in India, and it is charged with regulating the country’s currency and credit systems.

Department of Monetary Policy: Responsible for formulating and implementing monetary policy to achieve
price stability and economic growth.

Department of Banking Regulation: Regulates and supervises banks and financial institutions to ensure the stability and
efficiency of the banking system.

Department of Currency Management: Manages the issuance and circulation of currency notes and coins
Functions
of Department of Payment and Settlement Systems: Regulates and supervises payment and settlement systems to ensure the
RBI safety, efficiency, and reliability of payment systems in the country.

Department of Economic and Policy Research: Conducts economic research and analysis to provide inputs for policymaking
and to monitor economic indicators.

Department of Information Technology: Manages and develops IT infrastructure, systems, and applications to support the
operations of the Reserve Bank of India.

Finance and Investment Cell, KMC 51

 Insurance Regulatory and Development Authority of India
The Insurance Regulatory and Development Authority of India (IRDAI), established in 1999, regulates India's insurance industry, ensuring policyholder protection, sector growth,
financial stability, and fair competition.

CORE ELEMENTS Policyholder Regulation of Market Consumer

OF THE ACT Protection Insurers Development Education

Key Provisions
Policyholder Protection Objectives Regulation of Insurers
Notable Features

Ensures fair treatment and transparency. Sets capital and solvency requirements.

Addresses grievances effectively. Monitors the financial health of insurers.

Guarantees ethical pricing and claims processes. Licenses and oversees market participants.

Market Development Consumer Education

Encourages innovation and product diversification. Enhances public awareness of insurance.

Expands insurance reach in rural areas. Promotes financial literacy.

Promotes competition to benefit consumers. Educates on rights and claims processes.

60

Finance and Investment Cell, KMC 52

 Pension Fund Regulatory and Development Authority
The Pension Fund Regulatory and Development Authority (PFRDA) is the statutory body established under the PFRDA Act, 2013, tasked with regulating, promoting, and developing India's
pension sector to ensure financial security for citizens post-retirement. It oversees pension schemes like the National Pension System (NPS) and ensures transparency, efficiency, and
effective management of pension funds.

Functions of PFRDA Regulation of Pension Schemes: PFRDA regulates and supervises pension schemes like the National
Pension System (NPS) and ensures their compliance with prescribed rules.

Development of the Pension Sector: It promotes the expansion and accessibility of pension schemes to enhance financial
REGULATING security for all segments of society.
INVESTOR
PENSION
PROTECTION
SCHEMES Investor Protection: PFRDA safeguards the interests of subscribers by ensuring transparent operations and grievance redress
mechanisms.

Appointment of Pension Fund Managers: It appoints, monitors, and regulates pension fund managers to ensure effective
management of pension funds.

PROMOTING MONITORING Policy Framework and Oversight: PFRDA formulates policies, sets operational guidelines, and oversees the implementation
FINANCIAL PENSION FUND of pension schemes across India.

LITERACY PERFORMANCE
Encouraging Private Participation: PFRDA promotes private sector involvement in the pension industry to foster competition
and innovation in pension fund management.

