PRESTON UNIVERSITY

PESHAWAR
Program: BBA
Subject: Corporate FinanceSemester:
Spring 2020
Mid-TERM ASSIGNMENT
Name: Rehan ahmad
Reg:1711_316009
Instructions:

1. This is an assignment in-lieu of Mid-term Assessment and is not an examination.

2. All questions are compulsory.

3. You must submit the assignment by email directly to the email address of the teacher.

4. You are required to depict your understanding and knowledge of the subject by individually
attempting all of the given questions.

5. The workload for this assignment is about 2-3 hours. However, considering the connectivity difficulties
and limited/interrupted access to Internet, the maximum time

allowed is 24 hours, starting on May 2nd, 2020 at 4.00 pm).

6. You are advised to submit your assignment as soon as possible without waiting till the last hour.

7. No assignment will be accepted for any reason whatsoever if submitted after the deadline.
Attempt all of the following questions:

Q1. Define risk & return, characteristics line & its beta also define why beta a measure of systematic risk
and what is its meaning?

Answer.

Risk is defined in financial terms as the chance that an outcome or investment's actual gains will differ
from an expected outcome or return. Risk includes the possibility of losing some or all of an original
investment.

Quantifiably, risk is usually assessed by considering historical behaviors and outcomes. In finance,
standard deviation is a common metric associated with risk. Standard deviation provides a measure of
the volatility of asset prices in comparison to their historical averages in a given time frame.

Overall, it is possible and prudent to manage investing risks by understanding the basics of risk and how
it is measured. Learning the risks that can apply to different scenarios and some of the ways to manage
them holistically will help all types of investors and business managers to avoid unnecessary and costly
losses

the risk-return states that the potential return rises with an increase in risk. Using this principle,
individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty
or risk with high potential returns. According to the risk-return tradeoff, invested money can render
higher profits only if the investor will accept a higher possibility of losses.

the risk-return is the trading principle that links high risk with high reward. The appropriate risk-return
depends on a variety of factors including an investor’s risk tolerance, the investor’s years to retirement
and the potential to replace lost funds. Time also plays an essential role in determining a portfolio with
the appropriate levels of risk and reward. For example, if an investor has the ability to invest in equities
over the long term, that provides the investor with the potential to recover from the risks of bear
markets and participate in bull markets, while if an investor can only invest in a short time frame, the
same equities have a higher risk proposition.

A return, also known as a financial return, in its simplest terms, is the money made or lost on an
investment over some period of time.

A return can be expressed nominally as the change in dollar value of an investment over time. A return
can also be expressed as a percentage derived from the ratio of profit to investment. Returns can also
be presented as net results (after fees, taxes, and inflation) or gross returns that do not account for
anything but the price change. It even includes a 401(k) investment.

INVESTING INVESTING ESSENTIALS

A Return in Finance

By ADAM HAYES

Reviewed By GORDON SCOTT

Updated Mar 24, 2020

What Is a Return?

A return, also known as a financial return, in its simplest terms, is the money made or lost on an
investment over some period of time.

A return can be expressed nominally as the change in dollar value of an investment over time. A return
can also be expressed as a percentage derived from the ratio of profit to investment. Returns can also
be presented as net results (after fees, taxes, and inflation) or gross returns that do not account for
anything but the price change. It even includes a 401(k) investment.

KEY TAKEAWAYS

A return is the change in price on an asset, investment, or project over time, which may be represented
in terms of price change or percentage change.

A positive return represents a profit while a negative return marks a loss.

Returns are often annualized for comparison purposes, while a holding period return calculates the gain
or loss during the entire period an investment was held.

Real return accounts for the effects of inflation and other external factors, while nominal return only is
interested in price change. Total return for stocks includes price change as well as dividend and interest
payments.

Several return ratios exis

A characteristic line is a straight line formed using regression analysis that summarizes a particular
security's systematic risk and rate of return. The characteristic line is also known as the security
characteristic line (SCL).

The characteristic line.

