Professional Documents
Culture Documents
FM & ECO
MARATHON
2019
CA IPC
CA INTER
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CHAPTER 2 LEVERAGE
More you know about the past, better prepared you are for the future…
Exam Nov 2016 May 2017 Nov 2017 May 2018 Nov 2018
CA IPC
CA INTER
Formula
Interpretation
Question
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Formula
Interpretation
Question
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Formula
Interpretation
Question
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EBIT
‘ - Interest
= EBT
‘ - Tax
= EAT
‘ - Preference Dividend
= EPS
× P/E Ratio
= MPS
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It is that level of EBIT, at which the firm has 2 such financial plans, which result in
same level of EPS.
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Diagram
Question
Expected EBIT is Rs. 2 lacs. The company has Rs. 8 lacs in 10% debentures. The cost of equity or
capitalisation rate is 12.5%. Calculate the value of firm and the overall cost of capital.
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Diagram
Question
EBIT is Rs. 9,00,000. The firm’s cost of debt is 10 % and currently firm employs Rs. 30,00,000 of
debt. The overall cost of capital of firm is 12 %. Calculate cost of equity.
Diagram
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Question
In considering the most desirable capital structure of a company, the following estimates of the cost
of debt and equity capital (after tax) have been made at various levels of debt-equity mix :
Debt as a percentage of total Kd (%) Ke (%)
capital employed
0 5 12
10 5 12
20 5 12.5
30 5.5 13
40 6 14
50 6.5 16
60 7 20
Determine the optimal debt-equity mix for the company by calculating composite cost of capital.
Formula
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Question
'A' Ltd. and 'B' Ltd. are identical in every respect except capital structure. 'A' Ltd. does not employ
debts in its capital structure whereas 'B' Ltd. employs 12% Debentures amounting to Rs. 10 lakhs.
Assuming that :
a. All assumptions of M-M model are met;
b. Income-tax rate is 30%;
c. EBIT is Rs. 2,50,000 and
d. The Equity capitalization rate of ‘A' Ltd. is 20%.
Calculate the value of both the companies.
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Meaning
Formula
Decision Rule
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Computation of PAT
Sales
‘ - Variable Cost
= Contribution
‘ - Fixed Cost
= EBIT
‘ - Interest
= EBT
‘ - Tax
= EAT
METHOD 1 METHOD 2
EBDIT EBDIT
‘ - Depreciation ‘ - Interest
= EBIT = Balance
‘ - Interest ‘ - Tax
= =
= EBT = Balance
= Cash Flow
Question
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METHOD 1 METHOD 2
EBDIT EBDIT
‘ - Depreciation ‘ - Interest
= EBIT = Balance
‘ - Interest ‘ - Tax
= =
= EBT = Balance
Depreciation
= EAT (Depreciation × Tax Rate)
= Cash Flow
Meaning
Formula
If Cash Flows are equal p.a. If Cash Flows are not equal p.a.
Decision Rule
Question
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Decision Rule
Meaning
It denotes the net value of cash flows from the project, either positive or negative.
Formula
Decision Rule
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Computation of NPV
Question
Formula
Decision Rule
Formula
Decision Rule
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Meaning
Formula
Methodology
Decision Rule
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Meaning
To have the better management of working capital, its estimation in advance is essential and
important.
A Current Assets
1 Raw Material
Inventory
2 WIP Inventory
a Material
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b Labour
c Overheads
3 FG Inventory
4 Debtors
5 Prepaid Expenses
6 Cash
Total (A)
B Current Liabilities
1 Raw Material
Creditors
2 Outstanding
Expenses
Total (B)
D Safety Margin
Capital
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‘ - 25 % ‘ - Current Liabilities ‘ - 25 %
= MPBF
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Particulars Days
+ FG Holding Period
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2 Contribution
3 Incremental Contribution
4 Bad Debts
6 Administration Cost
8 Collection Cost
10 Discount
11 Incremental Discount
12 Opportunity Cost
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CONCEPT FACTORING
Average Debtors
‘ - Commission
‘ - Reserve
= Eligible Advance
‘ - Interest on Advance
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S.No. Particulars 1 2 3
A Opening Balance
B Receipts
1 Cash Sales
3 Sale of Asset
4 Tax Refund
Total (B)
C Payments
1 Cash Purchases
2 Payment to Creditors
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6 Purchase of Asset
7 Dividend Paid
Total (C)
D Balance (A + B - C)
E Investment
F Sale of Investment
G Borrowings
H Closing Balance (D – E + F + G)
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CONCEPT PERPETUITY
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CONCEPT MEANING
1 Debtors
2 Cash
3 Stock
4 Prepaid Expenses
Total (A)
B Current Liabilities
1 Creditors
2 Bills Payable
3 Outstanding Expenses
Total (B)
D Increase/ Decrease in WC
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Decrease in WC Increase in WC
Tax Paid
Dividend Paid
We are concerned with those transactions from where the flow of working capital arises.