Finance and Investment Cell, KMC 53

SECTION 7
APPLICATIONS TRENDS
 Case Studies
Dollar Cost Averaging
introductory something Diversification- Ray Dalio’s All-Weather Portfolio
Warren Buffett's Investment in Coca-Cola
The Enron financial scandal is one of the most infamous corporate
fraud cases in history. The Collapse of Enron
It was in 2001 that the Enron stock began to nose-dive since
Understanding
Strategy:Enron’s financialastrategies—and
Investing fixed amount how at
theyregular
were intervals to reduce the Strategy: Spreading investments across asset classes (stocks, bonds,
analysts and regulators started peeling the onion of financial
ultimately fraudulent—can provide valuable lessons in what not to
impact
do when of market
designing volatility.
successful financial strategies.
gold, commodities) to reduce risk. with the company. The fraudulent strategies used
problems
through SPEs, mark-to-market accounting, and many others had
been exposed and led the company to file for bankruptcy in
Case Study: Warren Buffett’s Berkshire Hathaway started buying Coca- Case Study: Hedge fund December
legend Ray 2001. Dalio created the All-Weather
Use of Special Purpose Entities (SPEs)
ColaOff-Balance-Sheet
Strategy: (KO) shares in 1988 and continued accumulating over time. Despite
Financing Portfolio, balancing different assets to perform well in various
market fluctuations, the consistent investment approach led to massive economic conditions. ThisThestrategy
fall of Enronhelped
led to: Bridgewater Associates
The Special Purpose
long-term Entities
gains, making(SPEs)
KOused by Enron
a core wereinmeant
holding to portfolio
Buffett’s remain resilient even duringLoss
financial crises like 2008.
maskdebt and increase profitability so that the company appears of Investor Confidence: Enron's stock price dropped from
morethan $90 per share to less than $1, which resulted in
better thanit is financially.
massive losses for shareholders and employees.
Legal and Financial Fallout: The executives of Enron were
How it worked: It shifted its debt off-balance sheet through
indicted on criminal charges for their participation in the fraud,
theseentities, which were technically independent but controlled and the auditors of the company, Arthur Andersen, were
by Enron. implicated in the scandal, leading to the firm's eventual
The problem: Enron still maintained the SPEs and very frequently dissolution.
guaranteed their debts. So, when the SPEs failed, Enron took the Regulatory Reforms: The scandal led to the passing of the
losses, though it did not report them in its financial statements as Sarbanes-Oxley Act of 2002, which increased corporate
a debt. transparency and accountability, especially regarding financial
The result: The tactic boosted Enron's stock price temporarily, but reporting.
once the hidden debt became known, investor trust crashed, and
the stock price crashed.

Finance and Investment Cell, KMC 55

 Emerging Trends
Fintech

Fintech, the word, is a shortened combination of “financial technology”; it is used to describe new technology that seeks to improve and automate the delivery and use of
financial services.

Key Statistics Application

37% of the global financial services institutions say they have a fintech
product or service ready for customers, 22% say they are at the pilot
stage, and 40% are at either the research or development stage. TECHNOLOGY NEW SERVICES

73.5 billion cumulative global investment in fintech companies in the first

three quarters of 2019, combining venture capital, private equity, and
mergers and acquisitions across the globe ORGANISATION NEW PRODUCTS

33% of global consumers would consider a new financial organization

when considering a new service.
MONEY FLOW NEW PROCESS
22% of non-adopters revealed they trust incumbent institutions more
than fintech.

Finance and Investment Cell, KMC 56

 Emerging Trends
Green Finance ESG Investing

ESG investing is one of the salient methods in the finance market, which
Green finance refers to financial activities supporting environmental sustainability. It
combines generating profits with the understanding of the needs of society
funds projects reducing carbon emissions, conserving biodiversity, and promoting
and the environment.
clean energy. Aligning investments with environmental goals, it drives the transition
to a low-carbon, resilient economy. Green finance fosters innovation, creates jobs,
and addresses climate challenges, ensuring long-term economic stability while ENVIRONMENTAL
safeguarding natural resources for future generations.

ESG SOCIAL

Processal Flowchart
GOVERNANCE
Inclusive
Climate
Policies
Wider Inclusion Recent Developments
Political and
Support Investments

Financial
Stability Bloomberg indicates that such assets are set to surpass $41 trillion by the year
Higher Enhanced 2023 – a figure that can only leave one perplexed.
Returns Resilience
ESG investing can be regarded as a paradigm shift in the financial space as it
Lower achieves profitability with a purpose.
Risk

Finance and Investment Cell, KMC 57

 Future of Finance
Role of AI Role of Data Analytics

AI-powered chatbots are transforming customer service in the finance sector by Big data in finance refers to large, complex datasets—both structured and
offering 24/7 support. These chatbots handle a variety of tasks, improving unstructured—that help financial services and banking companies solve
efficiency and customer experience. business challenges.

AI-driven Trading bots analyze vast amounts of market data and execute trades Data analytics helps financial institutions identify and mitigate risks by analyzing
in milliseconds by using predictive analysis to identify profitable opportunities. vast amounts of structured and unstructured data and asses credit risk.

All models assess financial risk by detecting patterns and anomalies in market
Predictive analytics helps investors forecast stock prices, market trends, and
data and help banks and investment firms predict credit defaults and market
asset performance to recommend optimal portfolio allocations.
crashes.

Machine Learning algorithms analyze transactions in real time to detect unusual Analyzes customer spending habits, preferences, and financial behavior to offer
activities and help prevent money laundering and cyber fraud. personalized financial products and enhance customer segmentation.

