Unit 9 Concepts and Modes Of Analysis
1. What is Simple Interest? Explain with Example
Definition: Simple Interest (SI) is the interest calculated only on the original
principal amount for the whole period.
Formula:
SI = \frac{P \times R \times T}{100}
= Principal
= Rate of Interest (%)
= Time (years)
Example: If you invest ₹10,000 at 10% per year for 2 years,
SI = \frac{10000 \times 10 \times 2}{100} = ₹2000
2. What is Compound Interest? Explain with Example + Formula
Definition: Compound Interest (CI) is the interest calculated not only on the
principal but also on the accumulated interest of previous periods.
Formula:
A = P \times \left(1 + \frac{R}{100}\right)^T
CI = A – P
Example: If you invest ₹10,000 at 10% per year for 2 years (compounded
annually),
A = 10000 \times (1+0.10)^2 = 10000 \times 1.21 = ₹12,100
CI = 12100 – 10000 = ₹2100
Difference: SI = ₹2000, CI = ₹2100.
3. Impact of Power of Compounding
Small amounts grow very large over long time.
Example: ₹1 lakh invested at 10% for 30 years →
FV = 100000 \times (1.1)^{30} = ₹17,44,940
4. What is Time Value of Money (TVM)?
Definition: “A rupee today is worth more than a rupee in the future because
money has earning potential.
Due to inflation, risk, and opportunity cost, money today has higher value.
Ways to compute TVM:
Future Value (FV) → value of today’s money in future
Present Value (PV) → current value of future money.
5. Future Value of a Single Cash Flow
Formula:
FV = PV \times (1+r)^t
Example: ₹10,000 invested at 8% for 5 years:
FV = 10000 \times (1.08)^5 = ₹14,693
6. Future Value of an Annuity (series of equal payments)
Formula:
FV = PMT \times \frac{(1+r)^t – 1}{r}
Example: Deposit ₹5,000 every year for 3 years at 10% interest:
FV = 5000 \times \frac{(1.1)^3 – 1}{0.1} = 5000 \times 3.31 = ₹16,550
7. Present Value of a Single Cash Flow
Formula:
PV = \frac{FV}{(1+r)^t}
Example: ₹20,000 to be received after 5 years at 10% discount rate:
PV = \frac{20000}{(1.1)^5} = ₹12,418
8. Present Value of an Annuity
Formula:
PV = PMT \times \frac{1 – (1+r)^{-t}}{r}
Example: You will receive ₹5,000 every year for 4 years, discount rate =
10%:
PV = 5000 \times \frac{1-(1.1)^{-4}}{0.1} = 5000 \times 3.17 = ₹15,850
9. Effective Annual Return (EAR)
Definition: It shows the real annual return considering compounding during
the year.
Formula:
EAR = \left(1 + \frac{r}{n}\right)^n – 1
To analyse a company systematically:
Study annual report, balance sheet, P&L statement, ratios (ROE, EPS, P/E),
cash flows.
Compare growth trend, debt levels, profitability.
10. What is an Annual Report?
A document published yearly by a company to show its financial
performance, operations, and future outlook.
Key features to read carefully
Chairman’s message
Management Discussion & Analysis (MD&A)
Balance Sheet
Profit & Loss Statement
Cash Flow Statement
Notes to Accounts
11. Balance Sheet vs Profit & Loss Account
Balance Sheet: Shows financial position at a point in time (Assets, Liabilities,
Equity).
Profit & Loss A/c: Shows performance over a period (Income – Expenses =
Profit).
Difference: Balance sheet = “What company owns/owes.”
P&L = “How much company earned/spent.”
12. What is Application of Funds?
It shows where the company has used its funds (Fixed Assets, Investments,
Working Capital).
“Sources of Funds” = where money came from.
“Application of Funds” = where money is invested/used.
13. How to Interpret Balance Sheet & Profit and Loss A/c
Check Growth (Revenue, Profit YOY).
Check Liquidity (Current Ratio, Cash).
Check Debt vs Equity.
Check Margins (Gross, Operating, Net Profit).
See EPS, ROE, ROA.
Compare with industry peers.
