FIN622 MidTerm ShortNotes
FIN622 MidTerm ShortNotes
FIN622 MidTerm ShortNotes
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VUSTUDENTS.NET TEAM.
Virtual University of Pakistan
Fin622
MIDTERM
1What is the difference between Private Co. and Public unlisted Co?
A public company is one whose stocks are traded by the public whereas a private
company is one whose shares are held by a specific number of shareholders. Public
Unlisted Company and Private Company both are limited liability businesses but the
difference is there in the formation procedure as well as in the operating manners of both
3What is the difference between the discount factor and present value factor?
Discount factor is also known as Present value factor. Both terms have same meanings
and are used alternatively. The discount factor (Present Value Factor) is a multiplication
factor that converts a projected cost or benefit in a future year into its present value.
4What is the difference between Book value and Market value with help of an example?
Book value is the price paid for a particular asset. This price never changes so long as
you own the asset. On the other hand, market value is the current price at which you can
sell an asset. For example, if you bought a house 10 years ago for Rs. 1,500,000, its book
value for your entire period of ownership will remain Rs. 1,500,000. If you sell the house
today for Rs. 1,800,000, this would be the market value.
What are the differences between financial statements and corporate finance?
Financial statements:
A financial statement (or financial report) is a formal record of the financial activities of a
business, person, or other entity. For a business enterprise, all the relevant financial
information, presented in a structured manner and in a form easy to understand, are called
the financial statements
Corporate finance:
Corporate finance is the study of planning, evaluating and drawing decisions in the
course of business. Corporate finance is an area of finance dealing with the financial
decisions corporations make and the tools and analysis used to make these decisions.
How many conventions are there for balance sheet construction and what are the
names?
There are two conventions for balance sheet construction.
1. In Pakistan IAS (International Accounting Standard) or IFRS (International
Financial Reporting Standard) (Nonliquid or Illiquid Asset is at top)
What is liquidity explain in your own words and also give example?
Liquidity is the nature of an asset that how quickly or easily it can be turned into mean of
payments without losing its value.
Cash, stocks and bonds are highly liquid asset as compare to inventories
What is Deferred Cost and what is the difference between deferred cost and
deferred income?
Deferred Cost: It is a prepaid cost incurred in a transaction against which benefit is not
taken and not fully treated as expense until subsequent accounting periods; it is treated as
long term asset in balance sheet.
Deferred Income: It is the unearned income received in advance of providing some
service or selling some product, therefore not treated as income. It appears in balance
sheet as liability.
Is Capital Budgeting Decisions Irreversible or not explain your answer with the
proper reason?
Capital Budgeting Decisions are irreversible in nature as these involve planning,
analyzing and acquiring capital assets like Plant and Machinery or Land or Building and
big amount is invested. If we reverse them, that will result in heavy losses.
IPO’s stands for Initial Public Offerings and made When Company lunches their shares
in market and offer general Public for Raising capital
what is short term solvency ratio and what are other two names of short
term solvency ratio?
This is a relationship between current assets and current liabilities.
other two names are current ratio and working capital ratio.
formulla:
Short term solvency/working capital/current ratio= current assets/current liabilities
The general idea behind CAPM is that investors need to be compensated in two ways:
time value of money and risk. The time value of money is represented by the riskfree (rf)
rate in the formula and compensates the investors for placing money in any investment
over a period of time. The other half of the formula represents risk and calculates the
amount of compensation the investor needs for taking on additional risk. This is
calculated by taking a risk measure (beta) that compares the returns of the asset to the
market over a period of time and to the market premium
Classification of project:
The WACC equation is the cost of each capital component multiplied by its proportional
weight and then summing:
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Calculated as:
Primary market is the market for issuing new securities. Many companies, especially
small and medium scale, enter the primary market to raise money from the public to
expand their businesses. They sell their securities to the public through an initial public
offering. For example a company decides to raise its capital through initial public
offering “IPO” through Banks so in this case, Banks would be regarded as Primary
market
What Does Leverage Mean?
1. The use of various financial instruments or borrowed capital, such as margin, to
increase the potential return of an investment.
2. The amount of debt used to finance a firm's assets. A firm with significantly more debt
than equity is considered to be highly leveraged.
Leverage is most commonly used in real estate transactions through the use of mortgages
to purchase a home.
