Government College University Faisalabad

Final Term Exam

Objective Part
150 Definitions And Concepts

Investment Analysis & Portfolio Management

By

Zahid Bashir
B.com Hons(Finance), M.Com 18 years (M.Phil Finane)

Instructor GCUF

DEPARTMENT OF COMMERCE
GOVERNMENT COLLEGE UNIVERSITY
FAISALABAD
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 1- Accrual basis/ cash basis

Accrual basis
Preparation of financial statements, recognizes revenue at the time of sale and
Recognizes expenses when they are incurred is called accrual basis.

Cash basis
Recognizes revenues and expenses only with respect to actual inflows and outflows
Of cash is called cash basis.

2- Assessment / techniques of risk

The process of determining the likelihood that a specified negative event will occur. Investors
and business managers use risk assessments to determine things like whether to undertake a
particular venture, what rate of return they require to make a particular investment and how to
mitigate an activity's potential losses.

3- Agency Relationship

All agency relationships are fiduciary relationships. This means the relationship involves a
certain level of trust and confidence. The agent is obligated to act in the best interests of the
principal because the agent's actions will create legal obligations for the principal

4- Agency problems
Problems that arise when managers place personal goals ahead of the goals of
Shareholders.

5- Agency costs

Costs arising from agency problems that are borne by shareholders and represent

A loss of shareholder wealth.

6- Asymmetric information

The situation in which managers of a firm have more information about operations

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And future prospects than do investors.

Definition of annualized net present value (anpv) approach

7- Annualized net present value (ANPV) approach

Annualized net present value (ANPV) approach: An approach to evaluating unequal-lived

projects that converts the net present value of unequal-lived, mutually exclusive projects into
an equivalent (in NPV terms) annual amount.

8- Annuity/ mixed stream

. Annuity

A stream of equal periodic cash flows over a specified time period. These cash
Flows can be inflows of returns earned on investments or outflows of funds
Invested to earn future returns.

Mixed stream
A stream of unequal periodic cash flows that reflect no particular pattern.

9- Accept–reject approach / ranking approach

Accept–reject approach
The evaluation of capital expenditure proposals to determine whether they meet
The firm’s minimum acceptance criterion.

Ranking approach
The ranking of capital expenditure projects on the basis of some predetermined
Measure, such as the rate of return.

10- Accounts receivable aging

Accounts receivable aging is a critical management tool as well as an analytic tool that helps
determine the financial health of a company's customers, and therefore the health of their
business.

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 11- Business Finance

Business finance--or corporate finance--is an economic activity that helps commercial entities
and non-profits secure cash for short-term operating needs or long-term investment decisions.

12- Bond and Its types

Bond
Long-term debt instrument, used by business and government to raise large sums
Of money, generally from a diverse group of lenders.

Types of Bonds

Ther are two types of bnds

I- Government Bond

These bonds are not risky because the GOVT. Issues these bonds on fix rate so, Govt. Bonds
are Risk free bonds.

II- Corporate Bond

Corporate bonds are more risky it can be devide into two types

i- Simple corporate bond

ii- High yeald corporate bond

13- Beta coefficient / market return

Beta coefficient
A relative measure of nondiversifiable risk. An index of the degree of movement
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Of an asset’s return in response to a change in the market return.

Market return
The return on the market portfolio of all traded securities.

14- Book value v/s market value weights

Book value
The strict accounting value of an asset, calculated by subtracting its accumulated
Depreciation from its installed cost.

Market value weights

Weights that use market values to measure the proportion of each type of capital
In the firm’s financial structure.

15- Business Risk v/s Financial Risk

Business Risk

A company's business risk is the risk of the firm's assets when no debt is used. Business risk
is the risk inherent in the company's operations. As a result, there are many factors that can
affect business risk: the more volatile these factors, the riskier the company.

Financial Risk

A company's financial risk, however, takes into account a company's leverage. If a company
has a high amount of leverage, the financial risk to stockholders is high - meaning if a
company cannot cover its debt and enters bankruptcy, the risk to stockholders not getting
satisfied monetarily is high.

16- Bond v/s debenture

Bond
Long-term debt instrument, used by business and government to raise large sums
Of money, generally from a diverse group of lenders.

Debenture

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A type of debt instrument that is not secured by physical assets or collateral. Debentures are
backed only by the general creditworthiness and reputation of the issuer

17- Corporate finance

1) The financial activities related to running a corporation.