Source Application
Any transaction which increases the Any transaction which decreases the
amount of working capital is a Source. amount of working capital is Application.
WC increases if the transaction WC decreases if the transaction
- Increases CA - Decreases CA
- Decreases CL - Increases CL
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CONCEPT BASICS
Meaning of CFS It’s a statement of change in cash and cash equivalents of an enterprise.
Cash It comprises Cash in Hand and Demand Deposits with the bank.
Cash Equivalents These are short term highly liquid investments which are readily
convertible into known amounts of cash and which are subject to
insignificant risk of change in value.
Any investment will qualify as cash equivalent only if it has short
maturity of 3 months or less from the date of acquisition.
AS : 3 As per AS 3, these are
Cash in Hand
Cash at Bank
Marketable Securities
Bank Overdraft
Cash Credit
Cash Flows These are inflows and outflows of cash & cash equivalents.
Cash flow arises when the net effect of transaction is to either
increase or decrease the amount of cash and cash equivalents.
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To find the impact of change in a variable on the outcome of project i.e. NPV.
More sensitive is the NPV, more critical is the variable.
Find Percentage change in NPV :
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CONCEPT SIMULATION
Determining the range of Random Numbers : For each variable, find the cumulative probability on the
base of probability given and specify the range of random numbers.
Fit the random numbers given in question for each trial run for each variable.
Find NPV for each run.
It’s a graphical presentation of relationship between future decisions and their consequences.
Computation of NPV
Path PVCF (Y 1) PVCF (Y 2) Total PVCI PVCO NPV
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CHAPTER 14 LEASING
More you know about the past, better prepared you are for the future…
Exam Nov 2016 May 2017 Nov 2017 May 2018 Nov 2018
CA IPC
CA INTER
0 Cost of Asset
n Scrap Value
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0 Down Payment
(Cost of Asset – Borrowings)
1 – n Tax Saving on Depreciation
1 – n Principal
1 – n Interest (1 - t)
n Scrap Value
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Steps Identifying the producing enterprises and classifying them into different
sectors according to the nature of their activities i.e. Primary, Secondary &
Tertiary Sector.
Estimating the gross value added (GVAMP) by each producing enterprise
Gross value added (GVAMP)
= Value of output – Intermediate consumption
Estimation of National income
Σ (GVAMP) – Depreciation = Net value added (NVAMP)
Net value added (NVAMP) – Net Indirect taxes = Net Domestic Product
(NVAFC)
Net Domestic Product (NVAFC) + (NFIA) = National Income (NNPFC)
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Aggregate Demand
Meaning Aggregate demand broadly refers to the total demand for final goods and services
in the economy.
Diagram
Aggregate Supply
Meaning Aggregate supply refers to the total output of goods and services produced for
sale by all the entrepreneurs in an economy.
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Components A major portion of income is spent on consumption of goods and services and the
balance is saved.
Thus, national income (Y) or aggregate supply (AS) is sum of
❖ consumption expenditure (C) and
❖ savings (S)
Diagram
Consumption Function
Meaning Consumption function shows the mathematical relation between income and
consumption i.e. how much of income is spent on consumption goods. Consumption is
related to income.
Features At zero or very low level of income, consumption expenditure is higher than income
because minimum consumption is necessary for survival, and
As income increases, consumption expenditure also increases but increase in
consumption is less than the increase in income.
Formula
Formula
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Savings Function
Meaning Saving function shows the mathematical relation between income and saving i.e.
how much of income is saved.
Features At zero or very low level of income, Savings can be negative and
As income increases, savings also increases but increase in savings is more than the
increase in income.
Formula
Formula
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Investment Multiplier
Meaning Investment Multiplier (K), is the ratio of increase in national income (Y) due to an
increase in investment (l).
Relationship There exists a direct relationship between MPC and the value of multiplier.
with MPC & Higher the MPC, more will be the value of the multiplier, and vice-versa.
MPS On the contrary, higher the MPS, lower will be the value of multiplier and vice-
versa.
