Instructors: Dr. Kiran Mehta & Dr.

Renuka Sharma, Professor, Finance, CBS, CU, Punjab

Financial Management-Key Terms for Viva-Voce

Sr. Key-Term Meaning of Key Term
No.
1 ABC Technique of It is that type of Inventory control in which Inventory is categorized into three types, type A consists of Inventory
Inventory Control which is of outstanding importance, type B average importance, type C relatively unimportant as a basis for a
control scheme.
2 Acquisition Acquisition is the process is acquiring. In accounting sense it means acquiring of a company or business
organization or assets and liabilities of an organization. It is something where a business organization purchases the
business of other organization.

3 Ageing Schedule It is an accounting table that shows the relationship between a company's bills and invoices and its due dates aging
schedules can be produced for both accounts payable and accounts receivable to help a company see whether it is
current on its payments to others and whether its customers are paying it on time.
4 Agency Cost Agency costs are a type of internal cost that arises from, or must be paid to, an agent acting on behalf of a
principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and
management.
5 Amalgamation It refers to combination of two or more companies into a new entity. It is different from Merger because neither of
the combining companies survives as a legal entity. Rather, a completely new entity is formed to house the
combined assets and liabilities of both companies.
6 Annuity An annuity is a series of equal payments at regular intervals. Examples of annuities are regular deposits to
a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. The
payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other interval of time. An annuity
which provides for payments for the remainder of a person's lifetime is a life annuity.
7 Annuity Due and In annuity due, the equal payments are made at the beginning of each compounding period starting from the first
Annuity Deferred period and In Annuity deferred money is invested for a period of time until the person is ready to take
withdrawals.
8 Bank Rate Bank rate is the rate at which Central bank lends money to the Commercial banks. At present bank rate is 7.75%.

9 Bond Yield A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be
calculated, nominal yield is the most common. This is calculated by dividing amount of interest paid by the face
value.

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10 Bonds A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental)
which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by
companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and
activities. Owners of bonds are debt holders, or creditors, of the issuer.

11 Break Even Point The breakeven point is the production level where total revenues equals’ total expenses. In other words, the break-
even point is where a company produces the same amount of revenues as expenses either during a manufacturing
process or an accounting period. Since revenues equal expenses, the net income for the period will be zero. The
company didn’t lose any money during the period, but it also didn’t gain any money either. It simply broke even.

12 Capital Budgeting Capital budgeting, or investment appraisal, is the planning process used to determine whether an organization's long
term investments such as new machinery, replacement machinery, new plants, new products, and research
development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or
retained earnings). It is the process of allocating resources for major capital or investment, expenditures. One of the
primary goals of capital budgeting investments is to increase the value of the firm to the shareholders.

13 Capital Rationing Capital rationing is a strategy used by organizations attempting to limit the costs of their own investments.
Typically, a company engaging in capital rationing has made unsuccessful investments of capital in the recent past
and would like to raise the return on those investments prior to engaging in new business. The main goal of
capital rationing is to protect a company from over-investing its assets. If this were to occur, the company might
continue to see low return on investment and even face a compromised financial position. Further, this can cause a
company's stock to drop.
14 Capital Structure A capital structure is 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.
15 CAPM The capital asset pricing model (CAPM) is a model that describes the relationship between risk and expected return
and that is used in the pricing of risky securities. The general idea behind CAPM is that investors need to be
compensated in two ways: time value of money and risk. CAPM is most often used to determine what the fair price
of an investment should be.
16 Cash Budget Cash budget is an estimation of the cash inflows and outflows for a business or individual for a specific period of
time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or
whether too much cash is being left in unproductive capacities.
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17 Certificate of Deposit A certificate of deposit (CD) is a savings certificate entitling the bearer to receive interest. A CD bears a maturity
date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial
banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years. A certificate
of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on
demand. Although it is still possible to withdraw the money, this action will often incur a penalty.

18 Commercial Papers Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of
large institutional buyers. Banks, corporations and foreign governments commonly use this type of funding.
Commercial paper is usually issued by companies with very high credit ratings. Because of this, and because it
generally matures in a very short period of time, commercial paper tends to be a very low-risk investment. Most
commercial paper is assessed by more than one rating agency. The four primary agencies are: Moody's, Standard &
Poor's, Fitch, and Duff & Phelps.
19 Compounding and Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own
Discounting earnings. In other words, compounding refers to generating earnings from previous earnings. Discounting is the
process of determining the present value of a payment or a stream of payments that is to be received in the future.
Given the time value of money, a dollar is worth more today than it would be worth tomorrow given its capacity to
earn interest. Discounting is the method used to figure out how much these future payments are worth today.