The characteristic line is created by plotting a security's return at various points in time. The y-axis on
the chart measures the excess return of the security. Excess return is measured against the risk-free rate
of return. The x-axis on the chart measures the market's return in excess of the risk free rate.

A characteristic line indicates a security's systematic risk and rate of return.

This line shows the security's performance versus the market's performance.

The characteristic line is also referred to as the security characteristic line.

The security's plots reveal how the security performed relative to the market in general. The regression
line formed from the plots will show the security's excess return over the measured period of time as
well as the amount of systematic risk the security demonstrates. The y-intercept is the security's alpha,
which represents its rate of return in excess of the risk-free rate, which cannot be accounted for by that
market’s specific risks. According to Modern Portfolio Theory (MPT), the alpha stands for the asset’s rate
of return above and beyond its risk-free return, adjusted for the asset’s relative riskiness. The slope of
the characteristic line is the security's systematic risk, or beta, which measures the correlated variability
of the specific asset’s price when compared to that of the market as a whole.

Beta, used in capital asset pricing model (CAPM), is a measure of the volatility, or systematic risk, of a
security or portfolio, in comparison to the market as a whole.

Systematic risk.

is that part of the total risk that is caused by factors beyond the control of a specific company or
individual. Systematic risk is caused by factors that are external to the organization. All investments or
securities are subject to systematic risk and, therefore, it is a non-diversifiable risk. Systematic risk
cannot be diversified away by holding a large number of securities.

Systematic risk, or market risk, is the volatility that affects many industries, stocks, and assets.
Systematic risk affects the overall market and is difficult to predict. Unlike with unsystematic risk,
diversification cannot help to smooth systematic risk, because it affects a wide range of assets and
securities. For example, the Great Recession was a form of systematic risk; the economic downturn
affected the market as a whole.
Q2. How many types of financial statements and explain each types in detail with examples?

Answer.

If you can read a nutrition label or a baseball box score, you can learn to read basic financial statements.
If you can follow a recipe or apply for a loan, you can learn basic accounting. The basics aren’t difficult
and they aren’t rocket science.

This brochure is designed to help you gain a basic understanding of how to read financial statements.
Just as a CPR class teaches you how to perform the basics of cardiac pulmonary resuscitation, this
brochure will explain how to read the basic parts of a financial statement. It will not train you to be an
accountant (just as a CPR course will not make you a cardiac doctor), but it should give you the
confidence to be able to look at a set of financial statements and make sense of them.

Let’s begin by looking at what financial statements do.

“Show me the money!”

We all remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the
money!” Well, that’s what financial statements do. They show you the money. They show you where a
company’s money came from, where it went, and where it is now.

There are four main financial statements. They are: (1) balance sheets; (2) income statements; (3) cash
flow statements; and (4) statements of shareholders’ equity. Balance sheets show what a company
owns and what it owes at a fixed point in time. Income statements show how much money a company
made and spent over a period of time. Cash flow statements show the exchange of money between a
company and the outside world also over a period of time. The fourth financial statement, called a
“statement of shareholders’ equity,” shows changes in the interests of the company’s shareholders over
time.

Let’s look at each of the first three financial statements in more detail.

Balance Sheets

A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’
equity.

Assets are things that a company owns that have value. This typically means they can either be sold or
used by the company to make products or provide services that can be sold. Assets include physical
property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched
but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are
investments a company makes.

Liabilities are amounts of money that a company owes to others. This can include all kinds of
obligations, like money borrowed from a bank to launch a new product, rent for use of a building,
money owed to suppliers for materials, payroll a company owes to its employees, environmental
cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or
services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a
company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the
shareholders, or the owners, of the company.

The following formula summarizes what a balance sheet shows:

ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY

A company's assets have to equal, or "balance," the sum of its liabilities and shareholders' equity.

A company’s balance sheet is set up like the basic accounting equation shown above. On the left side of
the balance sheet, companies list their assets. On the right side, they list their liabilities and
shareholders’ equity. Sometimes balance sheets show assets at the top, followed by liabilities, with
shareholders’ equity at the bottom.

