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Capital structure: A mix of a company's long-term debt, specific short-term

debt, common equity and preferred equity. 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. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Internal Rate Of Return - IRR': The discount rate often used in capital
budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as "economic rate of return (ERR)". Equity shares : Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital.Equity shareholders are paid dividend out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend. What is Shareholder Wealth Maximization? When business managers try to maximize the wealth of their firm, they are actually trying to increase their stock price. As the stock price increases, the individual who holds the stock wealth increases. As the stock price goes up, the value of the firm increases and the net worth of the individual who owns the stock increases. Definition of 'Leveraged Buyout - LBO':The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. Working Capital': A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as: Working capital=Current assets- current liabilities Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).Also known as "net working capital", or the "working capital ratio".

bonus share : Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. While this stock action increases the number of shares owned, it does not increase the total value. This is due to the fact that since the total number of shares increases, the ratio of number of shares held to number of shares outstanding remains constant. 'Economic Value Added EVA:A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".) The formula for calculating EVA is as follows: = Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital) Shareholder Value Added - SVA': A value-based performance measure of a company's worth to shareholders. The basic calculation is net operating profit after tax (NOPAT) minus the cost of capital from the issuance of debt and equity, based on the company's weighted average cost of capital: SVA=NOPAT-Cost of Capital trading on the equity: Borrowing funds to increase capital investment with the hope that the business will be able to generate returns in excess of the interest charges. capital rationing: Limiting a company's new investments, either by setting a cap on parts of the capital budget or by using a higher cost of capital when weighing the merits of potential investments. This might happen when a company has not enjoyed good returns from investments in the recent past. Capital rationing also could take place if a company has excess production capacity on hand. operating cycle:The average length of time between when a company purchases items for inventory and when it receives payment for sale of the items. A long operating cycle tends to harm profitability by increasing borrowing requirements and interest expense. Independent Project:A project that is not part of or dependent on any other project. Thus, the funding of an independent project does not depend on another project receiving funding first. Cost Of Debt: The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; however, because interest expense is deductible, the after-tax cost is seen most often. This is one part of the company's capital structure, which also includes the cost of equity. Average Rate of Return: The rate of return on an investment that is calculated by taking the total cash inflow over the life of the investment and dividing it by the number of years in the life of the investment. The average rate of return does not

guarantee that the cash inflows are the same in a given year; it simply guarantees that the return averages out to the average rate of return. Debenture: A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture. profit maximization:A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices. cutoff rate: rate of return that is necessary to maintain market value (or stock price) of a firm, also called a hurdle rate, cutoff rate, or minimum required rate of return Mutually Exclusive Projects: Mutually Exclusive Projects are a set of projects from which at most one will be accepted. For example, a set of projects which are to accomplish the same task. Thus, when choosing between "Mutually Exclusive Projects" more than one project may satisfy the Capital Budgeting criterion. However, only one, i.e., the best project can be accepted. Capital Lease/ Financial lease:A lease considered to have the economic characteristics of asset ownership. A capital lease would be considered a purchased asset for accounting purposes. An operating lease, on the other hand, would be handled as a true lease, or rental, for accounting purposes. The choice of lease classification will have important results on a firm's financial statements. A lease falls into this category if any of the following requirements are met: 1. The life of the lease is 75% or greater of the assets useful life. 2. The lease contains a purchase agreement for less than market value. 3. The lessee gains ownership at the end of the lease period. 4. The present value of lease payments is greater than 90% of the asset's market value. explicit cost of capital: The explicit cost of capital is associated with the raising of funds.. other words, it is nothing but internal rate of return . In capital budgeting In decision, investor will see which investment provides high internal rate of return but which company gets the money at high internal rate of return; it means that company is accepting money at high explicit cost of capital.