20 Conservative, Matching Maturity matching or hedging approach is a strategy of working capital financing wherein short term
and Hedging requirements are met with short term debts and long term requirements with long term debts. The underlying
Approaches of Working principal is that each asset should be compensated with a debt instrument having almost the same maturity.
Capital .Conservative approach is a risk free strategy of working capital financing. A company adopting this strategy
maintains higher level of current assets and therefore higher working capital also. The major part of the working
capital is financed by the long term sources of funds such as equity, debentures, term loans etc. So, the risk
associated with short term financing is abolished to a great extent. In conservative approach, fixed assets, permanent
working capital and a part of temporary working capital is financed by long term financing sources and the
remaining part only is financed by short term financing sources.

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21 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. Many companies use a combination of debt and equity to finance their businesses, and for such
companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as
the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must
overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether
the company should proceed with a project.
22 Creditors A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow
money if it is paid back at a later date. Creditors can be classified as either "personal" or "real." Those people who
loan money to friends or family are personal creditors. Real creditors (i.e. a bank or finance company) have legal
contracts with the borrower granting the lender the right to claim any of the debtor's real assets (e.g. real estate or
car) if he or she fails to pay back the loan.
23 Debentures A debenture is 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. 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.
Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is
unlikely to default on the repayment. An example of a government debenture would be any government-issued
Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because
governments, at worst, can print off more money or raise taxes to pay these type of debts.

24 Debt-Equity Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a
company's total liabilities by its stockholders' equity. The D/E ratio indicates how much debt a company is using to
finance its assets relative to the amount of value represented in shareholders' equity.
FORMULA - Debt - Equity Ratio = Total Liabilities / Shareholders

25 Discounted Cash In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the
Flows(DCF) concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to
give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present
value (NPV), which is taken as the value or price of the cash flows in question.[1] In finance, discounted cash flow
(DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money.
All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The
sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the
value or price of the cash flows in question.

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26 Diversification In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular
asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets.
If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance than the weighted
average variance of its constituent assets, and often less volatility than the least volatile of its constituents

27 Dividend Payout Ratio The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors
seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However
investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High
growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the
earnings back to investors FORMULA = YEARLY DIVIDEND PER SHARE/EARNINGS PER SHARE

28 Earning Per Ratio The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as
an indicator of a company's profitability.
Calculated as:
When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting
term, because the number of shares outstanding can change over time. However, data sources sometimes simplify
the calculation by using the number of shares outstanding at the end of the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the
outstanding shares number.
29 EBIDTA EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization'
EBITDA is an indicator of a company's financial performance which is calculated in the following manner:
EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization).
EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be
used to analyze and compare profitability between companies and industries because it eliminates the effects of
financing and accounting decisions.
30 EBIT Earnings Before Interest & Tax - EBIT'
An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is
also referred to as "operating earnings", "operating profit" and "profit before interest and taxes (PBIT)."
EBIT = Revenue - Operating Expenses

