Fast Track series for RBI Grade B 2018

A Video series by EduTap

LECTURE 38
www.edutap.co.in
 Fast Track series for RBI Grade B 2018
Our previous year results

RBI Grade B 2017 Results

124 EduTapians reached the Interview stage

27 got selected in the final list

www.edutap.co.in
 Fast Track series for RBI Grade B 2018
Courses offered by EduTap
Rs.12,500
Rs.10,500
Rs.9,000

Rs.6500 Rs.6500

www.edutap.co.in
 Discounts on EduTap courses

30% E-mail us at
Subscribers of 2017 EduTap courses discount deepak@edutap.co.in

20% Use Coupon code:

New Subscribers
discount OFF20

www.edutap.co.in
 Have any Query??

To know about our courses: Visit our website at www.edutap.co.in

Drop us a mail at: deepak@edutap.co.in

Call us at 8146207241

www.edutap.co.in
 TOPIC

MCQs on Finance

www.edutap.co.in
 QUESTION
Q1. The initial cash outlay of the project is 100000. It can generate a
cash inflow of 40000, 30000, 50000 and 20,000 in year 1 to 4. If
present value of Cash Inflows discounted @10% is Rs. 112350, then
find the Profitability Index (PI)?
a. 1.40
b. 1.12
c. 2.15
d. 0.80
e. None of the above

www.edutap.co.in
 Profitability Index
Profitability Index is the ratio of the present value of the cash inflows at
the required rate of return to the initial cash outlay of the investment.

Mathematically,

IF PI > 1 then project should be accepted

www.edutap.co.in
 Solving, Given Problem
The initial cash outlay of the project is 100000. It can generate a cash inflow
of 40000, 30000, 50000 and 20,000 in year 1 to 4. If present value of Cash
Inflows discounted @10% is Rs. 112350, then find the Profitability Index (PI)

Present Value of Cash Inflows = 112350

Initial Investment = 100000 Ans.

1.12
PI = Present Value of Cash Inflows / Initial Investment

PI = 112350 / 100000 = 1.1235

www.edutap.co.in
 SOLUTION
Q1. The initial cash outlay of the project is 100000. It can generate a
cash inflow of 40000, 30000, 50000 and 20,000 in year 1 to 4. If
present value of Cash Inflows discounted @10% is Rs. 112350, then
find the Profitability Index (PI)?
a. 1.40
b. 1.12
c. 2.15
d. 0.80
e. None of the above

www.edutap.co.in
 QUESTION
Q2. Which among these is not a solvency ratio?
a. Debt to Equity Ratio
b. Interest Coverage Ratio
c. Interest Earned Ratio RBI 2017
d. Quick Acid Ratio EXAM
e. Equity Ratio QUESTION

www.edutap.co.in
 RATIO ANALYSIS

Ratio analysis is a powerful tool of financial analysis. The ratio analysis

involves comparison for a useful interpretation of the financial statements.

www.edutap.co.in
 TYPES OF RATIOS
Liquidity ratios measure the ability of the firm to meet its current
LIQUIDITY RATIOS obligations (liabilities). In general, the greater the coverage of liquid assets
to short-term liabilities the better.

Profit is the difference between revenues and expenses over a period

PROFITABILITY (usually one year). The profitability ratios are calculated to measure the
RATIOS operating efficiency of the company.

Activity ratios are employed to evaluate the efficiency with which the firm
ACTIVITY RATIOS manages and utilizes its assets. These ratios are also called turnover ratios
because they indicate speed with which assets are being turned into sales.

They indicate the long-term financial position of the firm. These ratios
SOLVENCY RATIOS indicate mix of funds provided by owners and lenders. As a rule, there
should be an appropriate mix of debt and owners’ equity in financing the
firm’s assets.

www.edutap.co.in
Commonly Used Solvency Ratios

Also Solvency
Ratios

www.edutap.co.in
 Understanding through Practical Problem
Calculate Solvency Ratios from the following information:

www.edutap.co.in
 Debt-Equity Ratio

Extract of
Relevant
Information

Solution

www.edutap.co.in
 Debt to Capital Employed Ratio

Extract of
Relevant
Information

Solution

www.edutap.co.in
 Debt to Capital Employed Ratio

Extract of
Relevant
Information

Solution

www.edutap.co.in
 Proprietary Ratio

Extract of
Relevant
Information

Solution

www.edutap.co.in
 SOLUTION
Q2. Which among these is not a solvency ratio?
a. Debt to Equity Ratio
b. Interest Coverage Ratio
c. Interest Earned Ratio RBI 2017
d. Quick Acid Ratio EXAM
e. Equity Ratio QUESTION

www.edutap.co.in
 QUESTION
Q3. How much percent of credit of Small Finance Banks will need to go
to sectors that are considered part of priority sector i.e. agriculture,
small enterprises and low-income earners?
a. 50%
b. 62.5%
c. 75%
d. 90%
e. None of the above

www.edutap.co.in
 ABOUT SMALL FINANCE BANKS
• They offer basic banking services, accepting deposits and lending;

• To unserved and underserved sections, including small business

units, small and marginal farmers, micro and small industries, and
entities in the unorganized sector.

• The main objective of Small finance banks also is to increase financial

inclusion.

