FINANCE MAJOR

1. Define Finance, Financial Management, Public Finance and Financial

Statement?
i. Finance: The process of managing money and utilizing it for getting future benefits.
ii. Financial Management: The process of planning, controlling, and monitoring an
organization's financial resources.
iii. Public finance: The branch of finance that deals with government revenue,
expenditures, and fiscal policies.
iv. Financial statement: A formal report that summarizes a company's financial
transactions and performance.

2. What are the basic principles of finance? Can you explain the concept of
profitability and liquidity?
Basic Principles of Finance:
i. Time Value of Money: The changes of value of money by changes of time
ii. Risk and Return: Higher returns are typically associated with higher risk, and lower
returns are typically associated with lower risk
iii. Diversification: Spreading investments across different asset classes can reduce risk.
iv. Budgeting: Creating and adhering to a financial plan to manage income, expenses,
and savings.
v. Risk Management: Using insurance and other strategies to protect against
unexpected financial drawbacks.

vi. Liquidity: Maintaining a balance between accessible assets and long-term

investments to cover short-term financial needs.
vii. Profitability: Profitability indicates whether a business is generating sufficient
returns to cover expenses, grow, and provide returns to investors. (Negative

relation)
3. What are the functions played by finance managers?
i. Managerial Functions
a) Investment Decision: Where to invest fund at what amount
b) Financing Decision: Where to raise funds and at what amount
c) Dividend Decision: How much to pay by dividends
d) Asset Management Decision: Management of current and fixed asset
ii. Routine Functions
a) Financial Planning: Deciding future course of actions.
b) Identification of Sources: where the organization will be financed
c) Raising of Funds: Based on financial needs and demand of organization
d) Investment of Fund: Take decisions for short term and long-term
investments
e) Distribution of Profit: Make proposal for the profit payment
f) Fore Casting of Cash Flow: Identifying future cash requirements
g) Coordination & Control: Ensure that the firm is operated efficiently
h) Dealing with the Financial Markets: Deals with money and capital market
i) Risk Management: Purchasing insurance or by hedging in the derivatives
markets

4. What should be the goal of a firm? “Wealth Maximization or Profit

Maximization”? –Which one is superior and why?
Wealth Maximization: Wealth maximization is a financial and economic goal that aims to
increase the net wealth or value of an individual, organization, or investor over time. Wealth
maximization takes into account the long-term value of the firm by considering the net
wealth, which includes both current and future earnings and asset values. It focuses on
increasing the overall financial well-being of the firm and its stakeholders, including
shareholders, employees, and creditors. Profit maximization, on the other hand, may
encourage short-term decision-making that can be detrimental to the firm's long-term
sustainability.
5. What is agency conflict and agency cost? How to minimize the agency
conflict?
Agency conflict is a disagreement between the interests of a manager and an agent.
Agency cost is the cost to minimize the agency problems and contribute to the maximization
of owner’s wealth. Minimizing agency conflict by aligning the interests of a manager and an
agent and monitoring agent actions.

6. What is a perfect capital market? What are the assumptions of Perfect

Capital Market?
Perfect Capital Market: A perfect capital market is a market in which there are never any
arbitrage opportunities.
Assumptions of Perfect Capital Market:
➢ No transaction Cost
➢ No taxes
➢ Both individual and firms have equal access to the market
➢ Everyone has the same expectations
➢ Everyone has the same information

7. What is efficient market hypothesis? What are the forms of Market

efficiency?
The efficient market hypothesis suggests that stock prices reflect all available
information. Forms of market efficiency are weak, semi-strong, and strong.

8. What is DCF analysis?

DCF analysis: DCF analysis stands for Discounted Cash Flow analysis, a method for
valuing assets based on their future cash flows.

9. What is Risk & Return Trade off?

Risk & Return Trade off: The risk-return trade-off is the relationship between the level of
risk and expected return.
10.What is CAPM and APT? What is the main difference between them?
CAPM: CAPM is based on investor’s portfolio demand and equilibrium arguments.
APT: APT is based on the factor model of returns and the approximate arbitrage arguments.

11.What is Financial Asset? What is the difference between Financial Asset

and Real Asset?
Financial Asset: A financial asset is a tradable asset representing a claim on future cash
flows. The difference from real assets is that they don't have intrinsic value.

12.Who are the participants in the Financial Market of Bangladesh?

Participants in the Financial Market of Bangladesh include investors, banks, stock
exchanges, regulators, and companies.

13.Do you know DSE, CSE and BSEC? What is their main job?
DSE: The Dhaka Stock Exchange (DSE) located in Nikunja, Dhaka, is one of the two stock
exchanges of Bangladesh.
CSE: The Chittagong Stock Exchange is a stock exchange based in the port city Chittagong,
Bangladesh.
BSEC: The Bangladesh Securities and Exchange Commission (BSEC) is the regulator of
the capital market of Bangladesh, comprising Dhaka Stock Exchange (DSE) and Chittagong
Stock Exchange (CSE). The commission is a statutory body and attached to the Ministry of
Finance.

14.Why the time value of money concept is very important in financial

decision making?
Time value of money is important in financial decisions because it recognizes the value of
money changes over time due to inflation, opportunity costs, and risk.
15.What is Cash Flow? What are the components of Cash Inflows and Cash
Outflows?
Cash flow is the net amount of cash generated or used by a business. Components include
cash inflows from operations, financing, and investing, and cash outflows for the same
categories.