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31 EBIT-EPS Analysis EBIT refers to a company's earnings before interest and taxes. These metric strips out the impact of interest and
taxes, showing an investor or manager how a company is performing excluding the impacts of the balance sheet's
composition. EPS stands for earnings per share, which is the profit the company generates including the impact of
interest and tax obligations. EPS is particularly helpful to investors because it measures profits on a per share basis.
EPS captures this dynamic in a simple, easy to understand way.
32 Effective Rate of The effective interest rate is the true rate of interest earned. It could also be referred to as the market interest rate,
Interest the yield to maturity, the discount rate, the internal rate of return, the annual percentage rate (APR), and the targeted
or required interest rate.
33 EOQ An economic order quantity (EOQ) is an inventory-related equation that determines the optimum order quantity that
a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done
to minimize variable inventory cost.
34 Equity Shares Equity shares are the main source of finance of a firm. It is issued to the general public. Equity shareholders do not
enjoy any preferential rights with regard to repayment of capital and dividend. They are entitled to residual income
of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively
are the owners of the company.
35 EVA-MVA Economic Value Added (EVA) is an estimate of a firm's economic profit, or the value created in excess of the
required return of the company's shareholders. EVA is the net profit less the opportunity cost of the firm's capital.
Market value added (MVA) is a calculation that shows the difference between the market value of a company and
the capital contributed by investors. In other words, it is the sum of all capital claims held against the company plus
the market value of debt and equity.
36 Explicit & Implicit Cost An explicit cost is a business expense that is easily identified and accounted for. Explicit costs represent clear,
of Capital obvious cash outflows from a business that reduces its bottom-line profitability. This contrasts with less-tangible
expenses such as goodwill amortization, which are not as clear cut regarding their effects on a business's bottom-line
value. An implicit cost is a cost that is represented by lost opportunity in the use of a company's own resources,
excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain
project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital
project.
37 FIFO First in, first out (FIFO) is an asset-management and valuation method in which the assets produced or acquired
first are sold, used or disposed of first. FIFO may be used by a individual or a corporation. FIFO assumes that the
assets that are remaining in inventory are matched to the assets that are most recently purchased or produced.

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38 Finance Finance is a simple task of providing the necessary funds (money) required by the business of entities like
companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives

39 Financial Leverage Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading
on equity. Example - Sue uses $400,000 of her cash and borrows $800,000 to purchase 120 acres of land having a
total cost of $1,200,000. Sue is using financial leverage. Sue is controlling $1,200,000 of land with only $400,000 of
her own money.
40 Financial Management Financial management refers to the efficient and effective management of money (funds) in such a manner as to
accomplish the objectives of the organization. It is the specialized function directly associated with the
top management. Objectives of Financial Management
• To ensure regular and adequate supply of funds to the concern.
• To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible
way at least cost.
• To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be
achieved.
41 Financial Structure 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.
42 Financing and The primary goal of both investment and financing decisions is to maximize shareholder value. Investment
Investment Decisions decisions revolve around how to best allocate capital to maximize their value. Financing decisions revolve around
how to pay for investments and expenses. Companies can use existing capital, borrow, or sell equity. There are two
ways to finance an investment: using a company's own money or by raising money from external funders.

43 Free Cash Flows Free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital
(FCFs) expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money
required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue
opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions,
pay dividends and reduce debt. FCF is calculated as: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in
Net Working Capital - Capital Expenditure. It can also be calculated by taking operating cash flow and subtracting
capital expenditures.
44 Gilt-Edged Securities Gilt-edged securities are high-grade bonds that are issued by a government or firm. This type of security originally
boasted gilded edges, thus the name. In the case of a firm, a gilt-edged security is a stock or bond issued by a
company that has a strong record of consistent earnings and can be relied on to cover dividends and interest.

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45 Hedge Fund Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to
earn active return, or alpha, for their investors. Hedge funds may be aggressively managed or make use
of derivatives and leverage in both domestic and international markets with the goal of generating
high returns (either in an absolute sense or over a specified market benchmark). Because hedge funds may have
low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a
good diversifier.
46 Holding Period Return In finance, holding period return (HPR) is the total return on an asset or portfolio over a period during which it
was held. It is one of the simplest and most important measures of investment performance.HPR is the change in
value of an investment, asset or portfolio over a particular period. It is the entire gain or loss, which is the sum
income and capital gains, divided by the value at the beginning of the period.
47 Intrinsic Value In finance, intrinsic value refers to the value of a company, stock, currency or product determined through
fundamental analysis without reference to its market value.[1] It is also frequently called fundamental value. It is
ordinarily calculated by summing the discounted future income generated by the asset to obtain the present value. It
is worthy to note that this term may have different meanings for different assets.
48 IRR Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and
negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a
project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is
desirable. If IRR falls below the required rate of return, the project should be rejected. IRR allows managers to rank
projects by their overall rates of return.
49 Junk Bonds Junk bonds are an IOU from a corporation or organization that states the amount it will pay you back (principal), the
date it will pay you back (maturity date) and the interest (coupon) it will pay you on the borrowed money. These are
the bonds that pay high yield to bondholders because the borrowers don't have any other option. Their credit ratings
are less than pristine, making it difficult for them to acquire capital at an inexpensive cost. Junk bonds are typically
rated 'BB' or lower by Standard & Poor's and 'Ba' or lower by Moody's.