Implicit cost of capital: Implicit cost of capital is opportunity cost, if money is used one of best alternatives for effective use of resources. For example: I have Rs. 100,000, I can deposit it in bank and earn Rs.3500 as bank interest but I did not invested it in saving bank account and invested in the shares of XYZ company. So, my implicit cost of investment in shares will equal to the bank interest. This is not in money form because, it is not necessary that XYZ company give me my cost investment in shares. But, after thinking, I take the opportunity for getting best reward from investment, so I have taken this decision. The Liquidity Versus Profitability Principle:There is a trade-off betweenliquidity and profitability; gaining more of one ordinarily means giving up some of the other. Liquidity:Having enough money in the form of cash, or near-cash assets, tomeet your financial obligations. Alternatively, the ease with which assets can beconverted into cash. Profitability:A measure of the amount by which a company's revenues exceedits relevant expenses.

Liquidity " as being on one end of a straight line and ". Profitability " on theother end of the line. If you are on the line and move toward one, youautomatically move away from the other. In other words, there is the trade-off between liquidity and profitability. dividend equalization reserve: Revenue reserve that serves as a buffer between a certain dividend level and profits available. Sums are transferred to this reserve account in good years, and withdrawn from in poor years to maintain the dividend amount. Market Value Added - MVA:A calculation that shows the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. MVA=Company's Market value- Invested Capital Takeover: General term referring to transfer of control of a firm from one group of shareholders to another group of shareholders. Change in the controlling interest of a corporation, either through a friendly acquisition or an unfriendly, hostile, bid. A hostile takeover (with the aim of replacing current existing management) is usually attempted through a public tender offer.

Retained Earnings':The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet. Retained Earnings(RE)=Beginning Retained(BE) + Net Income - Dividends Paid Clientele Effect: The theory that a company's stock price will move according to the demands and goals of investors in reaction to a tax, dividend or other policy change affecting the company. The clientele effect assumes that investors are attracted to different company policies, and that when a company's policy changes, investors will adjust their stock holdings accordingly. As a result of this adjustment, the stock price will move. Financing decisions: Decisions concerning the liabilities and stockholders' equity side of the firm's balance sheet, such as a decision to issue bonds. accounting rate of return (ARR):The accounting rate of return (ARR) method may be known as the return on capital employed (ROCE) or return on investment (ROI). The ARR is ratio of the accounting profit to the investment in the project, expressed as a percentage. The decision rule is that if the ARR is greater than, or equal to, a hurdle rate, then accept the project. Advantages accounting rate of return (ARR): familiarity, ease of understanding and communication; managers' performances are often judged using ARR and therefore wish to select projects on the same basis.

Limitation/Disadvantages of accounting rate of return (ARR): it can be calculated in a wide variety of ways;
ARR uses profit rather than cashflows; does not account for the time value of money (TVM);

arbitrary cut-off date; some perverse decisions can be made.

Financial risk: Financial risk an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss.

(Public deposit )Utility of public deposit as a source of fund: "Public deposit" means funds in which the entire beneficial interest is owned by a public depositor or funds held in the name of a public official of a public depositor charged with the duty to receive or administer funds and acting in such official's official capacity. Operating lease: Operating lease is an operating lease is for part time usage of the property. It is usually used to get equipment on a short-term basis. This type of lease is beneficial for businesses who want to keep their leases out of their financial statements. With an operating lease, only the right to use the property is transferred and not the actual ownership of the asset. The lessee is only required to record the operating expense of the property and it does not affect the balance sheet. letter of credit: A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer. The issuer then seeks reimbursement from the buyer or from the buyer's bank. The document serves essentially as a guarantee to the seller that it will be paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of credit's issuer. Difference between Bonus issue and Stock Split: A bonus is a free additional share that is given to you without changing any face value. A stock split is the same share split into two.so think like this you have 100 rs and then you are taken that 100 rs and given 2 Fifty Rupees , you might have 2 counts now but the worth is same as 100 rs , but in case of Bonus you are given a extra 100rs . >In a stock split, the number of shares increases but the face value drops. The face value never changes for a bonus shares. Capital Asset Pricing Model(CAPM): A model that attempts to describe the relationship between the risk and the expected return on an investment that is used to determine an investment's appropriate price. The assumption behind the CAPM is that money has two values: a time value and a risk value. Thus, any risky asset or investment must compensate the investor for both the time his/her money is tied up in the investment and the investment's relative riskiness. This compensation must be in addition to the risk-free rate of return. There are a number of variations on the CAPM, notably the multifactor CAPM and the two-factor model. The CAPM is calculated according to the following formula: ra = rf + Betaa(rm - rf) where:ra is the asset price, rf is the risk-free rate of return, Betaa is the risk premium, and rm is the market rate of return. Cost of preference share capital calculation: If the preference share are redeemable at the end of a specific period, then the cost of capital of preference share can be calculated by equation.