16.What is a conventional Vs Non-Conventional cashflows?

Conventional cash flows are typically positive, while non-conventional cash flows can have
alternating positive and negative periods.

17.What is capital Budgeting? What are the techniques of Capital Budgeting?

Capital budgeting is the process of evaluating and selecting long-term investment projects.
Techniques include NPV, IRR, payback period, and profitability index.

18.Which technique of Capital Budgeting is better “NPV or IRR”?

Theoretical View: NPV is generally considered better than IRR for capital budgeting
decisions because it accounts for the time value of money and provides more accurate results.
Practical View: IRR is considered as better technique for capital budgeting decision because
interest rates, profitability, and so on are most often expressed as annual rates of return, thus
the use of IRR make sense to financial decision maker.
BUT NPV IS ALWAYS BETTER

19.What is a Portfolio? What is an optimum portfolio? Do you know Prof.

Harry Markowitz? Why he is famous for? Say the basics of Diversification
concept?
A portfolio is a collection of financial assets.
An optimum portfolio is one that maximizes returns for a given level of risk.
Harry Markowitz is famous for his work on portfolio theory and diversification which is
the idea that by holding a mix of assets with uncorrelated or negatively correlated returns,
an investor can reduce overall portfolio risk without sacrificing returns.
 Diversification is a risk management strategy that involves spreading investments across a
variety of assets to reduce the overall risk of a portfolio.

20.What is the difference between Risk and Uncertainty? ---Difference

between Systematic and Unsystematic Risk?
Risk involves uncertainty with known probabilities, while uncertainty has unknown
probabilities.
Systematic risk is market-related, while unsystematic risk is specific to a company

21.Do you know the difference between Pricing Efficiency and Operational
Efficiency of Financial Market?
Pricing efficiency relates to the accuracy of asset prices, while operational efficiency focuses
on market operations and infrastructure.

22.How much a firm should pay as dividend? What is Gordon and Walter
Model of Dividend Policy?
The amount a firm should pay as dividends is a significant decision and depends on various
factors, including the company's financial situation, growth prospects, and the preferences
of its shareholders.
Gordon Growth Model suggests that the firm should pay dividends based on the company's
expected growth rate and required rate of return by investors.
Walter Model suggests that a company should pay dividends when its IRR exceeds its cost
of capital.

23.Define working capital. What are the components of working capital? Why
working capital is termed as the blood of an organization?
Working capital is the capital used for a company's day-to-day trading operations.
Components include current assets and current liabilities. It's the lifeblood of an organization
as it ensures operational continuity.
24.What is a marketable security? Give us some examples of marketable
securities?
Marketable securities are short-term, easily tradable financial instruments. Examples include
Treasury bills, commercial paper, and money market funds.

25.What are the motives of holding cash? Why cash is termed as an on earning
asset?
Motives for holding cash include transaction, precautionary, and speculative. Cash is
considered a non-earning asset due to its low returns.

26.What is Liquidity? What are the dangers of Liquidity shortage and Excess
of Liquidity?
Liquidity is the ease of converting an asset into cash.
Dangers of liquidity shortage can lead to financial distress, while excess liquidity can result
in missed investment opportunities.

27.Do you know the concept of Cost of Capital? What are the components of
cost of capital? What is WACC?
Cost of capital is the cost of financing a firm's operations.
Components include the cost of debt and equity.
WACC (Weighted Average Cost of Capital) is a weighted average of these costs.

28.What should be the value of a Share and Bond (Financial Asset)?

The value of a share or bond is determined by supply and demand in the market,
influenced by factors such as company performance, interest rates, and economic conditions.
Money Laundering of Central Bank: Money laundering at the central bank refers to the illegal
process of disguising the origins of illicit funds within the central bank's financial system.
Per Capita Income: Per capita income is the average income earned by each individual in a specific
region or country, often used as an economic indicator.
GDP Growth Rate: GDP growth rate measures the percentage change in a country's Gross
Domestic Product over a specific period, indicating economic expansion or contraction.
Inflation Rate and Its Impact on the National Economy of Bangladesh: Inflation rate is the rate
at which general prices rise, and its impact in Bangladesh's national economy can affect purchasing
power and economic stability. (Inflation Rate 9.63%)
Current Bank Rate and Interest Rate: The current bank rate is the rate at which the central bank
lends money to commercial banks, influencing overall interest rates in the economy.
➢ Policy Rate (Repo Rate) 7.25%
➢ SLF (Standing Lending Facility) Rate 9.25%
➢ SDF (Standing Deposit Facility) Rate 5.25%
➢ Bank Rate 4.00%
RESERVE RATIOS (According to Bangladesh Bank)
SLR CRR
➢ Traditional Banking 13% 4.0%
➢ Islamic Banking 5.5% 4.0%
➢ Deposit Taker FIs 5% 1.5%
➢ Non-Deposit Taker FIs 2.5%
*FI = Financial Institutes
*SLR = Statutory Liquidity Ratio
CRR = Cash Reserve Ratio

Break-Even Point (BEP): The break-even point is the level of sales or operations at which total
costs are equal to total revenue, resulting in neither profit nor loss.
Ratio Analysis: Ratio analysis involves evaluating a company's financial performance by analyzing
key ratios derived from its financial statements, providing insights into its health and efficiency.