Notes

07.07.25

Elements of Investing Decisions

Expected Returns

Definition: The estimated profit or income generated from an investment,

expressed as a percentage of the initial investment.

Purpose: Used to assess the potential attractiveness of an investment.

Calculation: Based on historical data, forecasted cash flows, or

probability-weighted outcomes.

Importance: Helps in comparing different investment options and aligning

them with financial goals.

Cut-off Rate / Required Rate of Return

Definition: The minimum acceptable return that an investor expects from

an investment, considering its risk.

Also known as: Hurdle rate or discount rate.

Use in Decision-Making: Acts as a benchmark to accept or reject an

investment proposal.

If Expected Return ≥ Cut-off Rate → Accept

Notes 1
 If Expected Return < Cut-off Rate → Reject

Determining Factors: Includes risk-free rate, inflation expectations, and a

risk premium.

Risk

Definition: The uncertainty or variability of returns from an investment.

Types of Risk:

Systematic Risk: Market-wide risks (e.g., interest rates, inflation).

Unsystematic Risk: Firm-specific or sector-specific risks.

Measurement Tools:

Standard Deviation: Measures volatility of returns.

Beta Coefficient: Measures sensitivity to market movements.

Value-at-Risk (VaR): Estimates potential loss over a period.

Risk-Return Trade-off: Higher potential returns generally come with

higher risks.

Opportunity Cost of Capital

Definition: The return that could have been earned on the next best
alternative investment of similar risk.

Role in Investment Decisions:

Ensures capital is allocated to its most productive use.

Acts as a benchmark for evaluating projects.

Example: If an investor can earn 8% in government bonds, this becomes

the opportunity cost for any alternative project.

Strategic Implication: Choosing a lower-yielding investment means

sacrificing higher possible returns elsewhere.

Replacement Cost

Definition: The current cost of replacing an existing asset with a similar

one.

Notes 2
 Relevance:

Useful for valuing assets in inflationary environments.

Helps in decisions regarding whether to repair, maintain, or replace

existing equipment.

Comparison with Historical Cost: Replacement cost reflects current

market realities, whereas historical cost reflects past prices.

Application in Capital Budgeting: Important when assessing the economic

viability of continuing with old assets versus investing in new ones.

Financing Decision
Definition:

A financing decision refers to the process of determining the appropriate sources

and mix of capital (debt and equity) to fund the firm’s operations and growth. The
aim is to minimize the cost of capital, manage financial risk, and maximize
shareholder wealth.

Key Objectives:

Decide the right source (internal or external) and form (debt or equity) of
financing

Optimize capital structure

Maintain financial flexibility and solvency

Align funding with business needs and cash flows

1. Financial Aspects of Financing Decision

This component addresses the nature, timing, and structure of funds raised to
finance business operations.

a. Episodic Financing
Definition:

Notes 3
 Episodic financing involves raising capital at specific intervals or stages of
business development rather than continuously. It is especially common in early-
stage or high-growth firms.
Characteristics:

Funding is linked to milestones such as product development, market

expansion, or scaling operations

Typically includes equity rounds (seed, Series A, Series B, etc.) or structured

debt tranches

Examples of Sources:

Venture capital

Angel investors

Private equity

Strategic investors

Advantages:

Capital is raised only when needed, reducing idle funds

Aligns external funding with specific strategic objectives

Can increase firm valuation at each stage

Disadvantages:

Dilution of ownership and control over multiple rounds

Increased pressure to meet milestones for future funding

Uncertainty in securing next rounds at favorable terms

b. Determination of Degree or Level of Gearing

Definition:
Gearing (or leverage) refers to the ratio of debt to equity in the capital structure.
Determining the right degree of gearing is a critical part of the financing decision.

