Financial Analysis puzzles, solved step by step

Puzzles: 100
Traced to a firm: 47
Topics: 13
Hard: 30

Showing 11–20 of 53 · filtered from 100Clear filters

025A supermarket has annual cost of goods sold of Rs 3,650 crore. It pays suppliers in 45 days, holds 20 days of stock, and is paid in cash at the till. If its sales fall 10%, how much cash leaves the business through working capital?Working capital and cash riddlesCoreCorporate FP&ATreasury
Try it first
Sales fall 10% with payment and stock days unchanged. What happens to cash from working capital?
Show the worked solution
About Rs 25 crore of cash leaves. Cost of goods sold is Rs 10 crore a day, so payables are 45 days, Rs 450 crore, and stock is 20 days, Rs 200 crore. With no receivables, net working capital is minus Rs 250 crore: suppliers fund the business. A 10% fall cuts daily cost to Rs 9 crore, payables to Rs 405 crore and stock to Rs 180 crore, so net working capital rises to minus Rs 225 crore. That Rs 25 crore is cash consumed.
How can a business be funded by its suppliers?
Think of a school canteen where parents pay for the term in advance and the canteen pays its vegetable seller at the end of each month. The canteen holds other people's money for weeks. A supermarket sells for cash at the till, keeps stock for 20 days and pays suppliers after 45, so it collects from customers about 25 days before it pays for the goods. Its net working capital is negative: suppliers are lending it money, free of interest, all year.
The relationship
$\text{NWC} = \underbrace{10 \times 20}_{\text{stock}} - \underbrace{10 \times 45}_{\text{payables}} = 200 - 450 = -250$
10 cost of goods sold per day, Rs 3,650 crore over 365
20 days of stock held
45 days taken to pay suppliers
What it says in wordsNet working capital is stock less payables when customers pay at the till; here suppliers fund Rs 250 crore.
Before the fall, payables of Rs 450 crore fund stock of Rs 200 crore, leaving net working capital of minus Rs 250 crore. After a 10% fall, payables of Rs 405 crore and stock of Rs 180 crore leave minus Rs 225 crore, so Rs 25 crore of cash has left the business.
Why does shrinking cost this business cash?
Run it as two movements. Stock falls by Rs 20 crore, which frees cash, but supplier credit falls by Rs 45 crore, which the supermarket has to pay out, so the net is Rs 25 crore out. Each day of lower sales means paying suppliers for last month's larger purchases while this month's till receipts are smaller. The mirror image is why such businesses love growth: a 10% rise in sales would release about Rs 25 crore.
What makes the real number worse?
The answer assumes the days stay fixed, and in a downturn they often do not. Suppliers who see sales fall may shorten credit; if payable days drop from 45 to 40, payables fall to Rs 360 crore and the cash outflow grows to about Rs 70 crore. On top of the working capital effect, lower sales also cut profit. Say both, then name the lesson a lender draws: a business funded by its suppliers can look cash-rich while it grows and turn cash-hungry quickly when it shrinks.
Where candidates lose it
The common loss is saying cash comes in, because less stock is needed. That counts only the asset side and forgets that supplier credit shrinks faster, since payables are more than twice the size of stock.
The second loss is saying nothing changes because the days are unchanged. Days are ratios; the rupee balances scale with sales, and the cash moves with the rupees.
What the interviewer asks next
If sales grew 10% instead, how much cash would working capital release?
How would the answer change if 20% of sales were on credit with 30-day terms?
Why might a supermarket's suppliers accept 45-day terms?
026A company trades at 15x earnings and 6x EBITDA. Market cap is Rs 300 crore, net debt is Rs 180 crore, interest expense is Rs 18 crore and depreciation and amortisation is Rs 30 crore. What is the implied effective tax rate, and what does it suggest about the company?Valuation and multiples riddlesHardEquity researchTransaction advisory
Try it first
Before you calculate: which two numbers must you find first?
Show the worked solution
The implied tax rate is 37.5%. Market cap of 300 at 15x earnings gives net income of 20. Adding net debt of 180 gives EV of 480, so EBITDA at 6x is 80. Less D&A of 30 is EBIT of 50; less interest of 18 is pre-tax profit of 32. Tax is 32 minus 20, which is 12, and 12 over 32 is 37.5%, high enough to ask why.
Where do you start when six numbers arrive at once?
Think of working out a friend's take-home pay from what they spend and what they save. You do not start with their job title; you start with the two numbers that pin the answer. A tax rate is tax divided by pre-tax profit, so every other number in the question is a road to net income or to pre-tax profit. Say that first. Net income is one step: 300 over 15 is 20. Pre-tax profit needs EBITDA, which needs EV, which needs the net debt you were handed.