2) A division or department that oversees the financial activities of a company. Corporate

finance is primarily concerned with maximizing shareholder value through long-term and
short-term financial planning and the implementation of various strategies.

18- Capital Expenditure manager

Your online account is where you can manage your expenditures, advances, mileage and time
tracking. Set up branches and groups to improve companies’ expense policy.

19- Common stock v/s preferred stock

Common stock
A special form of ownership having a fixed periodic dividend that must be paid
Prior to payment of any dividends to common stockholders.
The purest and most basic form of corporate ownership.

Preferred stock
A special form of ownership having a fixed periodic dividend that must be paid
Prior to payment of any dividends to common stockholders.

20- Chief executive officer (ceo)

A corporate official responsible for managing the firm’s day-to-day operations
And carrying out the policies established by the board of directors.

21- Credit Analyst

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A financial professional who has expertise in evaluating the creditworthiness of individuals
and businesses.

22- Controller
The firm’s chief accountant, who is responsible for the firm’s accounting activities,
Such as corporate accounting, tax management, financial accounting, and
Cost accounting.

23- Capital gain

The amount by which the sale price of an asset exceeds the asset’s purchase
Price.

24- Capital asset pricing model (capm)

Describes the relationship between the required return, , and the nondiversifiable
The risk of the firm as measured by the beta coefficient, b.

25- Capital structure v/s financial structure

Capital structure
The mix of long-term debt and equity maintained by the firm.

Financial structure

The financial structure is a mixture that directly affects the risk and value of the business. The
main concern for the financial manager of the company is deciding how much money should
be borrowed and the best mixture of debt and equity to obtain.

26- Cross-sectional analysis

Comparison of different firms’ financial ratios at the same point in time;
Involves comparing the firm’s ratios to those of other firms in its industry or two

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Industry averages.

27- Common-size statement

A statement in which each item is expressed as a percentage of sales.

28- Cash flow statement and its parts

Cash flow statement is one of the primary financial statements used in business operations,
including small businesses. Creating a cash flow statement illustrates the amount of cash the
business generated during the reporting period.

Three parts of cash flow statement

Operating Activities

The first section of the cash flow statement illustrates the cash received and used during
normal operating activities.

Investment Activities

The second section is dedicated to investment activity. All of a company's investments are
listed under this category.

Financing Activities

The third section of the cash flow statement lists the information for the company's financing
activities. Financing activities include purchases of bonds and stock as well as dividend
payments.

29- Cash budget

A statement of the firm’s planned inflows and outflows of cash that is used to
Estimate its short-term cash requirements.

30- Compounding v/s Discounting

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Compounding finds the future value of a present value using a compound interest rate.

Discounting finds the present value of some future value, using a discount rate.

They are inverse relationships. This is perhaps best illustrated by demonstrating that a present
value of some future sum is the amount which, if compounded using the same interest rate
and time period, results in a future value of the very same amount.

31- Coupon
The percentage of a bond’s par value that will be paid annually, typically in two
Equal semiannual payments, as interest.

32- Coupon Bond

An unregistered, negotiable bond on which interest and principal are payable to the holder,
regardless of whom it was originally issued to. The coupons are attached to the bond, and
each coupon represents a single interest payment.

33- Call price and Call premium

Call price
The stated price at which a bond may be repurchased, by use of a call feature,
Prior to maturity.

Call premium
The amount by which a bond’s call price exceeds its par value.

34- Capital budgeting

The process of evaluating and selecting long-term investments that are consistent
With the firm’s goal of maximizing owners’ wealth.

35- Capital expenditure

An outlay of funds by the firm that is expected to produce benefits over a period
Of time greater than 1 year.

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 36- Conventional v/s Nonconventional cash flow

Conventional cash flow

A series of inward and outward cash flows over time in which there is only one change in the
cash flow direction. A conventional cash flow for a project or investment is typically
structured as an initial outlay or outflow, followed by a number of inflows over a period of
time. In terms of mathematical notation, this would be shown as -, +, +, +, +, +, denoting an
initial outflow at time period 0, and inflows over the next five periods.

Nonconventional cash flow

A series of inward and outward cash flows over time in which there is more than one change
in the cash flow direction. This contrasts with a conventional cash flow, where there is only
one change in cash flow direction. In terms of mathematical notation - where the - sign
represents an outflow and + denotes an inflow - an unconventional cash flow would appear as
-, +, +, +, -, + or alternatively +, -, -, +, -.

