Know Your EMI Calculations and your Overall Payment

Presently people are being provided plethora of choices to take Loans. Home Loans, Car Loans, Personal

EMI Calculation and Overall Payment

loans, Education Loans and so on. Loan makes life easier but along with it comes the EMI (Equated Monthly Instalments).

People pay EMI monthly for years together usually ranging from 1-20 years. It makes it very convenient to pay small amounts from time to time rather than a lump sum amount at once.

But did you ever think how much your Overall EMI total up to in years? Or how is this EMI calculated? You can do it yourself so that you have an idea how much you need to shell out and which scheme will benefit you more. The longer duration you take the higher you end up paying. The EMI might be low but the overall payment throughout the years increases.

Gather information about various schemes in which you are interested. You need to know 3 things

1. The amount of loan you require
2. The Annual Interest rate of a Bank on a loan
3. Number of years (more specifically months) to repay the loan

Formula to calculate:

E = P×R×(1 + R)ⁿ/((1 + R)ⁿ – 1)

E = EMI

P= Loan Amount

R= Rate of Interest (divide it by 12 to make it monthly interest)

Eg:

1. Leela takes a loan of Rs.1 lac for 3 years (i.e. 36 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 3 years

Calculation:  (100,000*12%)*(1+12%/12)³⁶/((1+12%/12)³⁶-1)

= 3321.43

So your EMI is Rs.3321.43

Now that you are paying it every month for 3 years, how much it totals up to:

= 3321.43 *36 = Rs.119,572/-

So overall you pay Rs. 119,572 in total (excluding the bank charges/processing fee)

Let us calculate a similar sum with longer duration

1. Krishnan takes a loan of Rs.1 lac for 5 years (i.e. 60 months)  at an interest rate of 12 %

Calculate his EMI and Overall amount paid at the end of 5 years

Calculation:  (100,000*12%)*(1+12%/12)⁶⁰/((1+12%/12)⁶⁰-1)

= 2224.44

So your EMI is Rs.2224.44/-

Now that you are paying it every month for 3 years, how much it totals up to:

= 2224.44 *60 = Rs.133,467/-

So overall you pay Rs. 133,467 in total (excluding the bank charges/processing fee)

So as you see in both the examples, the amount was same, the rate was same but as the Krishnan took loan for more years his overall payment is higher though the monthly EMI was low.

I hope this article helped you.

For all those Non-finance students who want to skip the torturous calculation please download the below link and simply feed in your loan details and you will get the results calculated.

https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdGk2TjFZTnUwUlktUVNIQVBMQjZ2Tnc&output=xls

Great Brains, Good Heart 🙂

D.V.P

FCF FCFF and FCFE uncluttered

Now that Cash Flow Statement is briefly explained, let us go through the various Cash Flow terms which is little

FCF FCFE FCFF

confusing i.e. Free Cash Flow (FCF), Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE)

Free Cash Flow

It is the Cash flow recorded by the Company as availablefor the company growth after taking care of its Operating expenses and Capex. Capex is the expense incurred during the year on assets and investments. The company might have added a new plant or replaced a plant and/or invested more in some securities or so on. It is a very essential expense which company can’t ignore. It is already calculated in the Cash flow statement as Cash from Investing Activities. We may also remove Dividends from it.

Basically it can be calculated as

FCF= Operating Cash Flow – Capex

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OR

FCF= Operating Cash Flow – Cash from Investing Activities

Free Cash Flow to Firm (FCFF)

The cash flow available to the overall security holders of the company whether it is owners/equity-holders and debt-holders of the company. What makes it different from FCF is that we include the  INTEREST for the debenture holders after removing the tax from the interest.  Be clear that usually Tax is already removed from the Operating Cash Flow but we never calculate Interest which we pay there. So we add back the Interest and deduct the tax applicable on Interest towards Debt-holders. Now, this cash flow is what is available to all the firm