Formula
Diagram
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Types of Market
Economic Government
System Mixed System
Allocation Function
Meaning Resource allocation refers to the way in which the available factors of production
are allocated among the various uses to which they might be put.
Importance Optimal or efficient allocation of scarce resources is one of the most important
function of an economic system so that the available resources are put to their
best use and no wastages are there.
Private vs. Private sector resource allocation is characterized by market supply and demand
Govt. forces and producer profit motives.
Sector Govt. sector resource allocation is accomplished through the revenue and
Allocation expenditure activities of governmental budgeting.
Market While private goods will be sufficiently provided by the market, public goods will
Failure not be produced in sufficient quantities by the market.
Market failure occurs when the free market leads to misallocation of resources
i.e. the resources are not allocated efficiently.
Government Market failures provide the rationale for government’s allocative function.
Intervention Government may directly produce the economic good.
Government may influence allocation through its competition policies, merger
policies etc. which will affect the structure of industry and commerce.
Redistribution Function
Meaning It is concerned with the adjustment of the distribution of income and wealth so
as to ensure distributive justice namely, equity and fairness.
Government If left to the market, the distribution of income and wealth among individuals in
Intervention the society is likely to be skewed and therefore the government has to
intervene to ensure a more desirable and just distribution.
Employment reservations
Special schemes for backward regions
Stabilisation Function
Meaning It aims at eliminating macroeconomic fluctuations arising from suboptimal
allocation.
Market Power
Meaning Market power can cause markets to be inefficient because it keeps price higher
and output lower than the outcome of equilibrium of supply and demand which
causes market failure.
Externalities
Meaning When the actions of either consumers or producers result in costs or benefits
that do not reflect as part of the market price, such costs or benefits which are
not accounted for by the market price are called externalities.
Private vs. Private cost is the cost faced by the producer or consumer directly involved in a
Social Cost transaction.
Social costs refer to the total costs to the society on account of a production or
consumption activity.
Social Cost = Private Cost + External Cost
Public Goods
Meaning A public good (also referred to as collective consumption good or social good) is
defined as one which all enjoy in common in the sense that each individual’s
consumption of such a good leads to no subtraction from any other individuals’
consumption of that good.
Features of Public goods yield utility to people and are products (goods or services) whose
Public consumption is essentially collective in nature.
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Goods No direct payment by the consumer is involved in the case of pure public goods.
Public good is non-rival in consumption.
Public goods are non-excludable.
Public goods are generally more vulnerable to issues such as externalities and free
rider problem.
Impure These are hybrid goods that possess some features of both public and private
Public goods. Such goods are called impure public goods and are partially rivalrous or
Goods congestible.
For Example, Open access Wi-Fi networks become crowded when more people
access it.
Quasi These are the goods which possess nearly all of the qualities of the private goods
Public and some of the benefits of public good.
Goods These are also called near public goods.
(Mixed It is easy to keep people away from them by charging a price or fee.
Goods) However, it is undesirable to keep people away from such goods because the
society would be better off if more people consume them like education.
Common Common access resources or common pool resources are a special class of impure
Access public goods which are non-excludable as people cannot be excluded from using
Resources them.
These are rival in nature and their consumption lessens the benefits available for
others.
These are generally available free of charge.
Free Rider Free riding is ‘benefiting from the actions of others without paying’. A free rider
Problem is consumer or producer who does not pay for a nonexclusive good in the
expectation that others will pay.
There is no incentive for people to pay for the public good because they can
consume it without paying for it.
Incomplete Information
Impact Due to information failure, misallocation of scarce resources takes place and
equilibrium price and quantity is not established through price mechanism, which
results in market failure.
Forms of Governments can prohibit some type of goods and activities, set standards and
Government issue mandates making others oblige.
Intervention The government can provide the merit goods at subsidized prices to increase their
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consumption.
When governments provide merit goods, it may give rise to large economies of
scale.
Government can provide such goods free of cost.
Excludable It covers goods where the government can charge certain fees. Government can
public goods itself provide such goods or services and charge the entry fees. Government can
grant licenses to private firms to provide such goods or services. The goods are
provided to the public on payment of an entry fee.
Price Intervention
Meaning Under this, Government puts Price Controls in place to influence the outcomes of a
market on grounds of fairness and equity.
Features Fiscal policy is designed to influence the pattern and level of economic activity in a
country. Fiscal policy is in the nature of a demand-side policy.
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Recession The automatic adjustments work towards stimulating aggregate spending during
Phase the recessionary phase.
More disposable income is available for consumption with the households.
