Professional Knowledge: Financial Management, Accounting and Banking
Financial management
Financial statements-balance sheet, P&L and cash-flow statement-feed ratio analysis: liquidity (current ratio), solvency (debt-equity), profitability (net margin, ROE) and efficiency (asset turnover). DuPont links ROE to margin, asset turnover and leverage. Capital budgeting uses incremental cash flows, ignores sunk costs, adds working-capital changes and terminal value, and compares NPV with IRR. WACC weights after-tax debt and equity costs; CAPM gives cost of equity = risk-free rate + beta × market risk premium.
Accounting and banking
Ind AS governs presentation and fair value; depreciation allocates cost, it does not fund repayment. In banking, NIM = net interest income ÷ average earning assets. CRAR = capital ÷ risk-weighted assets. An NPA is generally a loan overdue more than 90 days; provisioning and resolution follow RBI norms, SARFAESI and IBC. ALM matches asset and liability repricing to limit liquidity and interest-rate risk.
Worked example
Capital structure: 60% equity at 15%, 40% debt at 9%, tax 25%. After-tax debt cost = 9% × (1 − 0.25) = 6.75%. WACC = 0.60 × 15% + 0.40 × 6.75% = 9.00% + 2.70% = 11.70%. Use market values if available; book weights can misstate WACC.
Traps
Do not use pre-tax debt cost in WACC, confuse profit with cash flow, or treat depreciation as a cash outflow. In NPA questions, check the 90-day rule and whether provisioning or resolution is asked. NIM uses earning assets, not total assets.