Market cap of 300 at 15x gives net income of 20, and adding net debt of 180 gives EV of 480 and EBITDA of 80 at 6x. EBITDA less D&A of 30 and interest of 18 leaves pre-tax profit of 32, so a tax charge of 12 is a 37.5% rate.
The relationship
$t = \frac{\text{PBT} - \text{NI}}{\text{PBT}} = \frac{(480/6 - 30 - 18) - 300/15}{480/6 - 30 - 18} = \frac{12}{32} = 37.5\%$
PBT pre-tax profit: EBITDA less D&A less interest
NI net income: market cap over the P/E
480 enterprise value: market cap 300 plus net debt 180
What it says in wordsBuild pre-tax profit from the EV multiple, build net income from the P/E, and the tax rate is the share of pre-tax profit that did not survive.
What does a 37.5% rate tell you, and what have you assumed?
You assumed there are no minority interests, no associates and no interest income on cash, so EV is just market cap plus net debt and every rupee of pre-tax profit belongs to shareholders. Say that. Then read the number. An effective rate well above the statutory rate usually means some costs are not tax deductible, some losses sit in units that cannot use them, or there are one-off tax charges. Compare it with the statutory rate the company actually pays, which you should confirm for the year in question. A second check: interest of 18 on net debt of 180 is 10%, which is plausible, so the inputs hang together.
Where candidates lose it
Candidates reach EBITDA of 80, subtract tax from somewhere and forget one of the two lines between EBITDA and pre-tax profit, usually D&A. Walk the income statement in order, one line per step, and the missing line has nowhere to hide.
The second loss is stopping at 37.5%. The interviewer asked what it suggests. One sentence on non-deductible costs or loss-making units turns arithmetic into analysis.
What the interviewer asks next
If the company also held Rs 40 crore of cash earning 5%, how does the implied rate change?
Which items typically push an effective tax rate above the statutory rate?
What happens to the implied rate if the P/E rises to 20x with everything else fixed?
027A product sells at a 30% contribution margin. You raise the price by 5% and lose 8% of your volume. Is total contribution better or worse than before, and by how much?Pricing, costing and unit economicsCoreCorporate FP&ACost accounting
Try it first
Gut call: you gained 5% on price and lost 8% on volume. Where does total contribution land?
Show the worked solution
Better, by about 7.3%. Take a price of 100 with variable cost 70, so each unit contributes 30. After the rise the price is 105 and each unit contributes 35. Selling 92 units instead of 100 gives 92 x 35 = 3,220 against 3,000 before. Volume could fall as far as 14.3% before the price rise stopped paying.
Why does 5% on price beat 8% on volume?
Picture a tea stall that sells a cup for 10 rupees with 7 rupees of milk, leaves and sugar in it. Raise the price to 10.50 and the stall's profit per cup goes from 3 to 3.50, a sixth more. A price rise falls straight to contribution, so its effect is measured against the margin, not against the price. The volume loss, by contrast, removes whole cups and their contribution at the same rate as the lost units, 8%.
Raising price from 100 to 105 lifts contribution per unit from 30 to 35, a 16.7% gain, so 92 units at 35 earn 3,220 against 3,000 for 100 units at 30, and volume would need to fall 14.3% to erase the gain.
How much volume could you lose before the price rise hurts?
Set new contribution equal to old: units times 35 must equal 100 times 30, so units can fall to 3,000 over 35, which is 85.7. The breakeven volume loss for a price rise is the price change divided by the new margin: 5 over 35, or 14.3%. That is why thin-margin businesses gain so much from price and lose so much from discounts: at a 30% margin, a 5% discount needs volume to rise by 5 over 25, a full 20%, just to stand still.
The relationship
$\Delta V_{\text{breakeven}} = -\frac{\Delta p}{m + \Delta p} = -\frac{5\%}{30\% + 5\%} = -14.3\%$
Delta p the price change as a share of the old price, 5%
m the contribution margin before the change, 30%
What it says in wordsVolume can shrink by the price change divided by the new margin before the rise stops paying.
Say the limit too. The sum treats variable cost per unit as fixed and ignores any fixed costs that could be cut when volume falls, and it says nothing about customers who leave and do not come back next year.
Where candidates lose it
The usual loss is adding the two percentages: plus 5 and minus 8 is minus 3, so the move looks bad. That treats the price change as if it acted on revenue, when it lands entirely on the contribution slice.
The second loss is working in revenue instead of contribution. Revenue does fall slightly, 105 x 92 is 9,660 against 10,000, and a candidate who stops there gets the answer backwards.
What the interviewer asks next
At the same 30% margin, how much must volume rise to justify a 10% price cut?
How does the answer change if the margin is 70%, as in software?
Which fixed costs would you look at if volume did fall 8%?