• Examples: Au Financiers, Disha Microfin, Equitas Holdings etc.

www.edutap.co.in
 KEY FEATURES OF SMALL FINANCE BANK
• Every bank must have the words -- small finance bank -- in its name.
• They can issue both credit & Debit cards and can have own ATM’s.
• The maximum loan size and investment limit exposure to single and group
obligators cannot be more than 10 per cent and 15 per cent of its capital
funds, respectively
• Small finance banks will be subject to most of the prudential norms
including cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
• 75% of the credit advanced by them will go to Priority Sector Areas.
• They have to ensure that 50% of their loan portfolio constitutes advances
of up to Rs.25 lakh.
• They can undertake financial services like insurance products, pension
products, with prior approval from the RBI.
www.edutap.co.in
 SOLUTION
Q3. How much percent of credit of Small Finance Banks will need to go
to sectors that are considered part of priority sector i.e. agriculture,
small enterprises and low-income earners?
a. 50%
b. 62.5%
c. 75%
d. 90%
e. None of the above

www.edutap.co.in
 QUESTION
Q4. Company Y issued debentures worth 200000 at a premium of 10%.
The rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.
a. 6.43%
b. 7.52%
c. 8.18%
d. 9.64%
e. None of the above

www.edutap.co.in
www.edutap.co.in
 IRREDEEMABLE DEBT

In case of irredeemable debt, company has to pay the interest throughout

the life of the debt and has to never return the debt. This is also called
perpetual debt.

Payment of Interest Throughout the lifetime

FEATURES
OF
IRREDEEMABLE
DEBT Repayment of Principal /
Face Value

www.edutap.co.in
Formula for Cost of Perpetual Debt

www.edutap.co.in
 Solving, Given Problem
Company Y issued debentures worth 200000 at a premium of 10%. The
rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.

Cost of Debt (Kd) = Interest / Net Proceeds

Interest = 9% of 200000 = 18000 Ans.

8.18%
Net Proceeds = 200000 + 10% of 200000 = 220000

Kd = 18000/220000 = 8.18%

www.edutap.co.in
 SOLUTION
Q4. Company Y issued debentures worth 200000 at a premium of 10%.
The rate of interest is 9%. Compute the cost of debt assuming infinite
period of debt. Ignore taxes.
a. 6.43%
b. 7.52%
c. 8.18%
d. 9.64%
e. None of the above

www.edutap.co.in
 QUESTION
Q5. As per latest circular issued by RBI, issuance of which of the
following instruments has been discontinued for Trade Credits for
imports into India by Authorised Dealer Category-I banks?
1. Letter of Undertaking (LoUs)
2. Letter of Credits
3. Letter of Comfort (LoCs)
a. 1 only
b. 1 & 2
c. 1 & 3
d. 2 & 3
e. 1, 2 & 3
www.edutap.co.in
RECENT RBI CIRCULAR

www.edutap.co.in
 TRADE CREDIT INSTRUMENTS

Letter of Undertakings
Letter of Credits (LCs)
(LoUs)

Letter of Comforts (LoCs) Bank Guarantees (BG)

www.edutap.co.in
 Letter of Undertaking (LOUs)

• LOU serves the purpose of a bank guarantee for a bank's customer

for making payment to its offshore suppliers in the foreign currency.

• Once the letter of undertaking is acknowledged and accepted, the

lender (foreign branch of Indian bank) transfers money to the nostro
account of the bank that has issued the LoU.

• When an LoU is issued, the message of credit transfer is conveyed to

overseas bank through SWIFT (Society for Worldwide Interbank
Financial Telecommunication) system.

• The credit is ideally meant for short-term.

www.edutap.co.in
 Letter of Comforts (LoCs)

• LoC in the banking parlance is referred to a document which is

provided by a person, typically an affiliate (such as the holding /
parent company) of the borrower (“LoC Provider”) assuring the
financial soundness of the borrower to repay its debt(s).

• Example: If SBI India’s client takes buyers credit from SBI’s overseas
branches, SBI India will give Letter of Comfort, whereas if the
funding is arranged from say Bank of India overseas branches, SBI
India will give LOU.

www.edutap.co.in
 Letter of Credit and Bank Guarantees
• A letter of credit is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct
amount.

• A bank guarantee is issued to the applicant for carrying out a

transaction after necessary due diligence and is always given in favour
of a beneficiary who would be affected in a case where the applicant
fails to honour obligations.

• In Letter of Credit, once the obligation on production of documents

on fulfillment of contract, the bank pays amount to beneficiary.
However, in a bank guarantee, the beneficiary is paid on non
fulfillment of obligation as per contract of BG.

www.edutap.co.in
 Why Bank Guarantees and LCs ?

• Bank Guarantees and LCs are considered less risky because receiving
banks have to conduct their own credit appraisal on companies
before accepting them.

• LCs are more secure because they have details of the purchase by the
importer, the date of issue, expiry date, the material purchase and
other transaction details.

• In the case of the now-banned LoUs and LoCs, the receiving banks
were entirely dependent on the bank issuing them at the behest of
the importers.

www.edutap.co.in
 SOLUTION
Q5. As per latest circular issued by RBI, issuance of which of the
following instruments has been discontinued for Trade Credits for
imports into India by Authorised Dealer Category-I banks?
1. Letter of Undertaking (LoUs)
2. Letter of Credits
3. Letter of Comfort (LoCs)
a. 1 only
b. 1 & 2
c. 1 & 3
d. 2 & 3
e. 1, 2 & 3
www.edutap.co.in
IMPORTANT MCQs ON FINANCE

www.edutap.co.in
 Thank You! Happy Learning!
https://t.me/EduTapLearning

Like

Subscribe

Share

www.edutap.co.in