Expansion The automatic adjustments work towards reducing aggregate spending during this
Phase phase.
Less disposable income is available for consumption with the households.
Budget as The budget is simply a statement of revenues earned from taxes and other
an sources and expenditures made by a nation’s
Instrument government in a year.
of Fiscal It can be Balanced, Surplus or Deficit.
Policy
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Variables Income - Higher the income of individuals, higher the expenditure and richer
affecting people hold more money to finance their expenditure.
demand for General level of prices - Higher the prices, higher should be the holding of
money money.
Rate of interest - higher the interest rate, higher would be opportunity cost of
holding cash and lower the demand for money.
Degree of Financial Innovation - Innovations such as internet banking, application
based transfers and automatic teller machines reduce the need for holding liquid
money.
The total volume of transactions multiplied by the price level (PT) represents the
demand for money.
Basic MV = PT
Equation M= the total amount of money in circulation (on an average) in an economy
V = transactions velocity of circulation i.e. the average number of times across all
transactions a unit of money (say Rupee) is spent in purchasing goods and services
P = average price level (P=MV/T)
T = the total number of transactions
Fisher extended the equation of exchange to include demand (bank) deposits (M’)
and their velocity (V’) in the total supply of money.
MV + M'V' = PT
M' = the total quantity of credit money
V' = velocity of circulation of credit money
Equation Md = k PY
Md = is the demand for money
Y = real national income
P = average price level of currently produced goods and services
PY = nominal income
k = proportion of nominal income (PY) that people want to hold as cash balances
The The transactions motive for holding cash relates to ‘the need for cash for
Transactions current transactions for personal and business exchange.’
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Motive
The Demand for money arises due to the unforeseen and unpredictable
Precautionary contingencies involving money payments which occur in our day to day life.
Motive
The The speculative motive reflects people’s desire to hold cash in order to be
Speculative equipped to exploit any attractive investment opportunity requiring cash
Demand for expenditure.
Money
Stock The supply of money is a stock variable i.e. it refers to the total amount of
money at any particular point of time.
Inclusions It includes amount with public but not with producers of money.
and
exclusions
Sources of Money Supply
Decision of The central banks of all countries are empowered to issue currency and,
Central therefore, the central bank is the primary source of money supply in all countries.
Bank
Commercial The total supply of money in the economy is also determined by the extent of
Banking credit created by the commercial banks in the country.
system
Money Multiplier Approach To Supply Of Money
Formula The money supply is defined as :
M = m X MB
Where M is the money supply, m is money multiplier and MB is the monetary
base or high powered money.
Mechanism If some portion of the increase in high-powered money finds its way into currency,
this portion does not undergo multiple deposit expansion. In other words, as a rule,
an increase in the monetary base that goes into currency is not multiplied, whereas
an increase in monetary base that goes into supporting deposits is multiplied.
Commercial If this ratio increases, more reserves would be needed. This implies that banks
Banks must contract their loans, causing a decline in deposits and hence in the money
supply.
If this ratio falls, there will be greater expansions of deposits because the same
level of reserves can now support more deposits and the money supply will increase.
Behaviour The behaviour of public influences bank credit through the decision on ratio of
of Public currency to the money supply designated as the ‘currency ratio’.
Higher is this ratio, means higher is currency holding and less amount being
deposited in banks. Thus, less is the credit creation.
Lower is this ratio, means lower is currency holding and more amount being
deposited in banks. Thus, higher is the credit creation.
Basics
Meaning Monetary policy is essentially a programme of action undertaken by the monetary
authorities, normally the central bank, to control and regulate the demand for and
supply of money with the public and the flow of credit with a view to achieving
predetermined macroeconomic goals.
Nature Monetary policy is in the nature of ‘demand-side’ macroeconomic policy and works
by stimulating or discouraging investment and consumption spending on goods and
services.
Objectives
Price Establishment and maintenance of stability in prices has been the most
stability conventional objective which focuses towards controlling inflation.
Economic This objective aims to achieve high level of economy’s growth and maintenance of
Stability full employment.
Extent The RBI may set the ratio in keeping with the broad objective of maintaining
monetary stability in the economy.
Applicability This requirement applies uniformly to all scheduled banks in the country
irrespective of its size or financial position.
Meaning Statutory Liquidity Ratio (SLR) refers to the fraction of the total Demand and
Time Liabilities (DTL)/ Net DTL (NDTL) of a scheduled commercial bank in India,
which it should maintain in one of the following forms:
❖ Cash
❖ Gold, or
❖ Investments in un-encumbered instruments
Importance The SLR is also a powerful tool for controlling liquidity in the domestic market by
means of manipulating bank credit.