029A bowl holds 100 noodles. You pick two free ends at random and tie them together, and keep doing this until no free ends are left. What is the expected number of loops in the bowl at the end?Probability and expected valueHardConsulting-style caseKPO research support
Try it first
Before you compute: roughly how many loops do you expect from 100 noodles?
Show the worked solution
About 3.28 loops. Every tie cuts the number of strands by one, so there are exactly 100 ties. With k strands left, the second end you grab is one of 2k - 1 free ends, and only one of those closes a loop, so that tie adds 1 over (2k - 1) to the expected count. Summing 1 + 1/3 + 1/5 + ... + 1/199 gives 3.2843.
How do you avoid tracking the whole bowl?
Think of shaking hands at a party where each person has two hands. You do not need the seating plan to know that each handshake joins two hands. Whatever the bowl looks like, every tie reduces the count of strands by exactly one, and a strand is either an open piece or a closed loop that has left the game. So you can ignore the tangled history and ask one question per tie: does this tie close a loop, yes or no?
Pick any free end first; which one does not matter. With k strands there are 2k free ends, so 2k - 1 remain for the second pick, and exactly one of them is the other end of the same strand. That tie closes a loop with chance 1 over (2k - 1). Otherwise two strands fuse into one longer strand.
Early ties almost never close a loop: with 100 strands the chance is 1 in 199, and the expected count is only 1.15 after 90 ties. The last three ties add 0.2, 0.33 and 1, bringing the total to 3.28 loops.
Why can you add the step expectations when the steps depend on each other?
Whether an early tie closes a loop changes nothing about how many strands remain, because every tie removes one strand either way. Expected values add even when the events are linked, so the total is simply the sum of the per-tie chances. This is linearity of expectation, and it is what makes the puzzle a two-minute answer instead of a simulation. For large n the sum is close to half the natural log of n plus about 0.98; for 100 noodles that gives 3.28, a useful sanity check.
The relationship
$E[\text{loops}] = \sum_{k=1}^{n} \frac{1}{2k-1} = 1 + \tfrac13 + \tfrac15 + \cdots + \tfrac{1}{199} \approx 3.28$
n the number of noodles, 100
k strands left before a tie
1/(2k-1) the chance the second end chosen belongs to the same strand
What it says in wordsAdd, tie by tie, the chance that the tie closes a loop.
Where candidates lose it
Candidates try to picture how the strands grow and get lost in cases. The problem is only tractable when you notice that each tie does exactly one of two things and that the strand count falls by one either way.
The second loss is getting the chance wrong as 1 over 2k. You have already picked one end, so the pool for the second pick is 2k - 1, not 2k.
What the interviewer asks next
With just two noodles, what is the chance of ending with two loops?
Roughly how many loops would you expect from 10,000 noodles?
Where else does linearity of expectation save you from tracking dependence?
030A company's net debt is 3x EBITDA and its cost of debt is 10%. What is its EBITDA interest cover? What does cover become if leverage rises to 5x and the rate to 12%?Ratio and margin riddlesCoreRating agenciesBank credit
Try it first
Leverage rises from 3x to 5x and the rate from 10% to 12%. What happens to cover?
Show the worked solution
Cover is 3.3x, falling to 1.7x. Take EBITDA of 100. Net debt of 300 at 10% costs 30 of interest, so EBITDA covers it 3.33 times. At 5x and 12%, net debt is 500 and interest is 60, so cover is 1.67x. Cover is one over leverage times the rate, and 0.30 doubling to 0.60 halves it.
Why is there no need for an actual EBITDA figure?
Think of a household whose loan EMIs are some multiple of monthly salary. Whether the salary is 50,000 or 5 lakh, the share of salary that goes on interest depends only on how many months of salary it borrowed and at what rate. Interest cover is EBITDA over interest, and interest is leverage times EBITDA times the rate, so EBITDA cancels and cover is one over leverage times the rate. Pick EBITDA of 100 only to make the arithmetic visible.
The relationship
$\text{Cover} = \frac{\text{EBITDA}}{L \cdot \text{EBITDA} \cdot r} = \frac{1}{L\,r} = \frac{1}{3 \times 0.10} = 3.3\times$
L net debt as a multiple of EBITDA
r the average cost of debt
What it says in wordsInterest cover is the reciprocal of leverage multiplied by the interest rate.
With EBITDA of 100, net debt of 300 at 10% costs 30 of interest and gives cover of 3.3x, while net debt of 500 at 12% costs 60 and gives cover of 1.7x, so the two moves together cut cover exactly in half.
Why do leverage and rates tend to move together, and what does 1.7x mean?
A lender charges more to a borrower who owes more, so the second scenario is not a coincidence; it is how a stretched balance sheet usually looks. Because leverage and rate multiply, a company that adds debt while rates rise loses cover much faster than either change alone suggests. Cover of 1.7x also flatters the position: EBITDA is before tax, capex and working capital, so once maintenance capex is paid the cash left to service interest can be well under 1.7 times the bill. Say that limitation; credit analysts look at cover after capex for exactly this reason.