37- Capital Budgeting techniques

Capital budgeting (or investment appraisal) is the process of determining the viability to
long-term investments on purchase or replacement of property plant and equipment, new
product line or other projects.

Capital budgeting consists of various techniques used by managers such as:

1- Payback Period
2- Discounted Payback Period
3- Net Present Value
4- Accounting Rate of Return
5- Internal Rate of Return
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 6- Profitability Index

38- Conflicting rankings

Conflicts in the ranking of a given project by NPV and IRR resulting from differences in the
magnitude and timing of cash flows.

39- Cost of capital

The cost of funds used for financing a business. Cost of capital depends on the mode of
financing used – it refers to the cost of equity if the business is financed solely through
equity, or to the cost of debt if it is financed solely through debt.

40- Capital Structure Theories

Net Income Approach (NI) Net Income approach proposes that there is a definite relationship
between capital structure and value of the firm.

The capital structure of a firm influences its cost of capital (WACC), and thus directly affects
the value of the firm. NI approach assumptions – o NI approach assumes that a continuous
increase in debt does not affect the risk perception of investors. O Cost of debt (Kd) is less
than cost of equity.

41- Commercial finance companies

Lending institutions that make only secured loans—both short-term and longer
To businesses.

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 42- Cash conversion cycl

Liabilities of a company that are accumulated automatically as a result of the firm's day-to-
day business. Spontaneous liabilities can be tied to changes in sales - such as the cost of
goods sold and accounts payable. These liabilities can also be "fixed," as seen with regular
payments on long-term debt.

43- Commercial papers

A form of financing consisting of short-term, unsecured promissory notes issued
By firms with a high credit standing.

44- Difference between accounting and finance

The main difference between accounting and finance concerns time. Time plays a more
sophisticated role in finance than in accounting.

Another difference between accounting and finance is with respect to their purposes. With
accounting, it aims to collect and present financial information.

Meanwhile, financial director’s prime duty and responsibility associates to financial strategy,
managing and controlling, and decision making.

45- Director and Board of directors (B O D)

Director

An appointed or elected member of the board of directors of a company who, with other
directors, has the responsibility for determining and implementing the company’s policy

BOD

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A group of individuals that are elected as, or elected to act as, representatives of the
stockholders to establish corporate management related policies and to make decisions on
major company issues.

46- Dividends
Periodic distributions of cash to the stockholders of a firm is called dividend.

47- Duo Pont

Dupont Analysis' A method of performance measurement that was started by the dupont
Corporation in the 1920s. With this method, assets are measured at their gross book value
rather than at net book value in order to produce a higher return on equity (ROE).

48- Depreciation v/s amortization

Depreciation
A portion of the costs of fixed assets charged against annual revenues over time.

Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period
of time. Consumers are most likely to encounter amortization with a mortgage or car loan

49- Diversification
A risk management technique that mixes a wide variety of investments within a portfolio.
The rationale behind this technique contends that a portfolio of different kinds of investments
will, on average, yield higher returns and pose a lower risk than any individual investment
found within the portfolio.

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 50- Discount v/s premium

Discount
The amount by which a bond sells at a value that is less than its par value.

Premium
The amount by which a bond sells at a value that is greater than its par value.

51- Derivative

A security whose price is dependent upon or derived from one or more underlying assets. The
derivative itself is merely a contract between two or more parties. Its value is determined by
fluctuations in the underlying asset.

52- Economic Value Added (EVA)

Economic Value Added (EVA) is a financial performance method to calculate the true
economic profit of a corporation. EVA can be calculated as net operating after taxes profit
minus a charge for the opportunity cost of the capital invested.

53- Ethics

The study of proper business policies and practices regarding potentially controversial issues,
such as corporate governance, insider trading, bribery, discrimination, corporate social
responsibility and fiduciary responsibilities.

54- Earnings per share (eps) v/s dividends per share

Earnings per share (eps)

The amount earned during the period on behalf of each outstanding share of
Common stock, calculated by dividing the period’s total earnings available for
The firm’s common stockholders by the number of shares of common stock outstanding.
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Dividend per share (dps)
The dollar amount of cash distributed during the period on behalf of each outstanding
Share of common stock.

55- Efficient market

A market that allocates funds to their most productive uses as a result of competition
Among wealth-maximizing investors and that determines and publicizes
Prices that are believed to be close to their true value.

56- Efficient portfolio

A portfolio that maximizes return for a given level of risk.