Types:

High Gearing: Greater reliance on debt financing

Notes 4
 Low Gearing: Greater reliance on equity financing

Factors Influencing Gearing Decisions:

Cost of debt vs. cost of equity

Company’s cash flow stability and ability to service debt

Interest tax shield (interest expense is tax-deductible)

Market conditions and creditworthiness of the firm

Risk tolerance of management and investors

Implications of Gearing:

High gearing can boost returns to equity holders during profitable periods
(financial leverage) but increases the risk of default during downturns

Low gearing reduces financial risk but may result in underutilization of debt
advantages and a higher cost of capital

How to reduce cost of capital

Use a country to raise capital from which the the cost of capital is low (Low
interest rate)

Lowest interest country is Switzerland

But less capital offered

Second best is Japan

Compliance risk is really high in raising funds from foreign countries.

08.07.25

etc etc

Notes 5
 Maintenance of balance between owner’s capital and outside capital

26% - controlling stake

you can black the the decision requiring 3/4th majority

Study of economic and financial environment prevailing in the global to be

able to access the best source of funds from any destination to reduce cost
of capital.

Issue of Rights Shares

Legal :

Capital issue regualtions

Filling of DRHP, RHP, Prospectus, Offer Document

Due diligence

Listing regulations

Comliance

In India we use Cashflow test not balance sheet test

so liquidity matters a lot and is very important.

Managing a short term asset with a long term loan VS Managing a long term asset
with a short term asset.

there will be mismatch in both the cases.

09.07.25
Time Value of Money

Notes 6
 Required Rate of Return

the time preference for money is generally expressed by an interest rate

this rate will be positive even in absence of any risk. it may be therefore called
risk-free rate,

AN investor requires compensation for assuming risk, which is called risk

premium

The investor’s required rate for return is

Risk free rate + Risk premium.

Future value of a single present cash outflow(investment) : Compounding

Future Value = PV(1 + r)^n

Future Value = PV x CVF (r.n)

Question : You want to invest Rs 1 lakh today, what will be it’s future value
after 3 years at 10% Interest per annum compounded annually.

Calculation for the

Notes 7
 Clarification

In Excel formula you need to use is “=FV(0.1,15,,100000)”

For , Investing 1 Lakh, for 15 years at 10%

2. How to find the present value for the future value

Present value (PV) = FV/(1+r)^n

Present Value (PV) = FV * PVF(r.n)

Notes 8
 You recive Rs 10,00,000 after 3 year. what would be it’s present value
today at 10% intrest rate per anum discounted annually

Notes 9
 Excel Formula

Notes 10
 =PV(0.13,,-1000000,1)

10.07.25
3. Non Annual Compounding

Future value of a single present cash outflow(investment) with non annual

compounding.

Formula

Future Value = PV(1 + r/m)mn

M= number of times

N = Number of years

Notes 11
 Excel formula

Notes 12
 =1000*(1 + 0.12/12)^12

=FV(0.12/365,(365*2),,-1000)

4. Continuous Compounding

Effecting Annual Rate (EAR) : e^r -1

e = rate of natural logarithms

14.07.25
Annuity

Notes 13
 Fixed, Regular , Equal

Types

Ordinary Annuity

Payments or Receipts occur at the end of each period

Annuity Due

Payment or receipts occur at the beginning of the period

Better for more interest in investment

Gives more value

6. Future Value of a series of equal present cash outflow (ordinary Annuity-

end)

FV = Annuity Amount x CVAF (r,n)

CVAF = Compound Value Annuity Factor

Mathematic formula

CVAF(r,n) = [(1 + R)^n -1]/r

Notes 14
 Example

🔹 Example
❓ Question:
You invest ₹10,000 every year at the end of each year for 5
years, and the interest rate is 10% per annum.
👉 What will be the future value of this investment at the end
of 5 years?

✅ Step 1: Identify the values

A = ₹10,000

r = 10% = 0.10

n = 5 years

🔚 Answer:
At the end of 5 years, your investment will grow to ₹61,051.