Where candidates lose it
Candidates compute each change separately and add them: leverage up two-thirds, rate up a fifth, so cover falls by something like 50 to 90% depending on how they combine it. Say the formula first, cover equals one over L times r, and the answer is a single division.
The second loss is treating 1.7x as comfortable because it is above one. The interviewer wants to hear that EBITDA is not cash available for interest.
What the interviewer asks next
At 5x leverage, what rate would bring cover down to 1.0x?
How would you compute cover after maintenance capex, and why is it lower?
Which covenant would a lender set on this company, and at what level would you expect trouble?
033Convert to percentages in your head, quickly: 3/32, 5/16 and 7/64.Mental mathsWarm upTreasuryCorporate FP&A
Try it first
Which of these is 7/64 as a percentage?
Show the worked solution
3/32 is 9.375%, 5/16 is 31.25% and 7/64 is 10.9375%. Anchor on 1/8 = 12.5% and halve: 1/16 is 6.25%, 1/32 is 3.125% and 1/64 is 1.5625%. Then multiply the rung by the numerator, or step from a nearby eighth: 7/64 is 1/8 less 1/64, which is 12.5 minus 1.5625.
Why should powers of two be easy?
Think of cutting a pizza: halve it, halve the halves, halve again, and you have eighths without measuring anything. Fractions with 2, 4, 8, 16, 32 or 64 at the bottom work the same way. Every power-of-two fraction is 12.5% halved some number of times, so you only need one anchor and the habit of halving. 1/8 is 12.5%, 1/16 is 6.25%, 1/32 is 3.125% and 1/64 is 1.5625%. The digits 125, 625, 3125, 15625 repeat in every problem of this kind.
Halving 12.5% gives 6.25%, 3.125% and 1.5625% for sixteenths, thirty-seconds and sixty-fourths, so 3/32 is three rungs of 3.125% or 9.375%, 5/16 is five rungs of 6.25% or 31.25%, and 7/64 is 12.5% less one rung of 1.5625%, or 10.9375%.
When should you multiply up, and when should you step down from an eighth?
Small numerators multiply cleanly: 3 x 3.125 is 9.375 and 5 x 6.25 is 31.25. When the numerator sits one below a multiple of the anchor, subtract instead: 7/64 is 8/64 less 1/64. That turns a seven-times table of 1.5625 into one subtraction, 12.5 less 1.5625, which is 10.9375%. Checking 3/32 the same way, 4/32 is 12.5%, less 3.125% is 9.375%, which matches. Two routes agreeing is the habit that catches a slipped digit.
Where does this show up on a desk? Some bond prices are quoted in thirty-seconds of a point, so 3/32 of a point is 0.09375. Ownership splits and waterfall percentages often come in halves and quarters of halves. And an interviewer who asks this is really watching how fast you find a structure instead of reaching for longhand division.
Where candidates lose it
Candidates start long division, 3 divided by 32, and lose the decimal place or the tempo. The question is timed by feel: the interviewer wants an answer in a few seconds, and only the halving ladder gets you there.
The second loss is rounding: 10.9% for 7/64 is fine as an estimate, but if the interviewer asked for the exact figure, it is 10.9375%, and the ladder gives it to you exactly.
What the interviewer asks next
What is 11/64 as a percentage?
A bond is quoted at 98 and 5/32. What is that in decimal?
What is 1/128, and how do you get it from the ladder?
036A business has a 10% operating margin. Next year revenue grows 20% and costs grow 15%. What is the new margin?Percentages and averagesCoreCorporate FP&ABusiness finance
Try it first
Quick call: where does the margin land?
Show the worked solution
The new margin is 13.75%. Take revenue of 100, so cost is 90 and profit 10. Revenue grows to 120 and cost to 90 x 1.15 = 103.5, leaving profit of 16.5. The margin is 16.5 over 120, which is 13.75%. Profit itself grows 65%, because a 5 point gap between growth rates is large next to a 10% margin.
Why is the answer not simply 15%?
Think of a tea stall that takes in Rs 100 a day and spends Rs 90. If takings rise 20% and spending rises 15%, the extra takings are Rs 20 but the extra spending is Rs 13.50, because 15% is taken on 90, not on 100. Growth rates act on their own bases, so a margin moves by the gap in rupees, not by the gap in percentage points. Work in rupees on a base of 100 and the trap disappears: profit goes from 10 to 16.5 on revenue of 120.
On revenue of 100, profit of 10 gains 20 from revenue growth and loses 13.5 to cost growth, ending at 16.5 on revenue of 120, a margin of 13.75% rather than the 15% you get by adding the growth gap to the margin.
The relationship
$m_1 = 1 - (1-m_0)\frac{1+g_c}{1+g_r} = 1 - 0.90 \times \frac{1.15}{1.20} = 13.75\%$
m0, m1 the old and new margins
g_r, g_c revenue growth and cost growth
1 - m0 cost as a share of revenue before the change
What it says in wordsThe new cost share is the old cost share scaled by cost growth over revenue growth, and the margin is what is left.