57- Efficient frontier

A set of optimal portfolios that offers the highest expected return for a defined level of risk or
the lowest risk for a given level of expected return. Portfolios that lie below the efficient
frontier are sub-optimal, because they do not provide enough return for the level of risk.

58- Efficient-market hypothesis (emh)

Theory describing the behavior of an assumed “perfect” market in which (1)
Securities are in equilibrium, (2) security prices fully reflect all available information
And react swiftly to new information, and (3), because stocks are fully and
Fairly priced, investors need not waste time looking for mispriced securities.

59- Financial services

The area of finance concerned with the design and delivery of advice and financial
Products to individuals, businesses, and governments.

60- Financial merger and His Basic duty

A merger transaction undertaken with the goal of restructuring the acquired
Company to improve its cash flow and unlock its unrealized.

Financial managers perform some or all of the following duties: Plan, organize, direct,
control and evaluate the operation of an accounting, audit or other financial department.
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 61- Financial analysts

Financial analysts are often employed by mutual and pension funds, hedge funds, securities
firms, banks, investment banks, insurance companies, and other businesses, helping these
companies or their clients make investment decisions.

62- Foreign exchange manager

The manager responsible for managing and monitoring the firm’s exposure to
Loss from currency fluctuations.

63- Financial institution

An intermediary that channels the savings of individuals, businesses, and governments
Into loans or investments.

64- Financial markets

Forums in which suppliers of funds and demanders of funds can transact business
Directly.

65- Fasb
A statement issued by the fasb requiring u.s. Multinationals first to convert the
Financial statement accounts of foreign subsidiaries into the functional currency
And then to translate the accounts into the parent firm’s currency using the allcurrent-
Rate method.

66- Financial statements'

Records that outline the financial activities of a business, an individual or any other entity.

Financial statements are meant to present the financial information of the entity in question as
clearly and concisely as possible for both the entity and for readers.

Financial statements for businesses usually include: income statements, balance sheet,
statements of retained earnings and cash flows, as well as other possible statements.

67- Financial leverage multiplier (flm)

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The ratio of the firm’s total assets to its common stock equity.

68- Free cash flow (fcf)

The amount of cash flow available to investors (creditors and owners) after the
Firm has met all operating needs and paid for investments in net fixed assets and
Net current assets.

69- Future v/s present value

Future value
The value at a given future date of an amount placed on deposit today and
Earning interest at a specified rate. Found by applying compound interest over a
Specified period of time.

Present value
The current dollar value of a future amount—the amount of money that would
Have to be invested today at a given interest rate over a specified period to equal
The future amount.

70- Foreign direct investment

The transfer of capital, managerial, and technical assets to a foreign country.

71- Flotation costs v/s transaction costs'

Flotation costs
The total costs of issuing and selling a security.

Transaction costs'

Expenses incurred when buying or selling securities. Transaction costs include brokers'
commissions and spreads (the difference between the price the dealer paid for a security and
the price the buyer pays).

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 72- Factor and Factoring A/R

Factor
A financial institution that specializes in purchasing accounts receivable from
Businesses.

Factoring accounts receivable

The outright sale of accounts receivable at a discount to a factor or other financial
Institution.

73- Factoring cost

In general, you will pay a factoring fee of between 1% and 5% for accounts receivable
financing. The factor fee is also affected by the billing process some factoring companies
may charge a one-time set up fee to establish your factoring account, which could set you
back around $500 to $2,500, in addition to an initial brokerage fee of up to 3%.

74- Floating inventory lien

A secured short-term loan against inventory under which the lender’s claim is on
The borrower’s inventory in general.

75- Generally accepted accounting principles (gaap)

The practice and procedure guidelines used to prepare and maintain financial
Records and reports; authorized by the financial accounting standards board.

76- Growth model for stock valueation

A model for determining the intrinsic value of a stock, based on a future series of dividends
that grow at a constant rate. Given a dividend per share that is payable in one year, and the
assumption that the dividend grows at a constant rate in perpetuity, the model solves for the
present value of the infinite series of future dividends.

77- Historical weights v/s target weights

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Historical weights
Either book or market value weights based on actual capital structure proportions.

Target weights
Either book or market value weights based on desired capital structure proportions.

78- Investment

An asset or item that is purchased with the hope that it will generate income or appreciate in
the future. In an economic sense, an investment is the purchase of goods that are not
consumed today but are used in the future to create wealth.

79- Investment banker

An individual who works in a financial institution that is in the business primarily of raising
capital for companies, governments and other entities, or who works in a large bank's
division that is involved with these activities.