Changes in the SLR chiefly influence the availability of resources in the banking
system for lending.
Objective Its objective is to assist banks to adjust their day to day mismatches in liquidity.
REPO
Meaning Repo is a collaterised lending under which, other banks borrow money from RBI by
giving securities.
The rate charged by RBI for this transaction is called the ‘repo rate’.
Reverse Repo
Meaning Reverse repo operation takes place when RBI borrows money from banks by giving
them securities.
The rate paid by RBI for this transaction is called the ‘repo rate’.
Last Resort MSF would be the last resort for banks once they exhaust all borrowing options
including the liquidity adjustment facility on which the rates are lower compared
to the MSF.
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Impact When the RBI feels there is excess liquidity in the market, it resorts to sale of
securities thereby sucking out the rupee liquidity.
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Currency Domestic trade or internal trade involves exchange of goods and services within
the domestic territory of a country using domestic currency, whereas
international trade involves transactions in multiple currencies.
Exports vs. Mercantilism advocated maximizing exports in order to bring in more “specie”
Imports (precious metals) and minimizing imports through the state imposing very high
tariffs on foreign goods.
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Operation The absolute cost advantage theory points out that a country will specialize in
the production and export of a commodity in which it has an absolute cost
advantage.
In other words, exchange of goods between two countries will take place only if
each of the two countries can produce one commodity at an absolutely lower
production cost than the other country. As a result, each nation has an absolute
advantage in the production of one good.
Operation The first nation should specialize in the production and export of the commodity
in which its absolute disadvantage is smaller (this is the commodity of its
comparative advantage) and import the commodity in which its absolute
disadvantage is greater (this is the commodity of its comparative disadvantage).
Basis of The Heckscher-Ohlin (H-O) model studies the case that two countries have
theory different factor endowments which results in two countries having different
factor prices in the beginning. Thus, the two countries will have different cost
functions.
The Heckscher-Ohlin theory of trade states that comparative advantage in cost
of production is explained exclusively by the differences in factor endowments of
the nations. In a general sense of the term, ‘factor endowment’ refers to the
overall availability of usable resources including both natural and man-made means
of production.
Nevertheless, in the exposition of the modern theory, only the two most
important factors, labour and capital are taken into account.
Trade Policy
Meaning Trade policy encompasses all instruments that governments may use to promote
or restrict imports and exports.
Types of The instruments of trade policy that countries typically use to restrict imports
Instruments and/ or to encourage exports can be broadly classified into
❖ price-related measures such as tariffs and
❖ non-price measures or non-tariff measures (NTMs).
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Tariffs
Meaning Tariffs, also known as customs duties, are basically taxes or duties imposed on
goods and services which are imported or exported.
It is defined as a financial charge in the form of a tax, imposed at the border on
goods going from one customs territory to another.
Specific A specific tariff is an import duty that assigns a fixed monetary tax per physical
Tariff unit of the good imported.
It is calculated on the basis of a unit of measure, such as weight, volume, etc., of
the imported good.
Mixed Mixed tariffs are expressed either on the basis of value of imported goods (an
Tariffs ad valorem rate) or on the basis of a unit of measure of imported goods (a
specific duty) depending on which generates the most income for the nation.
Technical/ These are calculated on the basis of the specific contents of the imported goods
Other Tariff i.e. the duties are payable by its components or related items.
Tariff Rate Tariff rate quotas (TRQs) combine two policy instruments, quotas and tariffs.
Quotas Imports entering under the specified quota portion are usually subject to a lower
(sometimes zero) tariff rate.
Preferential A lower tariff is charged from goods imported from a country which is given
Tariff preferential treatment.
Bound Tariff A bound tariff is a tariff which a WTO member binds itself with a legal
commitment not to raise it above a certain level.
The bound rates are specific to individual products and represent the maximum
level of import duty that can be levied on a product imported by that member.
Applied An 'applied tariff' is the duty that is actually charged on imports on a most-
Tariffs favoured nation (MFN) basis.
Prohibitive A prohibitive tariff is one that is set so high that no imports will enter.
tariff
Anti- Dumping occurs when manufacturers sell goods in a foreign country below the
dumping sales prices in their domestic market or below their full average cost of the
Duties product.
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Anti-dumping duties which are tariffs to offset the effects of dumping which
may be initiated as a safeguard instrument by imposition of additional import
duties so as to offset the foreign firm's unfair price advantage.