Why does a thin margin make the move so large?
Profit is the small gap between two big numbers, so a modest difference in their growth rates is a big change to the gap. The thinner the starting margin, the more operating leverage a growth gap carries: here profit grows 65% on 20% revenue growth. Run the same 20% and 15% from a 30% margin and the new margin is 32.9%, a smaller relative move, because cost is a smaller share of revenue. Say the limit too: the formula assumes all cost grows at 15%. In practice fixed costs grow slowly and variable costs track volume, so you would split the cost line before trusting the answer.
Where candidates lose it
The fast wrong answer is 15%: 10% plus the 5 point gap between the growth rates. It treats both rates as if they applied to the same base, when cost growth applies to 90 and revenue growth to 100.
The second loss is stopping at the margin. The interviewer often wants the profit growth too, and 65% on 20% revenue growth is the sentence that shows you understand operating leverage.
What the interviewer asks next
What cost growth would keep the margin at exactly 10%?
If half the cost base is fixed and does not grow, what is the new margin?
Revenue falls 10% and costs fall 5%. What happens to a 10% margin?
040Receivables are Rs 300 crore at quarter end and revenue for the quarter was Rs 450 crore. A junior analyst reports days sales outstanding of 243 days. What went wrong, and what is the right figure?Working capital and cash riddlesWarm upCorporate FP&ABig Four
Try it first
What is the right DSO?
Show the worked solution
The right DSO is about 61 days; the junior set a quarter's revenue against a full year of days. DSO is receivables over revenue times the days in the same period. Either annualise revenue, 450 x 4 = 1,800, giving 300 / 1,800 x 365 = 60.8 days, or keep the quarter and multiply by its 91.25 days. The 243 is exactly four times too large.
What does DSO actually measure?
Think of a tailor who sells Rs 1,000 of clothes a day and is owed Rs 30,000 by customers. Customers are, on average, 30 days behind. DSO is receivables divided by revenue per day, so the revenue and the day count must come from the same period. Rs 450 crore over a quarter is about Rs 4.93 crore a day, and Rs 300 crore of receivables is about 61 days of that.
Dividing receivables of Rs 300 crore by one quarter's revenue of Rs 450 crore and multiplying by 365 days gives 243 days, exactly four times the right answer of about 61 days, which comes from annualising revenue or using the 91 days in the quarter.
The relationship
$\text{DSO} = \frac{\text{Receivables}}{\text{Revenue in period}} \times \text{days in period} = \frac{300}{450} \times 91.25 = 60.8$
Revenue in period sales over the same span of time as the day count
days in period 365 for a year, about 91 for a quarter
What it says in wordsMatch the revenue period to the day count, and DSO is the number of days of sales still unpaid.
How would you have caught 243 days before it went out?
Run a plausibility check before any number leaves your desk. 243 days says the average customer pays eight months after the sale, which almost no ordinary business tolerates, so the number should have triggered a second look on sight. A second check: compare with last quarter's DSO computed the same way. A sudden fourfold jump is almost always a formula or period error, not a collections crisis. Say the limitation of the corrected figure too: quarter-end receivables against average daily sales can swing with seasonality, so analysts often use average receivables over the period, and a strong last month of the quarter will push DSO up even when customers pay on time.
Where candidates lose it
The error itself is the trap: quarterly revenue with 365 days. It happens most when a template built for annual numbers is fed quarterly data. Spot the factor of four and say so.
The second loss is fixing it silently. The interviewer wants you to name the rule, match the period of revenue to the days you multiply by, and to say how you would catch it next time.
What the interviewer asks next
If the last month of the quarter carried half the quarter's sales, how would that distort DSO?
How would you compute days payable outstanding from quarterly data?
Why might an analyst prefer average receivables to the quarter-end figure?
041A distributor prices at cost plus 25%. A competitor says it earns a 25% gross margin. Who keeps more on every Rs 100 of sales, and what markup would give the distributor a 25% margin?Ratio and margin riddlesWarm upCorporate FP&ACost accounting
Try it first
What markup on cost delivers a 25% gross margin?
Show the worked solution
The competitor keeps more: Rs 25 against Rs 20 on every Rs 100 of sales. Cost plus 25% means a price of 1.25 times cost, so on Rs 100 of sales cost is Rs 80 and the margin is 20%. A 25% gross margin needs cost of Rs 75 on a price of Rs 100, which is a markup of 25 over 75, or 33.3%.
Why does the same 25% mean different money?