n P o = PDi / (1+kp)i + Pn / (1 + kp )n i =1 Where Po = Net Proceeds on issue of preference shares, PD = Annual preference dividend at fixed rate of dividend, Pn = Amount payable at the time of redemption, kp = Cost of preference share capital, and n = Redemption period of preference share. The dividend payout ratio : The dividend payout ratio measures the percentage of a company's net income that is given to shareholders in the form of dividends The dividend payout ratio is a relatively simple calculation:Total Annual Dividends Per Share / Diluted Earnings Per Share Advantages of lease financing 1. It offers fixed rate financing; you pay at the same rate monthly. 2. Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. 3. There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment. 4. Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it. 5. There is typically an option to buy equipment at end of lease term. Financial goal of a firm A. Profit Maximization, b. Shareholders Wealth Maximization PROFIT MAXIMIZATION: Simply a single-period or a short-term goal to be achieved within one year Management mainly focus on efficient utilization of capital resources to maximize profits WITHOUT considering the consequences of its actions towards the companys future performance. Maximization of Shareholders' Wealth: The goal is o maximize the shareholders' wealth for whom it is being operated. It being measured by the share price of the stock, which in turn is based on the timing of returns, the amount of the returns and the risk or uncertainty of the returns.

It also means maximizing the total market value of the existing shareholders' common stock. All financial decisions will affect the achievement of this goal. Shareholders' wealth maximization can be achieved by considering the present and potential future earnings per share, timing of returns, dividend policy and other factors that affect the market price of the company's stock. Drawbacks of Profit Maximization Profit maximization is a short-term concept. Profit maximization does not consider the timing of returns. Profit maximization ignores risk.

Main component of Cash-outlay Operating (functional activities)Investing (Outflows of expenditures and applicable returns on short-term and long-term investments)Financing activities (revolving door assets/liabilities)Implementation of any non-cash changes

'Time Value of Money - TVM': 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. Also referred to as "present discounted value". Financing Through Equity Shares and Debentures Comparison A company may prefer equity finance (i) if long gestation period is involved, (ii) if equity is preferred by the market forces, (iii) if financial risk perception is high, (iv) if debt capacity is lowand (v) dilution of control isn't a problem or does not rise. A company may prefer debenture financing compared to equity shares financing for the following reasons: i.Generally the debenture-holders cannot interfere in the management of the company,since they do not have voting rights. ii. Interest on debentures is allowed as a business expense and it is tax- deductible. iii. Debenture financing is cheaper since the rate of interest payable on it is lower than thedividend rate of preference shares. iv. Debentures can be redeemed in case the company does not need the funds raised throughthis source. This is done by placing call option in the debentures. v. Generally a company cannot buy its own shares but it can buy its own debentures. vi.Debentures offer variety and in dull market conditions only debentures help gainingaccess to capital market.

What is the difference between Finance Lease and Operating Lease? Major difference between a finance lease and operating lease lies in the ownership of the asset. Whereas risk and rewards are with the lessee in case of finance lease, they lie with the lessor in case of an operating lease. Another difference is the manner in which the lease gets reported in financial statements. In case of finance lease, asset is shown on the asset side of the balance sheet, whereas rentals are shown on the side of the liabilities of the balance sheet. On the other hand, an operating lease is shown as operating expense in profit and loss statement.