80- KIBOR and LIBOR

KIBOR

KIBOR is stand for "The Karachi inter-bank offered rate" which is used by the banks in order
to lend the money with each others and with their customers.

LIBOR

London Interbank Offered Rate (LIBOR): Interest rate at which the London banks are willing
to offer funds in the inter-bank marke

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 81- Liquidity
A firm’s ability to satisfy its short-term obligations as they come dueis called liquidity.

82- Leverage (Operating) v/s Financial

Operating leverage

A measurement of the degree to which a firm or project incurs a combination of fixed and
variable costs.

Financial leverage

The use of various financial instruments or borrowed capital, such as margin, to increase the
potential return of an investment.

83- Loan amortization and its schedule

Loan amortization
The determination of the equal periodic loan payments necessary to provide a
Lender with a specified interest return and to repay the loan principal over a
Specified period.

Loan amortization schedule

A schedule of equal payments to repay a loan. It shows the allocation of each
Loan payment to interest and principal.

84- Line of credit

An agreement between a commercial bank and a business specifying the amount
Of unsecured short-term borrowing the bank will make available to the firm
Over a given period of time.

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 85- Lien
A publicly disclosed legal claim on loan collateral.

86- Letter of credit

A letter written by a company’s bank to the company’s foreign supplier, stating
That the bank guarantees payment of an invoiced amount if all the underlying
Agreements are met.

87- Money market v/s capital market

Money market
A financial relationship created between suppliers and demanders of short-term
Capital market
A market that enables suppliers and demanders of long-term funds to make
Transactions.

88- Mutually Exclusive v/s Independent Projects

Mutually Exclusive

A set of projects from which at most one will be accepted is termed as Mutually Exclusive
Projects. In mutually exclusive projects, cash flows of one project can be adversely affected
by the acceptance of the other project.
Independent

A Project whose cash flows have no impact on the acceptance or rejection of other projects is
termed as Independent Project. Thus, all such Projects which meet this criterion should be
accepted.

89- Modigliani-miller(MM) propositions

A financial theory stating that the market value of a firm is determined by its earning power
and the risk of its underlying assets, and is independent of the way it chooses to finance its
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investments or distribute dividends. Remember, a firm can choose between three methods of
financing: issuing shares, borrowing or spending profits (as opposed to dispersing them to
shareholders in dividends).

90- Mortgaged v/s pledge

1.The Security in Mortgaged is an immovable property, while in a pledge it is a movable
property.
2. In a pledge the ownership of the pledged property remains with the debtor (the pledgor or
borrower). In a mortgage, the ownership of the mortgaged property is transfered to the
creditor (banker or mortgagee).
3. Delivery of the property is essential to a pledge; hence the goods delivered by the pledgor
or borrower will be in the custody of the banker. But, in a mortgage, the possession of the
property will be with the borrower.

91- Noncash charge

An expense that is deducted on the income statement but does not involve the
Actual outlay of cash during the period; includes depreciation, amortization, and
Depletion.

92- Nominal annual rate v/s effective annual rate

Nominal annual rate

Contractual annual rate of interest charged by a lender or promised by a borrower.

Effective annual rate (EAR)

The annual rate of interest actually paid or earned.

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 93- Nominal annual rate v/s Real Rate

Nominal annual rate

Contractual annual rate of interest charged by a lender or promised by a borrower.

Real Rate
The annual percentage return realized on an investment, which is adjusted for changes in
prices due to inflation or other external effects.

94- Over-the-counter (OTC) market

Market where smaller, unlisted securities are traded.

95- Operating expense

A category of expenditure that a business incurs as a result of performing its normal business
operations. One of the typical responsibilities that management must contend with is
determining how low operating expenses can be reduced without significantly affecting the
firm's ability to compete with its competitors.

96- Operating cash inflows

The incremental after-tax cash inflows resulting from implementation of a
Project during its life.

97- Optimal capital structure

The capital structure at which the weighted average cost of capital is minimized,
Thereby maximizing the firm’s value.
98- Option, put option v/s call option

Option
An instrument that provides its holder with an opportunity to purchase or sell a
Specified asset at a stated price on or before a set expiration date.

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Put option
An option to sell a specified number of shares of a stock (typically 100) on or
Before a specified future date at a stated price.

Call option
An option to purchase a specified number of shares of a stock (typically 100) on
Or before a specified future date at a stated price.

