ADMAJEE CANTONMENT COLLEGE

ASSIGNMENT

CONCEPTUAL QUESTION’S
ABOUT

FINANCIAL CONCEPT

Prepared for:
Md. Imran Hossain
Lecturer
Department of Finance
University of Dhaka
Prepared by:
BBA 4th year 8th semester
Major of Finance
Md. Ismail Hossain-510066
Farha Rifat Toma-510004
Reshma Sultana-510076
Monira Zahan-510042
Farzana Afrin-510070

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Finance:
Finance refers to the process of raising or collecting funds from
various sources at minimum cost of capital and investing those funds
into various projects a maximum rate of return in order to attend the
profit maximization and wealth maximization goals of the firm.
Financial management:
Financial management refers to the efficient and effective
management of money (funds) in such manner as to accomplish the
objectives of the organization. It is the specialized function directly
associated with the top management.
Functions of finance:
There are actually four function of finance, which are:
1. Investment decision.
2. Financial decision.
3. Dividend decision.
4. Liquidity decision.
Profit maximization:
The ability for company to achieve a maximum profit with low
operating expense.
Wealth maximization:
Wealth maximization is the concept of increasing the value of
a business in order to increase the value of the shares held by
stockholders.
Perfect capital market:
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 Any market in which assets are priced with total efficiency. In a
perfect capital market, there are no possibilities for arbitrage.
Perfect capital market assumption:
Modigliani assumptions of the perfect capital market are:
1. Investors are perfectly rational
2. No transaction costs or taxes
3. Perfect competition in the market
M&M proposition 1
The value of a firm does not depend on its capital structure.
M&M proposition 2
The required rate of return on equity increases as the firm’s debt-
equity ratio increases.

Market efficiency/Efficient market:

In financial economics, the efficient-market hypothesis (EMH)
states that it is impossible to “beat the market” because stock
market efficiency causes existing share prices to always incorporate
and reflect all relevant information.
Risk of return:
The principle that potential return rises with an increase in risk,
low level of uncertainty (low-risk) are associated with low potential
returns, whereas high level of uncertainty (high-risk) are associated
with high potential returns.
Portfolio:
A grouping of financial assets such as stocks, bonds and cash
equivalents as well as their mutual, exchange-traded and closed-fund

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counterparts. Portfolios are help directly by investors and managed
by financial professionals.
Valuation:
In finance, valuation is the process of estimating what
something is worth. Items that are usually valued are a financial
asset or liability
Stock:
A type of security that signifies ownership in a corporation and
represents a claim on part of the corporation’s assets and earnings.
There are two main types of stock: common and preferred.
Share:
In financial markets, a share is a unit of account for various
investments. It often means the stock of a corporation, but is also
used for collective investments such as mutual funds, limited
partnerships, and real estate investment trusts.
Common stock:
A security that represents ownership in a corporation. Holders
of common stock exercise control by electing a board of directors
and voting on corporate policy. Common stockholders are on the
bottom of the priority ladder for ownership structure.
Preferred stock:
A class of ownership in a corporation that has a higher claim on
the assets and earnings than common stock. Preferred stock
generally has a dividend that must be pain out before dividends to
common stockholders and the shares usually do not have voting
rights.

Bond:

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 A bond is an instrument of indebtedness of the bond issuer to
the holders. It is a debt security, under which the issuer owes the
holders a debt and depending on the terms of the bond, is obliged to
pay them interest (the coupon) and to repay the principal at a later
date, termed the maturity date.

Debenture:
A type of debt instrument that is not secured by physical asset
or collateral.Debenture is backed only by the general
creditworthiness and reputation of the issuer. Both corporation and
governments frequently issue this type of bond in order to secure
capital.
Cost of capital:
Cost of capital is the cost of collecting funds from the various
sources, in other way cost of capital is the minimum rate of return
that the firm must earn from its investment.
Discount rate:
The discount rate also refers to the interest rate used in
discounted cash flow (DCF) analysis to determine the present value
of the future cash flows.
WACC:
The weighted average cost of capital (WACC) is the rate that a
company is expected to pay on average to all its security holders to
finance its assets.
Investment:
In economic sense, an investment is the purchase of goods that
are not consumed today but are used in the future to create wealth.
In finance, an investment is a monetary asset purchased with the
idea that the asset will provide income in the future or appreciate
and be sold at a higher price.
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Dividend:
A dividend is a payment made by a corporation to its
shareholders, usually as a distribution of profits. When a corporation
earns a profit or surplus, it can re-invest it in the business (called
retained earnings) and pay a fraction of this reinvestment as a
dividend to shareholders.
Profit:
Profit is the financial return or reward that entrepreneurs aim
to achieve to reflect the risk that they take. Given that most
entrepreneurs invest in order to make a return, the profit earned by
a business can be used to measure the success of that investment.

Capital budgeting:
Capital budgeting is a long term investment decision of a firm.
It is a process of deciding whether a firm should accept or reject a
project.

NPV:
Net present value (NPV) is defined as the sum of the present
values (PVs) of incoming and outgoing cash flows over a period of
time. Incoming and outgoing cash flows can also be described as
benefit and cost cash flows, respectively.