Factor table

Notes 15
 A1 - Future value of single investment

A2 - Future value of Multiple investment (Annuity)

A3 & A4 : Talk about present value respectively

15.07.25

Excel formula

=FV[0.10,10,-10000,,0]

In the end “0” Means - ordinary annuity

If we write “1” - it would mean annuity due

8 % per year, annuity contributed 12k per month , for 5 years

=FV(0.08/12,5*12,-12000,,0)

(Don’t be over smart and multiply 12k with 12 and start calculating
annual annuity, The question is monthly that’s why convert
everything to months)

Future value of an Infinite annuity cannot be calculated

Hoee

What if the rate changes after few years, what will be the future value

Excel formula

First calculate the first 5 year’s value at (12%) = $A

Second calculate for the next 5 years at the changed interest

rate(14%) for the $A = $B

Now take Calculate at the changed interest rate for the annuity
deposityed (7000) = $C

Notes 16
 Now add $B + $C = ANS

16.07.25

Annuity due
Formula

Just do 1 + r’

7. PV of a series of equal future cash inflows (Ordinary Annuity-

end)
Formula

Excel Formula

Quesiton : Deposit 10Lakh , and take Rs10,000 annuity every month

form me for 20 years.

Rate of fall in the value of money 8%

=PV(0.08/12,20*12,-10000,,0)

Ans : $ 1,195,542.92

Since it is Still more than 10 Lakh (even after this call in vlaue),
It is a good offer and we should accept it.

23.07.25

LEARN HOW TO MAKE LOAN TREATEMENT IN EXCEL =

AMORTIZATION SCHEDULE in Excel

Notes 17
 EMI CALCULATOR

In the first years

Most of your payments go to interest recovery → Then onwards it’s

principal

So pre-payment in early stages is better as in that PRE PAYMENT, it goes

to majorly Principal payment.

Step up & Step Down EMI

Step-Up and Step-Down EMI are repayment options offered by banks or

financial institutions, primarily for loans like home loans, car loans, or
personal loans. These are flexible EMI plans designed to match a
borrower’s income growth or financial situation.

🔺 Step-Up EMI
Definition:
A Step-Up EMI is a repayment structure where the EMI starts low and
gradually increases over time.

Best For:
Young professionals who expect their income to rise steadily over the years.
Key Features:

Lower EMIs in the initial years.

EMIs increase gradually as time passes.

Higher loan eligibility due to initially lower EMI burden.

Helps borrowers manage early career cash flows better.

Example:

Year 1–2: ₹10,000/month

Year 3–5: ₹15,000/month

Notes 18
 Year 6–10: ₹20,000/month

🔻 Step-Down EMI
Definition:
A Step-Down EMI is a repayment structure where the EMI starts high and
gradually reduces over the loan tenure.
Best For:

Older borrowers or those who expect decreasing income (e.g. nearing

retirement).
Key Features:

Higher EMIs at the start when income is strong.

EMIs reduce over time.

Suitable when the borrower wants to repay a large portion of the loan
early.

Example:

Year 1–2: ₹25,000/month

Year 3–5: ₹20,000/month

Year 6–10: ₹15,000/month

📊 Comparison Table
Feature Step-Up EMI Step-Down EMI

EMI Pattern Increases over time Decreases over time

Near-retirement or high initial

Best For Young earners
income

Initial EMI Low High

Higher (due to low starting

Loan Eligibility Lower (due to high starting EMI)
EMI)

Total Interest
May be higher May be lower
Paid

Notes 19
 Reducing Instalments

Definition:

In a reducing instalment structure, the EMI decreases gradually over

the loan tenure because the interest is calculated on the outstanding
loan balance, not the original principal.

In the context of floating interest rates, the spread (also called the margin) is
the fixed component added on top of a benchmark rate (which varies) to
determine the final interest rate a borrower pays.

Reverse Mortgage
🏠 What is a Reverse Mortgage?
A reverse mortgage is a type of loan available to senior citizens, where they
mortgage their home to a bank or financial institution and receive regular income
(or a lump sum) without having to sell or leave the house.