Finance and Investment Cell, KMC 58

 Future of Finance
Block Chain Role of Block Chain

Security & Transparency – Transactions are immutable and publicly

A blockchain database stores data in blocks that are linked together in
verifiable, reducing fraud.
a chain.

Decentralization spreads data across a network of computers rather Decentralization – Eliminates the need for intermediaries like banks,
making transactions faster and cost-effective.
than a central server.This reduces costs and enhances security. It also
makes the system more resilient to tampering.
Smart Contracts – Self-executing contracts with automated
Transactions are verified by a network of computers, which ensures enforcement, widely used in finance and legal agreements.
accuracy, minimizes human error.
Tokenization – Digital assets (stocks, bonds, real estate) can be
Once confirmed, each transaction is added to a block that contains a tokenized for fractional ownership and easy trading.
unique hash and links to the previous block, making alterations nearly
impossible. Supply Chain Management – Enhances traceability and prevents
counterfeiting in industries like pharma, food, and luxury goods.
In business accounting, blockchain prevents manipulation of financial
data to appear more profitable. Cross-Border Payments – Enables faster and cheaper global
transactions compared to traditional banking systems.
It provides a transparent and immutable record of transactions,
ensuring integrity in financial reporting.

Finance and Investment Cell, KMC 59

 PHASE 2 - TABLE OF CONTENTS
TOPICS (PG NO. 60 - 69) TOPICS (PG NO. 69 - 77)

PORTER’s 5 Forces DCF Model

Definition Definition
Example - Indian EV sector Example - WACC (Jio)
Example - Enterprise Value (Reliance)
Ansoff Matrix
Definition
Example - Apple DuPont Model
Definition
McKinsey 7S Framework
Example - Jio
Definition
Example - MCDonald’s

SWOT Analysis
Definition
Example - Tesla

BCG Matrix
Definition
Example - Samsung
 Porter’s 5 forces
Porter’s Five Forces is a framework developed by Michael E. Porter to analyze the competitive intensity and attractiveness of an industry. It helps businesses assess their
strategic position by examining five key forces that shape competition.

Examines the level of competition among existing Evaluates the influence suppliers have on pricing
Analyzes the power customers have to
players in the industry. and quality.
demand lower prices or higher quality.
High competition reduces profitability. If few suppliers exist, they have more power.
More power if there are many alternatives.
Factors: Number of competitors, industry growth Factors: Number of suppliers, uniqueness of
Factors: Number of buyers, price sensitivity
rate, differentiation, and switching costs. inputs, and switching costs.

COMPETITIVE THREAT OF NEW BARGAINING POWER OF THREAT OF BARGAINING POWER OF

RIVALRY ENTRANTS SUPPLIERS SUBSTITUTES BUYERS

Assesses how easy or difficult it is for new companies to enter the industry.
Looks at the risk of customers switching to alternative products or services.
High barriers to entry protect existing players.
High threat reduces industry profitability.
Factors: Capital requirements, economies of scale, brand loyalty, and
Factors: Availability of substitutes, switching costs, and perceived value.
regulations.

Finance and Investment Cell, KMC 60

 Porter’s 5 Forces Analysis: Indian EV Industry
The Indian Electric Vehicle (EV) industry is rapidly emerging, driven by government incentives, rising fuel costs, and environmental concerns. Major players include Tata Motors, Ola
Electric, Ather Energy, Mahindra Electric, MG Motors, and BYD, with growing competition from startups and global brands like Tesla exploring entry into India.

Competitive Rivalry (Moderate to High) Threat of Substitutes (Moderate to High)

Petrol and diesel cars remain dominant, but rising fuel prices are shifting demand
The EV market is still developing but highly competitive, with companies racing to
towards EVs. Toyota and Maruti are betting on hybrids as an alternative to full EVs.
launch new models.
Improved metro, electric buses, and ride-sharing platforms (Ola, Uber) offer
Companies compete on battery range, charging speed, government incentives,
alternatives to personal EVs.
and technology (AI-based smart features).

Bargaining Power of Suppliers (High) Bargaining Power of Buyers (High)

Most EVs rely on imported lithium-ion batteries, giving suppliers (China, South Korea) EVs are more expensive upfront, making incentives and financing options crucial for
high power. India is working on battery localization, with companies like Ola and buyers. Consumers demand better charging networks and longer battery life before
Reliance investing in battery gigafactories. Motors, controllers, and chips have limited fully switching to EVs. As new models enter the market, customers have greater
suppliers, adding to supply chain challenges. bargaining power to demand better technology and affordability.