It can be calculated as

FCFF = Operating Cash Flow + [Interest *(1- tax)] – Capex

OR

FCFF = Operating Cash Flow + [Interest *(1- tax)] – Cash from Investing Activities

Free Cash Flow to Equity (FCFE)

As the name suggests it is the cash flow available for the equity shareholders after paying off all the obligations towards to the expenses and debt-holders. It shows how much of debt affects the company’s cash flow. The FCF would be adjusted after deducting the Interest or the Debt Repayment amount and adding any new Debt received as it indicates Cash inflow

FCFE = Operating Cash Flow – Capex – Debt Repayment + New Debt

OR

FCFE = Operating Cash Flow – Cash from Investing Activities – Debt Repayment + New Debt

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Calculate your future Income on your Monthly Fixed Investment yourself

Many people have started investing and planning a good savings for their future. Monthly Investment scheme seems to be very popular among all and especially among the new age income earners as it is quite reasonable. And if you are not sure about this I will show you the calculation as to how much your monthly investment will fetch you more income after a certain period.

You need to invest a fixed monthly amount eg: Rs.1000. There are various schemes available with different amount and different rate of interest and period. If you want to choose which scheme will fetch you more returns with the given information then do the following calculation.

Example:

You invest Rs.1000 per month

You will get returns at 8% compounded MONTHLY

You are depositing for 9 years

Calculation:
A = Rs.1000 per month

Rate of interest monthly = 8/12 months = 0.667% = 0.667/100 = 0.00667

N (period)  = 9 * 12 months = 108 months

Formula:                       A*(1+r) *( (1+r)ⁿ  -1)/ r

= 1000*(1+0.00667) * ((1+0.00667)108 -1)/  0.00667

= Rs.158479

So investing Rs.1000 per month at the rate of 8% per annum compounded monthly you will get Rs. 158,479/- at the end of 9 years

D.V.P

For non-finance student who simply want to calculate without the formula download the below excel link and click Enable Editing and simply calculate entering your details
https://docs.google.com/spreadsheet/pub?key=0AlC7HnnNgD3KdG9LZnpQcjlzZWY1QnZRQWVsb3N0clE&output=xls

Cash Flow Statement Explained

Cash flow statements are one of the essential Financial Statements that help you to understand the financial health and movement of the company.  It can be derived from the Balance sheets and the Income statements. Given an option of choosing only one statement among all these to analyse you may choose Cash Flow statement to know how the company is performing during a course of time. It is provided in the annual report of the listed company

So what exactly is a Cash Flow Statement? And what makes it the so important?

Cash Flow statement is a part of Fundamental Analysis showing the usage of cash and cash equivalents within an organisation for an ascertained period of time mostly a year or a quarter. It is not same as the Net Income of the company.

 It has three components namely

Cash Flow from Operating Activities

Cash Flow from Investing Activities

Cash Flow from Financing Activities

1. Cash Flow from Operating Activities

As the name suggest it involves the principal revenue generating activities. Net Income includes future incomes and expenses and non cash adjustments like depreciation and amortisation.  We need to know how cash has been utilised during a year. So we add back the depreciation to the Net income and add the Net Working Capital i.e. add or subtract the cash received from Debtors or paid to Creditors.  When the debtors pay you, the Bills receivable in Balance sheet reduces and we add in Cash flow and vice versa.

Operating Activity

Net Income

Add: Depreciation

Add: Cash received from Sales	Less: Cash Purchases
Cash from Debtors	Payment to creditors
Cash from Commission and fees	Cash Operating Expense
Royalty and other revenue	Payment of wages
	Income Tax
TOTAL CASH FROM OPERATIONS

If e.g. Balance sheet of Year 1 show Creditor as Rs.10,000 and Year 2 shows it as Rs.8,000 that means, Rs.2000 of cash outflow has happened to pay off the Creditors. So we subtract it from the cash flow. Similarly every cash expense and income is checked in the same way.

2. Cash Flow from Investing Activities

It takes into consideration the cash used to buy new equipment, buildings or short-term assets such as marketable securities.