Think of a vegetable seller who buys tomatoes for Rs 80 a kilo and adds Rs 20. To him, that is 25% on what he paid. To his customer, Rs 20 out of the Rs 100 she paid is 20%. Same Rs 20, two percentages. Markup divides profit by cost; margin divides it by price, and price is always the bigger number, so a margin is always smaller than the markup that produced it. The distributor's 25% markup is a 20% margin; the competitor's 25% margin is a 33.3% markup.
On Rs 100 of sales, pricing at cost plus 25% means cost of Rs 80 and Rs 20 kept, while a 25% gross margin means cost of Rs 75 and Rs 25 kept, a markup of 33.3% on cost.
Markup on cost Margin on price Kept per Rs 100 of sales
10% 9.1% Rs 9.1
20% 16.7% Rs 16.7
25% 20.0% Rs 20.0
50% 33.3% Rs 33.3
100% 50.0% Rs 50.0
Margin equals markup divided by one plus markup, so the gap widens as the markup grows: a 100% markup is only a 50% margin.
Where does this mix-up cost real money?
In pricing conversations, sales teams often quote markups because the numbers sound larger, while finance teams report margins. If a target says 25% margin and the price list is built at cost plus 25%, every sale falls 5 rupees short per Rs 100, a fifth of the profit the plan assumed. Discounts make it worse: a 10% discount off a cost-plus-25% price leaves a price of Rs 90 on cost of Rs 80, an 11.1% margin, so half the profit per unit is gone. Say the conversion formula out loud whenever someone gives you a percentage of profit, and ask which base it is on.
Where candidates lose it
The trap is answering that both keep the same, because both say 25%. The question is built to see whether you ask: 25% of what?
The second loss is getting the conversion backwards and saying a 25% margin needs a 20% markup. Check with Rs 100 of price: cost Rs 75, profit Rs 25, and 25 over 75 is a third.
What the interviewer asks next
What margin does a 40% markup give?
A retailer offers 20% off a product priced at cost plus 50%. What margin is left?
Why do sales teams often prefer to talk in markups?
042A company sells land with a book value of Rs 40 crore for Rs 100 crore and pays 20% tax on the gain. Walk it through the three statements, and explain why the gain is subtracted in cash from operations.Accounting flow riddlesCoreBig FourCorporate FP&A
Try it first
What does cash from operations show for this transaction?
Show the worked solution
Net income rises Rs 48 crore, cash rises Rs 88 crore, and the balance sheet balances at plus Rs 48 crore. The gain of Rs 60 crore less Rs 12 crore tax gives net income of Rs 48 crore. Cash from operations starts at 48 and subtracts the Rs 60 crore gain, leaving minus 12; investing shows the full Rs 100 crore. Cash is up Rs 88 crore, land down Rs 40 crore.
Why subtract a gain you actually made?
Think of selling your old scooter for Rs 50,000 when you had it on your books at Rs 20,000. You did receive Rs 50,000 in cash, all of it, on the day of the sale. If your diary records a Rs 30,000 profit under daily earnings and also Rs 50,000 under scooter sold, you have counted Rs 30,000 twice. The cash flow statement puts the full sale proceeds in investing, so the gain sitting inside net income has to be taken out of operations, or part of the sale would be counted twice.
Cash from operations starts at net income of Rs 48 crore and backs out the Rs 60 crore gain, leaving minus Rs 12 crore of tax, while investing carries the full Rs 100 crore of proceeds, so cash rises Rs 88 crore and the balance sheet balances at plus Rs 48 crore.
How does each statement move, line by line?
Income statement: a gain on sale of Rs 60 crore, tax of 20% on it, Rs 12 crore, so net income is up Rs 48 crore. Cash flow statement: start from net income of 48, subtract the non-operating gain of 60, and cash from operations is minus 12; investing shows plus 100; cash is up 88. Balance sheet: cash up 88, land down 40, so assets are up 48; retained earnings up 48. The check that matters is that the change in assets equals the change in equity, Rs 48 crore each side.
State the assumption: the tax is paid in cash in the same year. If it were deferred, operations would show zero, a tax liability would sit on the balance sheet and cash would be up the full Rs 100 crore. Say also why the tax stays in operations: accounting rules generally classify income taxes as operating unless they are specifically tied to an investing activity, and practice varies, so confirm the treatment the company uses.
Where candidates lose it
The trap is putting the Rs 100 crore in operations, or putting it in investing and forgetting to back out the gain. The second version leaves cash up Rs 148 crore, and the balance sheet will not balance.
Candidates also put the gain on the cash flow statement as an add-back, the way they treat depreciation. Depreciation is a non-cash expense, so it is added back. A gain is a non-operating income, so it is subtracted. Say which one it is before you pick the sign.
What the interviewer asks next
What changes if the land is sold for Rs 30 crore, a loss?
How would the answer change if the tax is deferred to next year?
Where would the sale of a machine at book value show up?