50 Just in Time Technique Just in time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving
of Inventory Control goods only as they are needed in the production process, thereby reducing inventory costs. This method requires that
producers are able to accurately forecast demand. For example a car manufacturer that operates with very low
inventory levels, relying on their supply chain to deliver the parts they need to build cars. The parts needed to
manufacture the cars do not arrive before nor after they are needed, rather do they arrive just as they are needed.

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51 Leverage It is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of
an investment. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is
considered to be highly leveraged. Leverage is most commonly used in real estate transactions through the use of
mortgages to purchase a home.
52 Leverage Ratio it is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or
assesses the ability of a company to meet financial obligations.
53 LIFO Last in, first out (LIFO) is an asset-management and valuation method that assumes that assets produced or acquired
last are the ones that are used, sold or disposed of first
54 Liquidity Decisions it is concerned with the management of current assets. Basically, this is Working Capital Management. Working
Capital Management is concerned with the management of current assets. It is concerned with short-term survival.

55 Liquidity Ratios Liquidity ratios analyze the ability of a company to pay off both its current liabilities as they become due as well as
their long-term liabilities as they become current. In other words, these ratios show the cash levels of a company and
the ability to turn other assets into cash to pay off liabilities and other current obligations.

Liquidity is not only a measure of how much cash a business has. It is also a measure of how easy it will be for the
company to raise enough cash or convert assets into cash. Assets like accounts receivable, trading securities, and
inventory are relatively easy for many companies to convert into cash in the short term. Thus, all of these assets go
into the liquidity calculation of a company.
56 Market Capitalization Market capitalization is the aggregate valuation of the company based on its current share price and the total
number of outstanding stocks. It is calculated by multiplying the current market price of the company's share with
the total outstanding shares of the company.
57 Meaning of Irrelevant Theories in which, valuation of a firm is irrelevant to the capital structure of a company. Whether a firm is highly
Theories of Capital leveraged or has lower debt component in the financing mix, it has no bearing on the value of a firm.

58 Meaning of Irrelevant Theories in which, dividends are not relevant to investors. Irrespective of whether a company pays a dividend or
Theories of Dividend not, the investors are capable enough to make their own cash flows from the stocks depending on their need for the
cash.
59 Meaning of Relevant Theories in which, change in financial leverage would lead to change in cost of capital. In short, if the ratio of debt
Theories of Capital in the capital structure increases, the weighted average cost of capital decreases and hence the value of the firm.
Structure

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60 Meaning of Relevant Dividend relevance theory proposes that dividend policy affect the share price. Therefore, according to these
Theories of Divident theories, optimal dividend policy should be determined which will ensure maximization of the wealth of the
shareholders.
61 Merger Merger is a term used when two companies become one. shareholders have to surrender their shares and they can
get share of new companies in exchange
62 Mortgage Mortgage is term used when we pledge something against a loan as a security

63 Mutual Fund Mutual fund is a professionally managed investment where different people pool money to invest in different type
of securities
64 Name the relevant and 1. Net income approach 2. Net operating approach 3. Modigliani–Miller approach. it was given by Franco
irrelevant theories of Modigliani, Merton Miller 4. Traditional approach
capital structure. Who
gave these theories?
65 Name the relevant and Relevance theory can be categorised as walter model (JAMES E. WALTER) and gordan model(MYRON
irrelevant theories of GORDON) irelevant theories( is M-M hypotesis(FRANCO MODIGLANI and MERTON MILLER)
Dividend. Who
gave these theories?
66 Nominal Rate of Nominal rate of interest is the rate which does not take into consideration the inflation.
Interest
67 NPV Net Present Value (NPV) is the difference between the present values of cash analyzes the profitability of a
projected investment or project. A positive net present value indicates that the projected earnings generated by a
project or investment exceeds the anticipated costs.
68 Operating Leverage Operating leverage is the degree to which fixed costs exist in a company's cost structure. Generally speaking,
operating leverage is fixed costs divided by total costs. Operating leverage is important to the investment
community because it is an indicator of the quality of earnings of a firm.
69 Optimum Capital The best debt-to-equity ratio for a firm that maximizes its value. The optimal capital structure for a company is one
Structure which offers a balance between the ideal debt-to-equity range and minimizes the firm's cost of capital. In theory,
debt financing generally offers the lowest cost of capital due to its tax deductibility. However, it is rarely the optimal
structure since a company's risk generally increases as debt increases.