Liquid assets are those assets which are readily convertible to cash e.g. cash, A/C
receivable etc are regarded as liquid assets because they can easily be converted to cash.
Positive working capital means that the company is able to pay off its shortterm
liabilities. Negative working capital means that a company currently is unable to meet its
shortterm liabilities with its current assets (cash, accounts receivable and inventory).
An Annuity is a series of fixed payments, which might be over a fixed number of
years, or over the lifetime of an individual, or both. The commonly known types of
annuities we see are the monthly rent, and monthly mortgage payments, or insurance
premiums.
There are two types of annuities:
1. An ordinary annuity, also known as deferred annuity, consists of a series of equal
payments at the end of each period, and
2. An annuity due consists of a series of equal payments at the beginning of each period.
The term "Annuity" refers to any terminating stream of fixed payments over a
specified period of time whereas” Perpetuity" is an annuity that has no definite end,
or a stream of cash payments that continues forever.
CF = Cash flow
r = discount rate
Discount factor is also known as Present value factor. Both terms have same
meanings and are used alternatively. The discount factor (Present Value Factor) is a
multiplication factor that converts a projected cost or benefit in a future year into its
present value
Economic health
Institutions tend to move investments out of weakening economies and into ones
perceived to be strengthening. So an economy whose indicators (like growth, inflation
and debt burden) are positive tends to see more demand for its currency and see its
exchange rate strengthen
Official interventions
Governments or central banks could intervene to prop up a currency – for political or
economic reasons by buying it on the international markets, or by raising interest rates.
Besides above factors, Many more factors influence exchange rates which you can search
on internet.
Normal Yield Curve is a yield curve in which shortterm debt instruments have a
lower yield than longterm debt instruments of the same credit quality. This gives the
yield curve an upward slope. This is the most often seen yield curve shape.
Flat Yield Curve is a yield curve in which there is little difference between shortterm
and longterm rates for bonds of the same credit quality. This type of yield curve is often
seen during transitions between normal and inverted curves.
Inverted Yield Curve exists in an interest rate environment in which longterm debt
instruments have a lower yield than shortterm debt instruments of the same credit
quality. This type of yield curve is the rarest of the three main curve types and is
considered to be a predictor of economic recession.
Relevant cost is a cost that affects the future cash flow. A relevant cost directly affects
our decision. For example opportunity cost is a relevant cost.
Non relevant cost is a cost that do not affect our decision or that do not affect our
future cash flows is regarded as non relevant cost. In other words, a cost that remains
same irrespective of the outcome of decision is called as irrelevant cost. For example
sunk cost is not relevant cost to decision making because it will not affect our future cash
flows and hence our decision.
Committed cost is a cost related either to the longterm investment in plant and
equipment of a business or to the organizational personnel whom top management deem
permanent; a cost that cannot be changed without long run detriment to the organization
Break up value is the sum of parts value of a publicly traded company. This value is
derived by analyzing each business segment of a company independently. This is usually
applied to large cap stocks that are likely to operate in several different markets or
industries. A breakup value analysis may be brought about by investors if the market cap
of the stock is less than the breakup value for a prolonged period of time.
As real Interest Rate is the interest rate adjusted for expected inflation. It is
calculated by deducting inflation rate from nominal rate
The front door margin is obtained by deducting cost of goods sold and cost of doing
business i.e. operating cost from sales or revenue whereas gross profit is simply obtained
by deducting cost of goods sold from sales.
Profitability index is the ratio of the present value of expected future cash flows after
initial investment divided by the amount of the initial investment.
Whereas
Profitability ratios are used to assess a business's ability to generate earnings as
compared to its expenses and other relevant costs incurred during a specific period of
time. Some examples of profitability ratios are profit margin, return on assets and return
on equity etc.
Prize bonds is a form of liquid cash and its not regarded as corporate bond.
Hybrid dividend policy is a policy that contains feature of both the stable and
constant dividend policies. Dividend consists of stable base amount and %age of
increment in fat income years. This is more flexible policy but increases uncertainty of
future cash flow or return to investors. The extra slice of %age is only paid when there is
high jump in income. So it is not regularly paid.
Direct financing is financing done without the use of an underwriter or broker. In the
situation of direct financing, the securities are sold directly to investors in order to avoid
the cost of underwriting. Underwriters are usually investment banks
Whereas
Indirect finance is where borrowers borrow funds from the financial market through
indirect means, such as through a financial intermediary.