99- Public v/s Private Company

Public Company
Public companies must inform shareholders about and get approval for the company's
operations, financial performance, management actions, and other decisions.
Going public is expensive, and there is unlimited liability for a company's owners.

Private company
A private company can be a corporation, a limited liability company, a partnership, or a sole
proprietorship, as long as the shares are privately held and not traded publicly.

100- Listed company v/s unlisted company

PUBLIC LISTED COMPANY PUBLIC UNLISTED COMPANY

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1.Minimum numbers of members
7 members 3 members

2.Maximum number of members

No maximum limit No maximum limit

3. Requires prospectus Requires SILP

4. Filing of accounts
Only with registrar With registrar and SECP

5.Quorum
10 members in person having at least 2 members in person having at least 25%
25% voting power through their own of voting power through their own
account or proxy account or proxy

6. Preparation of accounts
In accordance with 4th schedule In accordance with 5th schedule

7. News paper publication of notice

Required
Not required
8. Appointment of company’s secretary
Mandatory
Not mandatory

101- Public offering v/s private placement

The sale of either bonds or stocks to the general public.

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Private placement
The sale of a new security directly to an investor or group of investors.

Paid-in capital in excess of par

The amount of proceeds in excess of the par value received from the original
Sale of common stock.

102- Pro forma statements

Projected, or forecast, income statements and balance sheets.

103- Perpetuity
An annuity with an infinite life, providing continual annual cash flow.

104- Fixed v/s Floating rate

Fixed rate
Fixed interest rate means repayment of home loans in fixed equal installments over the entire
period of the loan. In this case, the interest rate doesn't change with market fluctuations.

Floating rate
Floating interest rate by name implies that the rate of interest varies with market conditions.

105- Prime interest rate

The interest rate that commercial banks charge their most credit-worthy customers. Generally
a bank's best customers consist of large corporations.

106- Risk
A measure of the uncertainty surrounding the return that an investment will
Earn or, more formally, the variability of returns associated with a given asset.
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 107- Retained earnings
The cumulative total of all earnings, net of dividends, that have been retained
And reinvested in the firm since its inception.

108- Risk preference refers for investors

Risk preference refers to the attitude people hold towards risks, which is a key factor in
studies on investors’ decision-making behavior. Standard financial theory assumes that
investors are rational and believes that when making investment decisions they tend to have
invariant risk preferences-risk averse.

109- Red herring

A preliminary prospectus made available to prospective investors during the
Waiting period between the registration statement’s filing with the SEC and its
Approval.

110- Relevant v/s incremental cash flows

Relevant cash flows

The incremental cash outflow (investment) and resulting subsequent inflows associated
With a proposed capital expenditure.

Incremental cash flows

The additional cash flows—outflows or inflows—expected to result from a proposed
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Capital expenditure.

111- Risk-adjusted discount rate (RADR)

The rate of return that must be earned on a given project to compensate the
Firm’s owners adequately—that is, to maintain or improve the firm’s share price.

112- Real options

Opportunities that are embedded in capital projects that enable managers to
Alter their cash flows and risk in a way that affects project acceptability (NPV).
Also called strategic options.

113- Ratios Their types and Interpretation

Quantitative analysis of information contained in a company’s financial statements.is called

ratio

Types
1. Liquidity ratios
2. Asset Management ratios
3. Leverage ratios
4. Profitability ratios
5. Valuation ratios

114- Stockholders v/s stakeholders

Stockholders
The owners of a corporation, whose ownership, or equity, takes the form of
Either common stock or preferred stock.

Stakeholders
Groups such as employees, customers, suppliers, creditors, owners, and others
Who have a direct economic link to the firm.

115- Securities and Exchange Commission (SEC)

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The primary government agency responsible for enforcing federal securities
Laws.

116- Short-termfinancial plans V/S long-term financial plans

Short-term (operating) financial plans

Specify short-term financial actions and the anticipated impact of those actions.

Long-term (strategic) financial plans

Plans that lay out a company’s planned financial actions and the anticipated
Impact of those actions over periods ranging from 2 to 10 years.

117- Sales, interna,external forecast

Sales forecast
The prediction of the firm’s sales over a given period, based on external and/or
Internal data; used as the key input to the short-term financial planning process.

Internal forecast
A sales forecast based on a buildup, or consensus, of sales forecasts through the
Firm’s own sales channels.
External forecast
A sales forecast based on the relationships observed between the firm’s sales and
Certain key external economic indicators.