Counter- Countervailing duties are tariffs that aim to offset the artificially low prices
vailing charged by exporters who enjoy export subsidies and tax concessions offered by
Duties the governments in their home country.
Financial Measures
The objective of financial measures is to increase import
costs by regulating the access to and cost of foreign exchange for imports and to
define the terms of payment.
Rules of origin
Rules of origin are the criteria needed by governments of importing countries to
determine the national source of a product.
Embargos
An embargo is a total ban imposed by government on import or export of some or
all commodities to particular country or regions for a specified or indefinite
period. This may be done due to political reasons or for other reasons such as
health, religious sentiments. This is the most extreme form of trade barrier.
Basics
Meaning International trade negotiations are complex interactive processes engaged in by
countries having competing objectives.
Complex Trade negotiations are not just face to face discussions; rather they are
Nature multilevel or network games and involve intricate and time consuming processes.
Evolvement The tariff concessions and rules together became known as the General
of GATT Agreement on Tariffs and Trade and entered into force in January 1948.
❖ world merchandise trade increased by leaps and bounds and was beyond
its scope
❖ the ambiguities in the multilateral system could be heavily exploited
❖ efforts at liberalizing agricultural trade were not successful
❖ there were inadequacies in institutional structure and dispute settlement
system
WTO
Beginning of The seeds of the Uruguay Round were sown in November 1982 at a Ministerial
Uruguay Meeting of GATT members in Geneva.
Round
Evolvement The agreement was signed by most countries on April 15, 1994, and took effect
of WTO on July 1, 1995.
It also marked the birth of the World Trade Organization (WTO) which
is a single institutional framework encompassing the GATT, as modified by the
Uruguay Round.
Objective of The principal objective of the WTO is to facilitate the flow of international
WTO trade smoothly, freely, fairly and predictably.
Freer trade
Lowering trade barriers is one of the most obvious means of encouraging trade.
The barriers concerned include customs duties (or tariffs) and measures such as
import bans or quotas that restrict quantities selectively.
Predictability
Investments will be encouraged only if the business environment is stable and
predictable.
The foreign companies, investors and governments should be confident that the
trade barriers will not be raised arbitrarily.
Greater competitiveness
This is to be achieved by discouraging “unfair” practices such as export
subsidies, dumping etc.
Exchange Rate
Meaning The exchange rate, also known as a foreign exchange (FX) rate, is the price of
one currency expressed in terms of units of another currency and represents
the number of units of one currency that exchanges for a unit of another.
Concept Exchange rate is the rate at which the currency of one country exchanges for
the currency of another country.
It is the minimum number of units of one country’s currency required to
purchase one unit of the other country’s currency.
Direct quote A direct quote is the number of units of a local currency exchangeable for one
unit of a foreign currency.
For example, Rs. 66/US$ means that an amount of Rs. 66 is needed to buy one
US dollar or Rs. 66 will be received while selling one US dollar.
Indirect An indirect quote is the number of units of a foreign currency exchangeable for
quote one unit of local currency. For example: $ 0.0151 per rupee.
Buying Rate It is the price at which the dealer buys the currency.
It is also called bid rate.
Selling Rate It is the price at which the dealer sells the currency.
It is also called ask rate or offer rate.
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Intermediate It refers to an exchange rate policy under which the exchange rate is generally
exchange determined by the market, but in case the exchange rate tend to be move
rate regimes speedily in one direction, the central bank will intervene in the market.
Type of Spot
Transactions Forward
Home- Under a floating rate system, if for any reason, the supply curve for foreign
currency currency shifts to the right representing increased supply for foreign currency,
appreciation and demand curve remains unchanged, then the exchange value of foreign
currency falls and the domestic currency appreciates in value.
The home currency thus becomes relatively more valuable.
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Extent of According to the IMF and OECD definitions, the acquisition of at least ten
Control percent of the ordinary shares or voting power in a public or private enterprise
by non-resident investor makes it eligible to be categorized as foreign direct
investment (FDI).
Modes It moves to investment in financial stocks, bonds and other financial instruments
and is effected largely by individuals and institutions through the mechanism of
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capital market.
Foreign portfolio investment (FPI) is not concerned with either manufacture of
goods or with provision of services.
Instruments An Indian Company can receive foreign investment by issue of ‘FDI compliant
instruments’ namely :
❖ equity shares,
❖ fully and mandatorily convertible preference shares and debentures,
❖ partly paid equity shares and warrants.
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