IRR:
The IRR is the interest rate also known as the discount rate
that will bring a series of cash flows (positive or negative) to a net
present value (NPV) of zero (or to the current value of cash invested).
Using IRR to obtain net present value is known as the discounted
cash flow method of financial analysis.

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MIRR:
The modified internal rate of return known as MIRR is a
financial measure of an investment’s attractiveness. It is used in
capital budgeting to rank alternative investments of equal size. As
the name implies, MIRR is a modification of the internal rate of
return (IRR) and as such aims to resolve some problems with the IRR.
PI:
Profitability index (PI) also known as profit investment ratio
(PIR) and value investment ration (VIR), is the ratio of payoff to
investment of a proposed project. It is a useful tool for ranking
projects because it allows you to quantify the amount of value
created per unit of investment.
PBP:
The payback period is 3.4 years
($20000+$60000+$80000=$160000 in the first three years + $40000
of the $100000 occurring in year 4). Note that the payback
calculation uses cash flows, not net income. Also, the payback
calculation does not address a project’s total profitability.
NPV-profile:
The NPV profile is a graph with the discount rate on the x-axis
and the NPV of the investment on the y-axis. Higher discount rates
mean cash flows that occur sooner are more influential to NPV.
Working capital:
A measure of both a company’s efficiency and is short-term
financial health. The working capital is calculated as: the working
capital ratio (current assets/current liabilities) indicates whether a
company has enough short term assets to cover its short term debt.
Budget:
A budget is quantitative expression of a plan for a defined
period of time. It may include planned sales volumes and revenues,

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resource, quantities, costs and expenses, assets, liabilities and cash
flows.
Financial statement:
An income statement (US English) or profit and loss account
(UK English) (also referred to as a profit and loss statement (P&L),
revenue statement, statement of financial performance, earnings
statement. Operating statement or statement of operations) is one
of the financial statements of a company.

Balance sheet:
Of the three basic financial statements, the balance sheet is
the only statement which applies to a single point in time of a
business calendar year. A standard company balance sheet has three
parts: assets, liabilities and ownership equity.
Cash flow statement:
A cash flow statement also known as statement of cash flows is
a financial statement that show how changes in balance sheet
accounts and income affect cash and cash equivalents and breaks the
analysis down to operation, investing and financing activities.
Charging:
May be a flat fee or a percentage of borrowings, with
percentage-based finance charges being the most common. A
finance charge is often an aggregated cost, including the cost of the
carrying the debt itself along with any related transaction fees,
account maintenance fees or late fees charge by the lender.
Cash dividend:

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 A cash dividend is money paid to stockholders, normally out of
the corporation’s current earnings or accumulated profits. Not all
companies pay a dividend. Usually the board of directors determines
if a dividend is desirable for their particular company based upon
various financial and economic factors.
Bonus share:
A bonus share is a free share of stock given to current
shareholders in a company, based upon the number of shares that
the shareholder already owns while the issue of bonus shares
increases the total number of shares issued and owned, it does not
change the value of the company.
Right share:
Right shares are the shares that are issued by a company for its
existing shareholders. The existing shareholders have their right to
subscribe to these shares unless some special rights reserve them for
some others person.
Share repurchase:
Share repurchase is usually an indication that the company’s
management thinks the shares are undervalued. The company can
buy shares directly from the market or offer its shareholder the
option to tender their shares directly to the company at a fixed price.
Capital structure:
The capital structure is how a firm finances its overall
operations and growth by using different sources of funds. Debt
comes in the form of bond issues or long term notes payable, while
equity is classified as common stock, preferred stock or retained
earnings.
Leverage:
The use of various financial instruments or borrowed capital,
such as margin to increase the potential return of an investment. The

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amount of debt used to finance a firm’s assets. a firm with
significantly more debt than equity is considered to be highly
leveraged.
EPS:
Earnings per share (EPS) the portion of a company’s profit
allocated to each outstanding share of common stock. Earing’s per
share serves as an indicator of a company’s profitability.
Return of asset:
Return of assets (ROA) is a financial ratio that shows the
percentage of profit a company earns in relation to its overall
resources. It is commonly defined as net income divided by total
assets. Net income is derived from the income statement of the
company and is the profit after taxes.
Return on equity:
ROE the amount of net income returned as a percentage of
shareholders’ equity. Return on equity measures a corporation’s
profitability by revealing how much profit a company generates with
the money shareholders have invested.
Merger:
A merger is a combination of two companies to form a new
company while an acquisition is the purchase of one company by
another in which no new company is formed.
Acquisition:
Mergers and acquisitions (M&A) are both aspects of strategic
management, corporate finance and management dealing with the
buying selling dividend and combining if different companies and
similar entities that can help and in enterprise grow rapidly in its
sector or location of origin, or a new field or new location.