Threat of New Entrants (Moderate to High)

Manufacturing EVs requires investment in battery technology, R&D, and charging infrastructure.
Government Incentives: The FAME II policy provides subsidies, making it easier for new players to enter. Established companies like Tata Motors and Mahindra have an advantage, but
startups like Ather have successfully built a brand.

Finance and Investment Cell, KMC 61

 Ansoff Matrix
The Ansoff Matrix is a two-by-two framework used by management teams and analysts to help plan and evaluate growth initiatives. This tool helps gain valuable insights into the
potential risks and rewards associated with different growth strategies.

MARKET PENETRATION PRODUCT DEVELOPMENT

This strategy focuses on increasing sales of existing Product development focuses on creating new
products within existing markets. This approach is products to serve an existing market. This strategy

Existing
generally considered the least risky of the four options, aims to leverage the brand's reputation and
as it leverages the company's established strengths and customer loyalty to introduce innovative offerings
market knowledge. Typical tactics for achieving market that address evolving customer needs or capitalize
penetration include: increasing marketing and on emerging trends. This can be done by investing in
promotional efforts, improving product quality or R&D to identify new opportunities.
features, adjusting pricing strategies, etc.

MARKETS

MARKET DEVELOPMENT DIVERSIFICATION

This is considered to be the riskiest of the four growth

This strategy involves taking existing products into
New

strategies, as it involves entering entirely new

new markets, whether by targeting different
markets with new products. Such change could be:
customer segments, expanding into new
expanding into new markets or products that are
geographic regions, or exploring alternative
related to the existing business, allowing for potential
distribution channels. This approach enables
synergies in terms of resources, capabilities, or
companies to leverage their proven product
customer base or venturing into markets or products
offerings while tapping into fresh sources of
demand. Existing New that are unrelated to the current business.
PRODUCTS

Finance and Investment Cell, KMC 62

 Ansoff Matrix: Apple
Using the Ansoff Matrix to understand the growth strategy undertaken by Apple - a leading tech giant

MARKET PENETRATION PRODUCT DEVELOPMENT

Market penetration is about increasing Product development strategy involves

sales. The existing market for Apple developing new products to sell to existing

Existing
consists of: Americas, Europe, Greater markets. Each new and updated product or
China, Japan, and Rest of Asian Pacific. service by Apple nicely fits within its
Apple engages in this strategy via ecosystem and serves to further strengthen
effective application of marketing the company ecosystem, through effective
strategy. R&D.

MARKETS

MARKET DEVELOPMENT DIVERSIFICATION

Market development strategy is associated Diversification involves developing new

New

with finding new markets for existing products to sell to new markets, and this is
products. It focuses on emerging economies considered to be the riskiest strategy.
in Asia as attractive markets for a long-term Starting with 2001, Apple has developed
perspective. This is substantiated by the fact innovative product lines like the iPod
that China is Apple’s second-largest market (2001), the iPhone (2007), the iPad (2010),
following the US. Existing New the Apple Watch (2015)
PRODUCTS

Finance and Investment Cell, KMC 63

 McKinsey 7s Framework
The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The goal of the model is to depict how effectiveness can be achieved in an organization
through the interactions of seven key elements – Structure, Strategy, Skill, System, Shared Values, Style, and Staff.

1. Structure- Structure is how a company is organized – the chain of command and accountability
relationships that form its organizational chart.
2. Strategy- Strategy refers to a well-curated business plan that allows the company to formulate a plan
of action to achieve a sustainable competitive advantage, reinforced by the company’s mission and
values.
3. Systems- Systems entail the business and technical infrastructure of the company that establishes
workflows and the chain of decision-making.
4. Skills- Skills form the capabilities and competencies of a company that enables its employees to
achieve its objectives.
5. Style- The attitude of senior employees in a company establishes a code of conduct through their ways
of interactions and symbolic decision-making, which forms the management style of its leaders.
6. Staff- Staff involves talent management and all human resources related to company decisions, such
as training, recruiting, and rewards systems
7. Shared Values- The mission, objectives, and values form the foundation of every organization and play
an important role in aligning all key elements to maintain an effective organizational design.