Why cost of equity capital is higher than that of debt capital. When you issue debt in the form of bonds, you pay interest out to your investors - this interest is tax deductible. When you issue equity, you pay out dividends. These dividends represent corporate income, and are subject to double taxation. You, the corporation, pay taxes once, and the equity holder pays taxes another time.Because debt circumvents taxation at the corporate level, the cost of debt is less than the cost of equity. This is called the DTS (Debt Tax Shield) commercial paper: Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually, 2 to 30 days, and not more than 270 days), and secured only by the reputation of the issuer. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash, and is offered generally at a discount instead of on interest bearing basis. Operating leverage : Operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and Extent to which a firm commits itself to high levels of fixed operating costs (which vary with time, such as insurance, rent, salaries but not interest) as compared with the levels of variable costs (which vary with volume, such as for energy, labor, material). Firms with high operating leverage have high breakeven points but (when the breakeven point is crossed) they show a greater increase in operating income with every increase in sales revenue (and greater losses with every drop in sales revenue) in comparison with firms with low operating leverage. Also called operation gearing, it is one of the major components of operating risk. See also financial leverage and investment leverage. Stock Dividend: A dividend that is paid in stock or bonds rather than cash. A stock dividend may be declared when the company is cash poor and cannot afford a dividend otherwise. They are generally not considered desirable because one must pay capital gains tax on stock dividends, even though there is no cash gain for the shareholder. It is also called a scrip dividend. See also: Payment-in-kind bond.

Difference between merger and acquisition(takeover) Though there is a thin line difference between the two but the impact of the kind of completely different in both the cases. Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity. When one company takes over the other and rules all its business operations, it is known as acquisitions. In this process of restructuring, one company overpowers the other company and the decision is mainly taken during downturns in economy or during declining profit margins. Among the two, the one that is financially stronger and bigger in all ways establishes it power. The combined operations then run under the name of the powerful entity who also takes over the existing stocks of the other company. Risk-Free Rate of Return :The theoretical rate of return for an investment that has zero risk. The risk-free rate represents the expected return from an absolutely riskfree investment over a specified period. Financial Management: The planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization. Risk-Return Tradeoff': The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. Capital Budgeting:The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. Also known as "investment appraisal". cost of capital : The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock. The weighted average cost of capital (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. The WACC is the minimum return that a

company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere.

Where: Re = cost of equity , Rd = cost of debt , E = market value of the firm's equity , D = market value of the firm's debt , V = E + D , E/V = percentage of financing that is equity , D/V = percentage of financing that is debt , Tc = corporate tax rate Types of Reserves: Revenue Reserve, Capital Reserve, General Reserve and Specific Reserve Factoring :Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection. In "maturity" factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Definition of 'Capitalization' In accounting, it is where costs to acquire an asset are included in the price of the asset. The sum of a corporation's stock, long-term debt and retained earnings. Also known as "invested capital". A company's outstanding shares multiplied by its share price, better known as "market capitalization".

Over Capitalization: When a company has issued more debt and equity than its assets are worth. An overcapitalized company might be paying more than it needs to in interest and dividends. Reducing debt, buying back shares and restructuring the company are possible solutions to this problem. Under Capitalization: When a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity. If a company can't generate capital over time, it increases its chance of going bankrupt as it loses the ability to service its debts. Undercapitalized companies also tend to choose high-cost sources of capital, such as short-term credit, over lower-cost forms such as equity or long-term debt.

payback period method: Method of evaluating investment opportunities and product development projects on the basis of the time taken to recoup the investment. This period is compared to the required payback period to determine the acceptability of the investment proposal. In contrast to return on investment and net present value methods, the cash inflows occurring after the payback period are not included in this method. Formula: Payback period (in years) = Initial capital investment Annual cash-flow from the investment. financial leverage: The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders' return on investment and often there are tax advantages associated with borrowing. also called leverage. current liabilities/ current debt: Obligations such as deferred dividend, trade credit, and unpaid taxes, arising in the normal course of a business and due for payment within a year. Also called current debt. Gross Working Capital: Cash and short-term assets expected to be converted to cash within a year. Businesses use the calculation of gross working capital to measure cash flow. Gross working capital does not account for current liabilities, but is simply the measure of total cash and cash equivalent on hand. Gross working capital tends not to add much to the business' assets, but helps keep it running on a day-to-day basis. retained earnings: retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. dividend policy: A company's stance on whether it will pay out profits as dividends or keep them as retained earnings. If the company decides to issue dividends, the policy will outline whether or not the dividends will be issued on an ongoing basis, or if the dividend payout will be infrequent.