118- Sources of Risk

1- Production > Yeald /Quality Veriability
2- Marketing> Changes in price/ External condition
3- Financial > Varability in Debt/equity capital and ability to meet cash demand
4- Legal> Responsibility for contracts, Stutatory compliance
5- Human>Managing people and estate transfer
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 119- Security Market Line (Sml) V/S Capital Market Line - Cml

Security market line (SML)

The depiction of the capital asset pricing model (CAPM) as a graph that reflects
The required return in the marketplace for each level of nondiversifiable risk
(beta).

Capital Market Line - Cml

A line used in the capital asset pricing model to illustrate the rates of return for efficient
portfolios depending on the risk-free rate of return and the level of risk (standard deviation)
for a particular portfolio.

120- Supervoting shares v/s nonvoting common stock

Supervoting shares
Stock that carries with it multiple votes per share rather than the single vote per
Share typically given on regular shares of common stock.

Nonvoting common stock

Common stock that carries no voting rights; issued when the firm wishes to
Raise capital through the sale of common stock but does not want to give up its
Voting control.

121- Stock purchase warrants

Instruments that give their holders the right to purchase a certain number of
Shares of the issuer’s common stock at a specified price over a certain period of
Time.

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 122- Sunk costs v/s opportunity costs

Sunk costs
Cash outlays that have already been made (past outlays) and therefore have no
Effect on the cash flows relevant to a current decision.

Opportunity costs
Cash flows that could be realized from the best alternative use of an owned
Asset.

123- Sensitivity Analysis v/s Scenario Analysis

Sensitivity Analysis
To conduct sensitivity analysis, take a certain variable involved in a potential investment and
change it in order to see how that change would affect the over all investment. They may look
at the number of units a company can sell or the current and potential interest rate.

Scenario Analysis

Scenario analysis can be thought of as performing multiple sensitivity analyses at the same
time. Investors conducting this type of analysis will look at the variables that affect a
company's bottom line and use them to plan accordingly. For example, investors considering
purchasing a company will want to understand the cash flow of the business. This is more
than just considering revenue and expenses.

124- Simulation
A statistics-based behavioral approach that applies predetermined probability
Distributions and random numbers to estimate risky outcomes.

125- Spontaneous liabilities

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Financing that arises from the normal course of business; the two major shortterm
Sources of such liabilities are accounts payable and accruals.
126- Time-series analysis
Evaluation of the firm’s financial performance over time using financial ratio
Analysis.

127- Time value of money

The idea that money available at the present time is worth more than the same amount in the
future due to its potential earning capacity. This core principle of finance holds that, provided
money can earn interest, any amount of money is worth more the sooner it is received.

128- Treasurer
The firm’s chief financial manager, who manages the firm’s cash, oversees its
Pension plans, and manages key risks.

129- Total risk and its types

Total risk
Total risk is the combination of all risk factors associated with making some type of
investment decision. Identifying all the factors that could come into play means looking
closely at both the systematic and the unsystematic risk involved with either buying or selling
a given investment, such as shares of stock, bonds, mutual funds, or commodities. This all-
encompassing approach makes it easier to choose the course of action that is likely to result
in the best possible outcome for the investor.

Systematic Risk - Systematic risk influences a large number of assets. A significant political
event, for example, could affect several of the assets in your portfolio. It is virtually
impossible to protect yourself against this type of risk.

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Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk". This kind
of risk affects a very small number of assets. An example is news that affects a specific stock
such as a sudden strike by employees

130- Term structure of interest rates & Theories

Term structure of interest rates

The relationship between the maturity and rate of return for bonds with similar
Levels of risk.

Theories
1- Pure Expectation Theory
2- Liquidity Preference Theory
3- Market Segmentation Theory

131- Terminal cash flow

The after-tax nonoperating cash flow occurring in the final year of a project. It
Is usually attributable to liquidation of the project.

132- Transfer prices

Prices that subsidiaries charge each other for the goods and services traded
Between them.

133- The target (optimal) capital structure

The target capital structure is simply defined as the mix of debt, preferred stock and common
equity that will optimize the company's stock price. As a company raises new capital it will
focus on maintaining this target (optimal) capital structure.The target (optimal) capital
structure is simply defined as the mix of debt, preferred stock and common equity that will
optimize the company's stock price. As a company raises new capital it will focus on
maintaining this target (optimal) capital structure.

134- Underwriter

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The person who perform the role of the investment banker in bearing the risk of reselling, at
a profit, the
Securities purchased from an issuing corporation at an agreed-on price.