Finance and Investment Cell, KMC 64

 McKinsey 7s Framework: McDonald’s
Strategy- McDonald’s follows a cost leadership
strategy, offering a diverse menu at the lowest Staff- As the world's second-largest restaurant

possible prices. The company sets SMART goals chain, McDonald’s employs over 200,000
people globally, fostering diversity and
for its short- and long-term vision, ensuring
inclusivity in its workforce.
clear communication with employees.

Skills- Regular training and workshops ensure

employees provide flawless service.
Structure- Despite its global presence,
McDonald’s maintains a flat structure. Outlet
managers oversee assistants and employees,
promoting teamwork and easy access to senior
Style- McDonald’s leadership is participative,
leadership.
encouraging employee feedback to refine
strategies, operations, and conflict resolution.

Systems- McDonald’s has highly efficient

systems across sales, marketing, and Shared Values- McDonald's core values—Serve,
operations, continuously innovating. For Inclusion, Integrity, Community, and Family—
instance, a recent initiative reduced drive- drive its commitment to integrity, diversity,
through order times by 30 seconds. teamwork, and giving back to the community.

Finance and Investment Cell, KMC 65

 SWOT Analysis
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company's competitive position and to develop strategic
planning

STRENGTHS WEAKNESSES
Strengths describe what an organization excels at and what
Weaknesses stop an organization from performing at its
separates it from the competition: a strong brand, loyal customer
optimum level. They are areas where the business needs to
base, unique technology, and so on. For example, a hedge fund
improve to remain competitive: a weak brand, higher-than-
may have developed a proprietary trading strategy that returns
average turnover, high levels of debt, an inadequate supply
market-beating results. S W
chain, or lack of capital.

SWOT
Analysis
OPPORTUNITES THREATS

Opportunities refer to favorable external factors that could give O T Threats refer to factors that have the potential to harm an
an organization a competitive advantage. For example, if a organization. For example, a drought is a threat to a wheat-
country cuts tariffs, a car manufacturer can export its cars into a producing company. Other common threats include things like
new market, increasing sales and market share. rising costs for materials, increasing competition, tight labor
supply, and so on.

Finance and Investment Cell, KMC 66

 SWOT Analysis: Tesla
Bird's-Eye View of Tesla

STRENGHTS WEAKNESSES

Tesla has a strong position in the EV market because of its strong brand Tesla has struggled with production capacity limitations, often failing to
recognition as an industry pioneer. The company's advanced battery meet demand and delivery targets. Quality control issues have also been
technology allows for superior range in its vehicles. Tesla's extensive a recurring problem from time to time. Tesla's vehicles are generally
Supercharger network also provides a significant advantage in terms of priced higher than those of competitors, which may limit market
charging infrastructure penetration in more price-sensitive regions.

OPPORTUNITIES THREATS

Tesla stands to benefit from the growing global demand for electric Tesla has struggled with production capacity limitations, often failing to
vehicles. The company has opportunities to expand beyond automotive meet demand and delivery targets. Quality control issues have also been
into related fields such as energy storage and solar power, leveraging its a recurring problem from time to time. Tesla's vehicles are generally
battery expertise. The development of autonomous driving technology priced higher than those of competitors, which may limit market
also presents another significant growth avenue, as Tesla has already penetration in more price-sensitive regions.
begun implementing self-driving cars.

Finance and Investment Cell, KMC 67

 BCG Matrix
The BCG Matrix (Boston Consulting Group Matrix) is a strategic tool used to analyze a company's product portfolio by classifying products or business units into four categories—Stars, Cash
Cows, Question Marks, and Dogs—based on their market growth rate and market share. It helps businesses decide where to invest, develop, or discontinue products to maximize profitability.

STARS QUESTION MARK

Question Marks are business units with low market share in a high-
Stars are business units with high market share in a high-
growth market. They consume significant investment to increase
growth industry. They lead the market with strong

HIGH
their market position but offer uncertain returns. If they succeed,
competitive advantages. Stars require heavy investment but
they can become Stars and eventually Cash Cows as the market
generate high returns. Over time, as market growth slows,
matures. However, if they fail to grow, they risk becoming Dogs and
Stars are expected to become Cash Cows, providing steady
draining resources. Therefore, Question Marks need careful

Growth Rate
profits. Star Question Mark evaluation to decide whether to invest further or exit.