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Diversification:
Diversification is a risk management technique that mixes a
wide variety of investments within a portfolio in order to minimize
the impact that any one security will have on the overall
performance of the portfolio. Diversification lowers the risk of your
portfolio.
IPO:
An initial public offering (IPO) refers to the first time a
company publicly sells shares of its stock on the open market. It is
also known as going public.
RPO:
Recruitment process outsourcing (RPO) while MSP stands for
managed service provider. An MSP as the name suggest, provides
outsourced management services to organizations that prefer not to
handle certain day-to-day management functions, such as HR, IT
support or procurement in house.
Opportunity cost:
Opportunity cost is the cost of avoiding or forgoing and
alternative investment.

Inflation:
Inflation is a general increase in prices, normally expressed as
the annual rate of growth in the consumer price index (CPI) or retail
price index (RPI) measures of the inflation rate. One can also
measure inflation in producer or wholesale price terms.

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Exchange rate:
Exchange rate means rate between two currencies it the rate
at which one currency will be exchanged for another. It is also
regarded as the value of one country’s currency in terms of another
currency.
GDP:
The gross domestic product (GDP) is one the primary indicators
used to gauge the health of a country’s economy. It represents the
total dollar value of all goods and services produced over a specific
time period. It is also the size of the economy.
GNP:
GNP is a measure of a country’s economic performance or what
its citizens produced and whether they produced these items within
its borders.
Monetary policy:
Monetary policy is one of the ways that the U.S. government
attempts to control the economy. If the money supply grows too
fast, the rate of inflation will increase, if the growth of the money
supply is slowed too much, then economic growth may also slow.
Fiscal policy:
Fiscal policy is the use of government spending and taxation to
influence the economy. Governments typically use fiscal policy to
promote strong and sustainable growth and reduce poverty.
Bankruptcy:
Bankruptcy is a legal status of a person or other entity that
cannot repay the debts it owes to creditors. In most jurisdictions.
Bankruptcy is imposed by a court order, often initiated by the
debtor.

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Treasury bill (T-Bill):
A Treasury bill or T-Bill is a short term debt issued and backed
by the full faith and credit of the United States government. These
debt obligations are issued in maturities of four , 13 and 26weeks in
carious denominations as low as $1000.
TVM:
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.

Capital market:
Capital markets are financial markets for the buying and selling
of long term debt or equity backed securities. These markets channel
the wealth of savers to those who can put it to long term productive
case, such as companies or governments making long term
investments.

Money market:
The money market is a subsection of the fixed income market.
We generally think of the term fixed income as being synonymous to
bonds. In reality a bond is just one type of fixed income security.
Market capitalization:
Market capitalization is given by the formula. Where MC is the
market capitalization, N is the number of shares outstanding and P is
the price per share. For example, if some company has 4 million
shares outstanding and the price per share is $20 its market cap is
then $80 million.

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Demutualization:
Is the process by which a customer-owner mutual organization
(mutual) or co-operative changes legal form to a joint stock
company. It is sometimes called stocking or privatization.
SLR:
Statutory liquidity ratio is the minimum percentage of deposits
that a bank has to maintain in form of gold, cash or other approved
securities. It is the ratio of liquid assets (cash and approved
securities) to the demand and term liabilities/deposits. RBI is
empowered to increase this ratio up to 40%.
CRR:
Cash reserve ratio is a specific minimum fraction of the total
deposits of customers, which commercial banks have to hold as
reserves with the central bank.
Liquidity:
Liquidity is the term used to describe how easy it is to convert
assets to cash. The most liquid assets and what everything else is
compared to, is cash. This is because it can always be used easily and
immediately.
Credit:
Credit debt can be defined as money goods or services
provided to an individual in lieu payment. Common forms of
consumer credit include credit cards, store cards, motor finance,
personal loans (installment loans) consumer lines of credit, retail
loans (retail installment loans) and mortgages.
Face value:
The nominal value or dollar value of security stated by the
issuer. For stocks, it is the original cost of the stock shown on the
certificate. For bonds, it is the amount paid to the holder at maturity
(generally $1000)
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Book value:
Book value refers to the total amount a company would be
worth if it liquidated its assets and paid back all its liabilities. Book
value can also represent the value of particular assets on the
company’s balance sheet after taking accumulated depreciation into
account.

Market/fair value:
‘Market value’ the price an asset would fetch in the
marketplace. Market value is also commonly used to refer to the
market capitalization of publicly-traded company and is obtained by
multiplying the number of its outstanding shares by the current
share price.
Premium:
For affluent people who don’t want to liquidate other assets to
pay for life insurance, borrowing funds form a third party to cover
the cost of a policy and paying it back in installments – a practice
called premium financing –can seem a practical solution.
Discount:
The discount or charge is the difference (expressed as a
difference in the same units (absolute) or in percentage terms
(relative) or as a ratio) between the original amount owed in the
present and the amount that has to be paid in the future to settle
the debt.
Corporate governance:
The system of rules, practices and processes by which a
company is directed and controlled. Corporate governance
essentially involves balancing the interests of the many stakeholders
in a company – these include its shareholders, management,
customers, suppliers, financiers, government and the community.

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Risk:
Risk is the possibility of occurring financial loose in future.
Broadly risk is the difference between the expected rate of return
and actual rate of return from an investment.
Discount rate:
The discount rate also refers to the interest rate used in
discounted cash flow (DCF) analysis to determine the present value
of future cash flows.

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