🧾 Simple Definition:
A reverse mortgage is a loan where the bank pays the homeowner, instead of
the homeowner paying EMIs to the bank.

📌 Key Features:
Feature Details

Eligibility Senior citizens (usually 60+ years) who own a self-occupied home

Notes 20
 Feature Details

Collateral Residential property

Payout Options Monthly, quarterly, lump sum, or a combination

Ownership Borrower remains the owner and continues living in the house

Repayment No need to repay during the borrower’s lifetime

After death, the bank sells the house to recover the loan; heirs may repay
Loan Recovery
and reclaim the house

🧮 How It Works:
1. You mortgage your fully owned house to a bank.

2. The bank evaluates the house value.

3. Based on your age and house value, it decides how much to pay you monthly.

4. You receive payments for a fixed period (say, 15-20 years) or till your lifetime
(depending on the plan).

5. After your death:

Heirs can repay the loan and take back the house.

Or the bank can sell the property and return any surplus (after loan
recovery) to your heirs.

🔁 Regular Mortgage vs. Reverse Mortgage

Feature Regular Mortgage Reverse Mortgage

EMI Payments Borrower pays EMIs to bank Bank pays money to borrower

Age Group Any adult Senior citizens (60+ years)

Purpose To buy a home To get income from an existing home

Loan Repayment Monthly EMIs After death or if house is sold

✅ Advantages:
Provides financial independence in old age

Notes 21
 No need to sell or vacate your home

No monthly repayment burden

❌ Disadvantages:
House may eventually be sold by the bank

Heirs must repay if they want to retain the property

Loan amount is limited to the house value and age of the borrower

🇮🇳 Reverse Mortgage in India:

Introduced in 2007 by the National Housing Bank (NHB).

Available through banks like SBI, PNB, LIC Housing Finance, etc.

Income is tax-free under Indian law.

24.07.25

9. FV of an infinte series of equal future cash inflows perpetuity

PV= CF1(1+r)^1 + CF2/(1+r)^2 +…….

📘 Definition:
A perpetuity is a stream of equal cash flows that continues forever. While
Present Value (PV) of a perpetuity is commonly used and well-defined, the Future
Value (FV) of a perpetuity is undefined or infinite under normal assumptions,
because cash flows never stop — so the sum just keeps growing.

📌 Formula (PV of Perpetuity):

For a perpetuity with constant cash flows:

Notes 22
 11. PV of an infinite series of periodic future cash inflows which grow at a
constant rate per period

PVp = CF1(end of the period)/(r-g)

Notes 23
 12. PV of a finite series of periodic future cash inflows which grow at a constant
rate per period

Notes 24
 PV = CF1/(r-g)[1-{(1+g)/(1+r)}^n]

Notes 25
 13. Sinking Fund

FV = Annuity Amount * CVAF (r,n)

28.07.25

Rule of 72
If the number of years, N , that an investment will be held is divide into the
value 72, we will get the approximate interest rate, i, required for the
investment t double in value

72/n = Interest rate

FV = PV x CVAF x (1+r)

Notes 26
 1+r we are doing because it was Annuity due

FV = PV x CVAF

To calculate annuity amount for a future value given

use PMT function

To calculate rate of interest with everything given for the annuity

Interpolation

Mathamatics

Difference between the higher and lower limit of CVAF you have
found

0.0871

11 (lower limit) + 0.0871

Excel

Use RATE function

29.07.25
To calculate Number of Year

use Function NPER

Mathamatixs

10 = 17.549

11 = 20.655

1. Subtract

a. 17.549 - 20.655 = 3.106

2. Now subtract again

Notes 27
 17.549 - 20 = 2.451

3. Now just do

a. 10 + 2.451/3/106

INFINITy series

CF/r

Growing annuity

Infinite series

CF/ r - g

Finite Series

CF/r - g {[1- (1+g)(1+r)^n]

07.07.25

04.08.25
Capital Budgeting

Notes 28
 The exchange of current funds for future benefits

Features
The influence the firm’s growth in the long run

They affect the risk of the firm

They involve commitment of large amount of funds

They are ususally irreversible

They are some of the most difficult decisions to make.