135- Underwriting syndicate and selling group

Underwriting syndicate
A group of other bankers formed by an investment banker to share the financial
Risk associated with underwriting new securities.

Selling group
A large number of brokerage firms that join the originating investment
Banker(s); each accepts responsibility for selling a certain portion of a new security
Issue on a commission basis.

136- Unlimited funds v/s capital rationing

Unlimited funds
The financial situation in which a firm is able to accept all independent projects
That provide an acceptable return.

Capital rationing
The financial situation in which a firm has only a fixed number of dollars available
For capital expenditures, and numerous projects compete for these dollars.

137- Venture capital

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Privately raised external equity capital used to fund early-stage firms with
Attractive growth prospects.

138- Venture capitalists v/s angel capitalists

Venture capitalists
Providers of venture capital; typically, formal businesses that maintain strong
Oversight over the firms they invest in and that have clearly defined exit strategies.

Angel capitalists
Wealthy individual investors who do not operate as a business but invest in
Promising early-stage companies in exchange for a portion of the firm’s equity.

139- Weighted average cost of capital (WACC)

Reflects the expected average future cost of capital over the long run; found by
Weighting the cost of each specific type of capital by its proportion in the firm’s Capital
structure.

140- WACC and Break points

Weighted average cost of capital (WACC)

Reflects the expected average future cost of capital over the long run; found by
Weighting the cost of each specific type of capital by its proportion in the firm’s Capital
structure.

Breakpoint
For load mutual funds, the dollar amount for the purchase of the fund's shares that qualifies
the investor for a reduced sales charge (load). The purchase may either be made in a lump
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sum or by staggering payments within a prescribed period of time. The latter form of
investment purchase in a fund must be documented by a letter of intent.

141- Yield to maturity(YTM) and Yield curve

Yield to maturity
Compound annual rate of return earned on a debt security purchased on a given
Day and held to maturity.
Yield curve
A graphic depiction of the term structure of interest rates

142- Zero-coupon bond

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering
profit at maturity when the bond is redeemed for its full face value.

143- Modified dupont

Formula
Relates the firm’s return on total assets (ROA) to its return on common equity
(ROE) using the financial leverage multiplier (FLM.

144- Share capital

Funds raised by issuing shares in return for cash or other considerations.

145- Portfolio Return and Risk

The Expected Return on a Portfolio is computed as the weighted average of the expected
returns on the stocks which comprise the portfolio. The weights reflect the proportion of the
portfolio invested in the stocks. This can be expressed as follows:

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The variance/standard deviation of a portfolio reflects not only the variance/standard
deviation of the stocks that make up the portfolio but also how the returns on the stocks
which comprise the portfolio vary together. Two measures of how the returns on a pair of
stocks vary together are the covariance and the correlation coefficient.

The Covariance between the returns on two stocks can be calculated using the following
equation:

146- Fixed v/s Floating Rate loan

Fixed rate loan

A loan with a rate of interest that is determined at a set increment above the prime rate and
remains unvarying until maturity.

Floating rate loan

A loan with a rate of interest initially set at an increment above the prime rate
And allowed to “float,” or vary, above prime as the prime rate varies until maturity.

147- Bond indenture

A legal document that specifies both the rights of the bondholders and the duties of the
issuing corporation.

148- Primary Financial Market v/s Secondary

Pimary Financial Markt

A market that issues new securities on an exchange. Companies , governments and other
groups obtain financing through debt or equity based securities.

Secondary Financial market

The secondary market is what people are taking about when they reffer to the stock market.
This includes the New York Stock Exchange (NYSE) Nasdaq and all major exchanges
around the world.

149- Kindes of Investors

Angel Investors
An angel onvestor typically an individual with significant financial resources that invests in
start up business according to entrepreneur.

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Peer-To-Peer Lending
Peer-to-peer lending is typically arranged via websites that bring investors and small business
owners together, says consumers reports.

Venture Capitalist
According to CNN Money, venture capitalist is a funding organization that typically get
involved in companies that have already shown a history returns.

Banks
A bank loan works in much the same way as other business investment.

Personal Investor
Friends and family members with means can also be considered business investors.
150- Default Maturity and Contractual Provision

Default Maturity
Default maturity occurs when the brrower under a mortgage loan fails to pay the lender
the ballon payment or principal balance , when due at the maturity of the loans.

Contractual Provision
A legal clause or condition contained within a contract that requires or prevents either one
or both parties to perform a particular requirement by some specified time.

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