10	cost of goods sold per day, Rs 3,650 crore over 365
20	days of stock held
45	days taken to pay suppliers

PBT	pre-tax profit: EBITDA less D&A less interest
NI	net income: market cap over the P/E
480	enterprise value: market cap 300 plus net debt 180

Delta p	the price change as a share of the old price, 5%
m	the contribution margin before the change, 30%

n	the number of noodles, 100
k	strands left before a tie
1/(2k-1)	the chance the second end chosen belongs to the same strand

Try it first

How can a business be funded by its suppliers?

Why does shrinking cost this business cash?

What makes the real number worse?

Where candidates lose it

What the interviewer asks next

Try it first

Where do you start when six numbers arrive at once?

What does a 37.5% rate tell you, and what have you assumed?

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Why does 5% on price beat 8% on volume?

How much volume could you lose before the price rise hurts?

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How do you avoid tracking the whole bowl?

Why can you add the step expectations when the steps depend on each other?

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Why is there no need for an actual EBITDA figure?

Why do leverage and rates tend to move together, and what does 1.7x mean?

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Why should powers of two be easy?

When should you multiply up, and when should you step down from an eighth?

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Why is the answer not simply 15%?

Why does a thin margin make the move so large?

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What does DSO actually measure?

How would you have caught 243 days before it went out?

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Why does the same 25% mean different money?

Where does this mix-up cost real money?

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Why subtract a gain you actually made?

How does each statement move, line by line?

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