Add:	Less:
Sale of fixed Asset	Purchase of Fixed Asset
Sale of Investment	Purchase of investments
Interest Received
Dividend Received
TOTAL INVESTING ACTIVITY

3. Cash Flow from Financing Activities

A company receives money when it issues equity or debentures to the public or get a loan. It shells out its money when it has to pay dividend to shareholders and interest to debenture holders and also while redeeming it.  These changes decide the cash flow from financing activity

Add:	Less:
Issue of shares	Dividends paid
Issue of debentures in cash	Interest paid on Loan/ Debenture
Loan Received	Loan Repayment
TOTAL FINANCING ACTIVITY

All the three sub cash flows would be totalled and added to the Opening balance of Cash to reach Cash and Cash equivalent at the end of the year

Cash Flow Statement

Add: Cash from Operating activity

Add: Cash from Investing Activity

Add: Cash from Financing Activity

Add: Opening Balance of Cash & Equivalent

Cash & Equivalent at the end of the year

Negative Cash Flow is not preferred as seen as sign of weak business but we need to check whether the company has followed any growth strategy and hugely made investments which led to the cash outflows.

-D.V.P

How to Value a Stock/Business – Brief on various methods

There are several methods which help us decide the value or price of a stock/business. All the financial and economic aspects are taken into consideration. Growth rates, rate of discount and expected returns from a stock are estimated.  It is always better to consider few methods to arrive at a conclusion about a stock rather than going for a single method. The reason being every method has its own pros and cons.

Before we get down to valuing stocks in detail you need to be clear with various terms like WACC, NPV, Cost of Capital, Beta, Cost of Equity, IRR, etc.

Here is a brief about the various methods. It would be discussed in detail separately.

Two Methods

Absolute Valuing – i.e. finding the Intrinsic Value

Relative or Comparable valuing method

Absolute Valuation Method:

·         Discounted Dividend Model  (DDM)

It is also known as Gordon Model. Dividend is an actual cash flow paid to shareholders annually.  The estimated future dividends are discounted to the present value to arrive at a stock price. This method can’t be used for all companies. To use DDM, a company must be consistent in its dividend payment and earnings which is possible in Blue chips or fundamentally highly rated companies. It uses Cost of Equity to discount the dividend cash flows.

·         Discounted Cash Flow (DCF)

It is one of the most widely used methods. In this we calculate the present value of all future cash flows of the company.  If a company is irregular in dividend payment they can opt for this method. It uses WACC to discount the cash flows.

·         Residual Income Method

This method is not much popular. Residual Income in this context means deducting the expected returns for equity shareholders from the Net Income. This shows how much of income would be left if Net Income is directly distributed to the owners. The residual income for future is calculated and then discounted at the expected rate of return to arrive at the present value of the stock/business. It uses Cost of Equity to discount the Residual Income.

·         Asset Based Valuation

This is not much preferred method. The assets are valued against the market value. If the book value shows a lower value than the market then it is considered good and not over valued as no investor likes to pay more for a company which has no market standing.  It gets difficult to value the intangible assets and at times some company inflate their Goodwill which is very difficult to value as there is no exact value. Liabilities and Shares are deducted from the Assets valued.

Relative or Comparable Valuation Method:

This method involves comparing the various ratios or parameters of different companies of the same sector involved in similar activities.  The Market capitalisation would be compared.

Various Ratios especially Price Earnings Ratio (P/E), Price to Book Value (P/BV),  Price to Cash Flow (P/CF), Liquidity Ratio, Debt Turnover Ratio, etc are compared. It is much easier to calculate than the Absolute method as most of the elements to calculate are available to us from the company. Comparing variables also help us to know how a particular company is performing compared to all its competitors.

As there is no fool proof way to estimate the value, analysts always prefer to mix various methods and arrive at n conclusion. As past data doesn’t always seems to be the exact for future but yet it goes a long way.

D.V.P