CASH COWS DOG

LOW

Cash cows are the products with high market share in a slow- Dogs are business units with low market share in a mature, slow-
growing industry. These business units typically generate growing market. They have limited potential, often generating
more cash than what’s needed to maintain them. They tend minimal profits or even losses, while consuming valuable resources.
to be in more mature markets,and are valuable due to their Cash Cow Dog Although they might provide some benefits like jobs or minor
cash-generating abilities. They should continue to be revenue, the opportunity cost of keeping them is high. To maximize
“milked” with as little investment as possible given that efficiency and focus on stronger products, Dogs are usually divested
HIGH LOW
additional time, capital, and efforts wouldn’t yield much in a or sold.
Relative Market Share
low growth industry.

Finance and Investment Cell, KMC 68

 BCG Matrix - Samsung
Star
Samsung’s Galaxy S and Note smartphones are Stars, holding a strong market share in a fast-
growing industry. They require high investment to stay competitive with innovations like 5G
and foldable technology, but they also deliver high revenue, making them crucial for
Samsung's growth.
HIGH

Question Mark
Samsung’s wearable products, like smartwatches and fitness bands, are Question Marks due
to their low market share in a growing industry. They require heavy investment to compete,
Growth Rate

Star Question Mark and their future depends on whether they can gain a stronger market position or face
decline.

Cash Cow
Samsung’s television segment (LED, QLED, Smart TVs) is a Cash Cow, dominating a mature
market with steady profits and low investment needs. The cash generated supports other
growing segments like Stars and Question Marks.
LOW

Dog
Cash Cow Dog Samsung’s digital camera segment is classified as a Dog, with low growth and declining
demand due to smartphones with advanced cameras. With limited profitability, Samsung
exited this market to focus on stronger, revenue-generating divisions.
HIGH LOW
Relative Market Share

Finance and Investment Cell, KMC 69

 Discounted Cash Flow Analysis
Definition
Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment, business, or asset based on its expected future cash flows, adjusted for the time value of money. The
general Formula for DCF is:

Key Concepts DCF Process

Future Cash Flows: The expected cash inflows and outflows over the life of the investment.
1. Forecast Cash Flows: Estimate future cash flows (e.g., Free Cash Flow to the Firm (FCFF) or
Discount Rate: The rate used to discount future cash flows to their present value, reflecting the
risk and opportunity cost of capital. Free Cash Flow to Equity (FCFE)).
Weighted Average Cost of Capital (WACC): WACC represents the average cost of financing a
2.Determine Discount Rate: Use WACC or another appropriate rate.
company, weighted by the proportion of debt and equity in its capital structure
Net Present Value (NPV): NPV is the difference between the present value of cash 3.Calculate Present Value: Discount future cash flows using:
inflows and outflows. Determines the intrinsic value of an investment to assess if it is
overvalued or undervalued.

4. Sum Present Values: Add discounted cash flows to get the total present value.

Finance and Investment Cell, KMC 70

 Discounted Cash Flow Analysis
Scenario: You are evaluating a small business that generates the following expected cash flows over the next 3 years:
Year 1: $50,000 ; Year 2: $70,000 ; Year 3: $100,000

Discount Rate (rr): 8% (0.08) – reflecting the risk of the business and your required return.

Calculation: (2 methods of calculation)

Year Cash Flow Discount Factor Present Value

Result: The present value of the business's cash flows is $185,693.22.

Decision: If the business is being sold for less than $185,693.22, it may be a good investment; otherwise not.

Examples for Calculation of WACC and Enterprise Value given ahead ->

Finance and Investment Cell, KMC 71

 Discounted Cash Flow Analysis
Meaning

WACC (Weighted Average Cost of

Capital) is the average rate a

company is expected to pay to
finance its assets, weighted according

to the proportion of each component

—debt and equity—in its capital
structure. It reflects the minimum
return that a company must earn on

its existing asset base to satisfy its

creditors, owners, and other capital

providers.

Finance and Investment Cell, KMC 72

Discounted Cash Flow Analysis

Notes

1. The Tax Rate is considered as Marginal Tax Rate for the country.

2. Levered beta is based on 5-year monthly data.

3. Unlevered Beta = Levered Beta/(1+(1-Tax Rate)*Debt/Equity)

4. Levered Beta = Levered Beta*(1+(1-Tax Rate)*Debt/Equity)

Calculation of Weighted Average Cost of Capital (WACC) for Jio Financials

Finance and Investment Cell, KMC 73

DCF Analysis: Reliance Industries
Below is the DCF analysis for Reliance Industries. Click here for the link to the Excel sheet.