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70 Payback Period Payback period in capital budgeting refers to the period of time required to recoup the funds expended in an
investment, or to reach the break-even point. For example, a $1000 investment which returned $500 per year would
have a two-year payback period. The time value of money is not taken into account.
Calculated as:
Payback Period = Cost of Project / Annual Cash Inflows
71 Permanent and Permanent working is the minimum investment kept in the form of inventory of raw materials, work in process,
Temporary Working finished goods, stores & spare, and book debts to facilitate uninterrupted operation of a firm.
Capital Temporary working capital is the additional current assets required for temporary period, and it is above permanent
WC. A firm is required to maintain an additional current asset temporarily over and above the permanent working
capital to satisfy cyclical demands.
72 Portfolio Portfolio refers to any collection of financial assets such as cash. Portfolios may be held by individual investors
and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally
accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment
objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio and is referred to as
the asset allocation of the portfolio. When determining a proper asset allocation one aims at maximizing the
expected return and minimizing the risk. This is an example of a multi-objective optimization problem: more
"efficient solutions" are available and the preferred solution must be selected by considering a tradeoff between risk
and return.C75
73 Preference Shares Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the
event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first.
Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders,
preference share shareholders usually do not have voting rights.
74 Profitability Index An index that attempts to identify the relationship between the costs and benefits of a proposed project through the
use of a ratio calculated as:
75 Right Issue It is said to be done when a company issues a right to its existing shareholders to buy additional shares in the
company. Under this, the company offers the shareholders to buy a certain number of shares at a stated
price. Generally the shares are given at a discounted price so as to encourage the shareholders to take up the
offer. However, it is up to the shareholder to take the rights issue made by the company.
76 Risk A probability or threat of damage, liability, loss, or any other negative occurrence that is caused by external or
internal vulnerabilities, and that may be avoided through pre-emptive action.
77 Risk-free securitiesAn investment where the return is known with certainty. The certainty generally comes from a supreme amount of
confidence in the issuer of the investment;

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78 ROI Return on investment (ROI) is the benefit to an investor resulting from an investment of some resource. A high ROI
means the investment gains compare favorably to investment cost. As a performance measure, ROI is used to
evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. It is one
way of considering profits in relation to capital invested.
Return on investment = Net income / Investment, Where
Net income = gross profit − expenses.
investment = stock + claims. Or
Return on investment = (gain from investment – cost of investment) / cost of investment or
Return on investment = (revenue − cost of goods sold) / cost of goods sold
79 Rule of 69 A general rule estimating how long it will take for an investment to double, assuming continuously compounding
interest. One calculates this by dividing 69 by the rate of return. The rule of 69 is not exact, but it provides a quick
look at the effects of compounding on an investment
80 Rule of 72 The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual
rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it
will take for the initial investment to duplicate itself.
81 Shareholder’s WealthShareholder wealth is defined as the present value of the expected future returns to the owners (that is, shareholders) of
the firm. These returns can take the form of periodic dividend payments and/or proceeds from the sale of the stock.
Shareholder wealth is measured by the market value (that is, the price that the stock trades in the marketplace) of the
firm's common stock.
82 Stakeholders of A corporate stakeholder is a person or group who can affect or be affected by the actions of a business.
Business Internal stakeholders are groups within a business or people who work directly within the business, such as
employees, owners, and investors.
83 Stock Split An issue of new shares in a company to existing shareholders in proportion to their current holdings.

84 Systematic Risk Systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which
affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate
income.
85 Takeover An act of assuming control of something, especially the buying out of one company by another.

86 Term Loan A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last
between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed
interest rate that will add additional balance to be repaid.