Assets are generally listed based on how quickly they will be converted into cash. Current assets are
things a company expects to convert to cash within one year. A good example is inventory. Most
companies expect to sell their inventory for cash within one year. Noncurrent assets are things a
company does not expect to convert to cash within one year or that would take longer than one year to
sell. Noncurrent assets include fixed assets. Fixed assets are those assets used to operate the business
but that are not available for sale, such as trucks, office furniture and other property.

Liabilities are generally listed based on their due dates. Liabilities are said to be either current or long-
term. Current liabilities are obligations a company expects to pay off within the year. Long-term
liabilities are obligations due more than one year away.

Shareholders’ equity is the amount owners invested in the company’s stock plus or minus the
company’s earnings or losses since inception. Sometimes companies distribute earnings, instead of
retaining them. These distributions are called dividends.

A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’ equity at the end
of the reporting period. It does not show the flows into and out of the accounts during the period.

Income Statements

An income statement is a report that shows how much revenue a company earned over a specific time
period (usually for a year or some portion of a year). An income statement also shows the costs and
expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows
the company’s net earnings or losses. This tells you how much the company earned or lost over the
period.

Income statements also report earnings per share (or “EPS”). This calculation tells you how much money
shareholders would receive if the company decided to distribute all of the net earnings for the period.
(Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)

To understand how income statements are set up, think of them as a set of stairs. You start at the top
with the total amount of sales made during the accounting period. Then you go down, one step at a
time. At each step, you make a deduction for certain costs or other operating expenses associated with
earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how
much the company actually earned or lost during the accounting period. People often call this “the
bottom line.”

At the top of the income statement is the total amount of money brought in from sales of products or
services. This top line is often referred to as gross revenues or sales. It’s called “gross” because expenses
have not been deducted from it yet. So the number is “gross” or unrefined.

The next line is money the company doesn’t expect to collect on certain sales. This could be due, for
example, to sales discounts or merchandise returns.

When you subtract the returns and allowances from the gross revenues, you arrive at the company’s net
revenues. It’s called “net” because, if you can imagine a net, these revenues are left in the net after the
deductions for returns and allowances have come out.

Moving down the stairs from the net revenue line, there are several lines that represent various kinds of
operating expenses. Although these lines can be reported in various orders, the next line after net
revenues typically shows the costs of the sales. This number tells you the amount of money the
company spent to produce the goods or services it sold during the accounting period.
The next line subtracts the costs of sales from the net revenues to arrive at a subtotal called “gross
profit” or sometimes “gross margin.” It’s considered “gross” because there are certain expenses that
haven’t been deducted from it yet.

The next section deals with operating expenses. These are expenses that go toward supporting a
company’s operations for a given period – for example, salaries of administrative personnel and costs of
researching new products. Marketing expenses are another example. Operating expenses are different
from “costs of sales,” which were deducted above, because operating expenses cannot be linked
directly to the production of the products or services being sold.

Depreciation is also deducted from gross profit. Depreciation takes into account the wear and tear on
some assets, such as machinery, tools and furniture, which are used over the long term. Companies
spread the cost of these assets over the periods they are used. This process of spreading these costs is
called depreciation or amortization. The “charge” for using these assets during the period is a fraction of
the original cost of the assets.

After all operating expenses are deducted from gross profit, you arrive at operating profit before
interest and income tax expenses. This is often called “income from operations.”

Next companies must account for interest income and interest expense. Interest income is the money
companies make from keeping their cash in interest-bearing savings accounts, money market funds and
the like. On the other hand, interest expense is the money companies paid in interest for money they
borrow. Some income statements show interest income and interest expense separately. Some income
statements combine the two numbers. The interest income and expense are then added or subtracted
from the operating profits to arrive at operating profit before income tax.

Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses. (Net profit is
also called net income or net earnings.) This tells you how much the company actually earned or lost
during the accounting period. Did the company make a profit or did it lose money?

Earnings Per Share or EPS

Most income statements include a calculation of earnings per share or EPS. This calculation tells you
how much money shareholders would receive for each share of stock they own if the company
distributed all of its net income for the period.