Another Classification
Mutually exclusive investment

Serves the same purpose & compete with each other

Independent Investments

Different purpose & don’t compete with each other

Contingent Investments

Dependent projects

Steps in Evaluation Criteria

Estimation of cash flows

only cash can have interest, not accruals

Estimation of the required rate of return

How to find Weighted Average cost of Capital?? (WACC)

(Fore each capital contributors) = Percentage of capital contribution X

expected Return (in percentage terms) = 0.__

e.g 0.40 * 0.12 = 0.048

Then add all the final answers

Notes 29
 Application of a decision rule for making the choice

Sharacteristics of sound Appraisal Technique

Consideration of all cash flows

Objective way to separate good project from bad one

Help in ranking the projects

Recognize

Bigger cash flows over smaller ones

Early cash flows over later ones

Transit oriented development

Two broad catergories

Non dicounted Cash Flow criteria

Pay back period

aka Break Even

Discounted

Pay back period

05.08.25
How to calculate breakeven point

Notes 30
 Total Fixed Cost / Contribution per Unit

How to calculate break even point in terms of Ammount (rupees)

Total Fixed Cost / Contribution : Sales Ratio (2:5)

How to calculate number of Units out of desier profit.

Total Fixed Cost + Desierd Profit / Contribution per Unit

How to calculate Sales out of desier profit. (In terms of Rupees)

Total Fixed Cost + Desierd Profit / Contribution : Sales Ratio

Margine of Safety (In terms of Rupees)

Profit / Contribution : Sales Ratio

Margine of Safety (In terms of Unit)

Profit / Contribution per Unit

When it makes to shut down the business

When the contribution is either 0 or in Negative.

06.08.25
Only practice done

Fixed = 5850 + 10000 = 15850

Variable of Product B = 1500 + 400 + 1000 +2000 = 4900

Notes 31
 Contribution of product B

Sales - Total Variable cost = 2600

Profit will reduce with - 9750 - 2600 = 7150

07.08.25

Net Present Value (NPV)

→ Discounted Cash Flow (DCF) Method

A capital budgeting technique that recognizes the Time Value of Money
(TVM).

It helps determine the current value of future cash flows generated by a

project or investment.

Key Features
Considers all cash flows associated with the project.

Adjusts cash flows based on when they occur — i.e., cash flows occurring in
the future are worth less than present cash flows.

Helps in evaluating the profitability of a project or investment.

Notes 32
 Interpretation of NPV
NPV > 0 → Project is profitable; accept it.

NPV < 0 → Project is unprofitable; reject it.

NPV = 0 → Project breaks even; may be accepted based on non-financial

factors.

Another Formula for NPV

Present Value of Cash Inflows - Additional Investment

Discount Rate

Must include Inflation + Risk assesment

Notes 33
 Internal Rate of Return

return at which the NPV would be zero

IRR Formula

Interpolation

IRR = L + A / (A-B) * (H-L)

21.08.25
Risk Adjusted Discount Rate

CAPM = Rf + Beta (Rm -Rf)

Rf =Risk Free Rate

Either G-Sec Rate, or FD rate etc etc (anything which is stable)

apx 7%

Beta = Volatility of Stock

1.25

Formula

Covariance of the stock /

Rm = market Risk Premium

Reasonable Market Risk Premium

Resonable return which equity market provides

13-14% (is historically has been the return of the Market)

Notes 34
 Rate of Return = Rf + Rm (Risk Free Rate + Risk Premium)

Risk Adjusted NPV = Cf i / (1 + R)i -C0

Certainity Equivalents

Risk Adjusted NPV = Sigma n..i= 1 [Aplha x Cf i / (1+ R) i ] - Co

Alpha = Certain Cash Flow Expected Cash Flow

Notes 35