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 Instructors: Dr. Kiran Mehta & Dr. Renuka Sharma, Professor, Finance, CBS, CU, Punjab

87 Theories of Capital capital structure theory refers to a systematic approach to financing business activities through a combination of
Structure equities and liabilities. Competing capital structure theories explore the relationship between debt financing, equity
financing and the market value of the firm.
88 Time Value of Money The time value of money (TVM) is 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. Money that you hold today is worth more because you can
invest it and earn interest.
89 Treasury Bills Treasury bill is a monetary policy instrument through which government raise funds for short period requirements
and commercial banks invest their short period surpluses by buying these bills from government. The interest
received on them is the discount, which is the difference between the price at which they are issued and their
redemption value.
90 Unsystematic Risk Unsystematic Risk is specific to particular company or an industry Unsystematic risk is that portion of total risk that
arise due to the factors which effects the internal working of the firm. Factors like, management capability,
consumer preferences, labor strikes and stages in product life cycle can affect the firm’s variability in return. Two
main sources of systematic risks are, business risk financial risk. Unsystematic risk can be eliminated through
diversification and proper asset allocation. An investor gets no reward for taking un-needed unsystematic risk as this
risk can be easily eliminated by diversification.
91 VED Technique of It attempts to classify the items used into three broad categories, namely Vital, Essential, and Desirable. The
Inventory Control analysis classifies items on the basis of their criticality for the industry or company.
Vital: Vital category items are those items without which the production activities or any other activity of the
company, would come to a halt, or at least be drastically affected.
Essential: Essential items are those items whose stock – out cost is very high for the company.
Desirable: Desirable items are those items whose stock-out or shortage causes only a minor disruption for a short
duration in the production schedule. The cost incurred is very nominal.
92 What do you mean by Creditor management to understand what your credit terms are, how much you have outstanding and how you
Creditors' intend to pay those liabilities for the smooth operation of your business. It includes setting out a payment policy
Management? before hand, identifying key creditors and building a relationship.

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 Instructors: Dr. Kiran Mehta & Dr. Renuka Sharma, Professor, Finance, CBS, CU, Punjab

93 What do you mean by Receivables are amounts owed to the company by the customers to who company sell goods or services in the
Receivable normal course of business. The main purpose of managing receivables is to meet competition and to increase sales
Management? and profits. The objectives of receivables management which will help us to understand the purpose of receivables:
1. To optimize the amount of sales
2. To minimize cost of credit
3. To optimize investment in receivables.
4. To increase credit sales.

94 What is Boumol's Baumol model of cash management helps in determining a firm’s optimum cash balance under certainty. It is
Model of Cash extensively used and highly useful for the purpose of cash management. As per the model, cash and inventory
Management management problems are one and the same. The Baumol model of cash management theory relies on the trade off
between the liquidity provided by holding money (the ability to carry out transactions) and the interest foregone by
holding one’s assets in the form of non-interest bearing money.
Equational Representations in Baumol Model of Cash Management:
Holding Cost = k(C/2)
Transaction Cost = c(T/C)
Total Cost = k(C/2) + c(T/C)
95 What is measured by Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a
Beta? whole. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market
as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an
asset based on its beta and expected market returns. Beta is calculated using regression analysis.
96 What is measured by Standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility.
Standard Deviation? Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of
expected volatility. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the
square root of variance. A standard deviation close to 0 indicates that the data points tend to be very close to the
mean (also called the expected value) of the set, while a high standard deviation indicates that the data points are
spread out over a wider range of values.
97 What is Miller-Orr It is an important cash management model as well. It helps the present day companies to manage their cash while
Model of Cash taking into consideration the fluctuations in daily cash flow. As per the Miller and Orr model of cash management
Management the companies let their cash balance move within two limits – the upper limit and the lower limit. The companies
buy or sell the marketable securities only if the cash balance is equal to any one of these.

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 Instructors: Dr. Kiran Mehta & Dr. Renuka Sharma, Professor, Finance, CBS, CU, Punjab

98 What is Sensitivity A sensitivity analysis is a technique used to determine how different values of an independent variable will impact a
Analysis? particular dependent variable under a given set of assumptions. This technique is used within specific boundaries
that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's
price.
99 Working Capital Working Capital is a measure of both a company's efficiency and its short-term financial health. Working capital is
calculated as: Working Capital = Current Assets - Current Liabilities. If a company's current assets do not exceed its
current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is
bankruptcy
100 Zero Coupon Bond A zero-coupon bond (also discount bond or deep discount bond) is a bond bought at a price lower than its face
value, with the face value repaid at the time of maturity. it assumes a positive time value of money. It does not make
periodic interest payments, or have so-called "coupons", hence the term zero-coupon bond. When the bond reaches
maturity, its investor receives its par value.

All the Best

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