Finance and Investment Cell, KMC 74

 DuPont Analysis
Definition
DuPont Analysis is a financial performance framework that breaks down Return on Equity (ROE) into key components to help analyze a company's profitability,
efficiency, and financial leverage. It provides deeper insights into what drives ROE rather than just looking at it as a single figure.

Dupont 3 Factor Analysis Practical Uses

ROE=Net Profit Margin×Asset Turnover×Equity Multiplier A) Investor Decision-Making: Investors use DuPont Analysis to compare
companies in the same industry and identify whether a company’s ROE is
Formula Breakdown:
sustainable or artificially inflated.
Net Profit Margin (Profitability) = Net Income/Revenue
Asset Turnover (Efficiency) = Revenue/Total Assets
(B) Business Management & Strategy: Company executives and financial
Equity Multiplier (Leverage) = Total Assets/Shareholders’ Equity ​ managers use DuPont Analysis to identify weaknesses in profitability,
efficiency, or leverage and make strategic decisions.
Dupont 5 Factor Analysis
ROE=Tax Burden×Interest Burden×EBIT Margin×Asset Turnover×Equity Multiplier
Formula Breakdown: (C) Credit Risk & Banking Decisions: Lenders and banks use DuPont Analysis
to assess the creditworthiness of a company before approving loans.
Tax Burden =Net Income/EBT=→ Effect of taxes on profits
Interest Burden =EBT/EBIT​→ Impact of interest payments
EBIT Margin =EBIT/Revenue→ Operating profitability (D) Merger & Acquisition Analysis: When evaluating whether to acquire a
Asset Turnover → Efficiency in using assets company, businesses use DuPont Analysis to see if the target company has
Equity Multiplier → Leverage strong financial fundamentals.

Finance and Investment Cell, KMC 75

 DuPont Analysis:Example
Case: Using the DuPont framework with hypothetical numbers for illustration.
Case: Using the DuPont framework with hypothetical numbers for illustration.

Net Income = $100 billion Revenue = $400 billion Total Assets = $500 billion Shareholders’ Equity = $150 billion

Calculation Key Insights

ROE=Net Profit Margin×Asset Turnover×Equity MultiplierROE 1. High ROE Driven by Leverage: ABC Ltd. has a moderate Net Profit Margin (25%)
=25%×0.8×3.33=0.25×0.8×3.33=0.666=66.6% and decent Asset Turnover (0.8). However, a high Equity Multiplier (3.33) shows that
it is using leverage (debt) to boost ROE. If debt is too high, this could be risky during
Formula Breakdown: economic downturns.

1.Net Profit Margin=Net Income/Revenue=100/400=25%

→ This means ABC Ltd. earns $0.25 in profit for every $1 in revenue.
2. Efficiency & Profitability Check: A rising Net Profit Margin would indicate
2.Asset Turnover=Revenue/Total Assets=400/500=0.8 improved profitability, and a declining Asset Turnover might suggest inefficiency in
→ ABC Ltd. generates $0.80 in revenue per $1 of assets. utilizing assets.

3.Equity Multiplier=Total Assets/Shareholders’ Equity=500/150=3.33

→ ABC Ltd. finances its assets 3.33x with equity and debt combined.
3.Comparison with Peers: If ABC Ltd. ROE is much higher than competitors, DuPont
Analysis helps determine if it’s due to better operations or excessive leverage.

Finance and Investment Cell, KMC 76

DuPont Analysis: Jio Financials
Analysis

Massive increase in revenue: Sales increased from ₹44.84 Cr to

₹1854.68 Cr — a ~41x jump!
Net Profit grew from ₹31.25 Cr to ₹1604.55 Cr—indicating a
profitable scaling.
Improved Net Profit Margin: From 0.70 to 0.87 — shows better
profitability efficiency.
Better Tax Burden: From 0.63 to 0.82 — implies lower effective
tax rate or better tax optimization.
Low Equity Multiplier (1.0) — implies no financial leverage.
While this reduces financial risk, it also limits ROE amplification.
ROE is still low (1.15%) despite the profit jump — largely due to
low turnover and absence of leverage.

Click here for DuPont Calculation

Finance and Investment Cell, KMC 77

 THANK YOU
Dear Readers,
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FINANCE AND INVESTMENT CELL, KMC