To calculate EPS, you take the total net income and divide it by the number of outstanding shares of the
company.

Cash Flow Statements

Cash flow statements report a company’s inflows and outflows of cash. This is important because a
company needs to have enough cash on hand to pay its expenses and purchase assets. While an income
statement can tell you whether a company made a profit, a cash flow statement can tell you whether
the company generated cash.

A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time.
It uses and reorders the information from a company’s balance sheet and income statement.

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period.
Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from
one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activitie

Q3. What is the purpose of the statement of cash flows? Explain in detail with examples. Also discuss the
benefits that can be derived by the firm from cash budgeting?

Answer.

The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the
amount of cash and cash equivalents entering and leaving a company

CORPORATE FINANCE & ACCOUNTING FINANCIAL STATEMENTS

Understanding the Cash Flow Statement

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By CHRIS B. MURPHY

Updated Jun 11, 2019

TABLE OF CONTENTS

EXPAND

What Is a Cash Flow Statement?

How to Use a Cash Flow Statement

The Structure of the CFS

Operating Activities

How Cash Flow Is Calculated

Direct Cash Flow Method

Indirect Cash Flow Method

Accounts Receivable and Cash Flow

Inventory Value and Cash Flow

Investing Activities and Cash Flow

Cash From Financing Activities

Analyzing an Example of a CFS

Negative Cash Flow Statements

Balance Sheet and Income Statement

The Bottom Line

What Is a Cash Flow Statement?

The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the
amount of cash and cash equivalents entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages its cash position, meaning how
well the company generates cash to pay its debt obligations and fund its operating expenses. The cash
flow statement complements the balance sheet and income statement and is a mandatory part of a
company's financial reports since 1987.
In this article, we'll show you how the CFS is structured, and how you can use it when analyzing a
company.

How to Use a Cash Flow Statement

The CFS allows investors to understand how a company's operations are running, where its money is
coming from, and how money is being spent. The CFS is important since it helps investors determine
whether a company is on a solid financial footing.

Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as
liquidity) for the company to fund its operating expenses and pay its debts.

A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents
entering and leaving a company.

The cash flow statement measures how well a company manages its cash position, meaning how well
the company generates cash to pay its debt obligations and fund its operating expenses.

The cash flow statement complements the balance sheet and income statement and is a mandatory part
of a company's.

A cash budget is a finance tool geared toward limiting a company's expenditures to the amount of cash
it actually has available. The alternative to a cash budget is one that is based on the availability of credit,
or money that will have to be repaid down the line.

Practical Benefits

The most immediate practical benefit of a cash budget is restricting your spending so you do not incur
debt. A cash budget involves a realistic assessment of how much money you will have coming in during
an upcoming period. Your determinations of how much money your business has available to spend are
based on these forecasts, forcing you to spend within your means. It forces you to restrict discretionary
purchases to items that you can pay for out of the cash you have on hand.

Strategic Implications

A cash budget also provides the benefit of forcing you to think critically about your company's financial
situation and make realistic predictions. This process is useful to you as a business owner working to
maintain an accurate sense of your company's operations. When you prepare a cash budget, look
closely at past patterns and use them to forecast future business activity. This exercise familiarizes you
with the rhythms of your company's sales and expenditures, as well as variables that can affect changes.
Seasonal Planning

A cash budget can help to prepare you financially for seasonal fluctuations in sales and expenditures. If
you are required to renew expensive licenses at a particular time of year, for example, a cash budget can
help you to set aside money over time for these outlays. Preparing a cash budget can help you to
identify times of year when you may have a surplus to put aside to prepare yourself for leaner periods.

Self Evaluation

A cash budget provides you with a basis for comparing your predictions and assumptions with actual
events as they unfold. Your cash budget is not a plan set in stone, but rather a flexible road map meant
to keep your spending on track if everything goes as planned. As the period covered in your cash budget
elapses, you will find that some of your income and spending predictions were off base. These
discrepancies provide you with valuable feedback. Sometimes they occur because of circumstances that
you could not have foreseen, but just as often they are the result of faulty reasoning that you can
correct in the future.