Module I: Time Value of Money & Sources of Simple Interest=Principal×Rate×Time

Financing Define compound interest.

What is the time value of money? Compound interest is calculated on the initial principal, which
also includes all accumulated interest from previous periods. It
The time value of money is the concept that money available
can significantly increase investment growth. The formula is
now is worth more than the same amount in the future due to
more complex than simple interest.
its potential earning capacity. This principle forms the basis of
finance. It emphasizes the importance of cash flows and interest What is capital recovery?
rates.
Capital recovery is the process of recouping the initial investment
What is the future value of a single cash flow? made in a project or asset. It’s essential for understanding
profitability. Businesses often use depreciation for capital
The future value of a single cash flow calculates the value of
recovery.
money at a future date, given a specified interest rate. It helps in
determining the worth of an investment over time. The formula Explain loan amortization.
uses compounding interest.
Loan amortization is the process of paying off a loan with regular
Define present value of a single cash flow. payments over time. Each payment consists of interest and
principal. It results in a gradual reduction of the loan balance.
Present value refers to the current worth of a future sum of
money given a specific rate of return. It helps assess the value of What are shares?
future cash flows today. Discounting is used to calculate the
Shares represent ownership in a company and provide
present value.
shareholders with voting rights. Shareholders may receive
What is annuity? dividends based on the company’s performance. Shares are
traded in stock markets.
An annuity is a series of equal payments made at regular
intervals over a period of time. Examples include loan What are debentures?
repayments and retirement payments. Annuities can be ordinary
Debentures are long-term debt instruments used by companies
or due.
to borrow money. They are unsecured, relying on the
Explain perpetuity. creditworthiness of the issuer. Debentures pay fixed interest to
investors.
A perpetuity is a type of annuity that provides an infinite series
of periodic payments. Since it lasts forever, its present value is Define term loans.
calculated using a specific formula. It’s commonly used in
Term loans are loans with a fixed repayment schedule and
financial theory.
interest rate, generally used for capital investment. They are
What is simple interest? often used by businesses for expansion. The loan is repaid in
regular installments
Simple interest is calculated only on the principal amount, or the
initial sum of money. It does not consider any interest earned
over time. The formula is
. Convertibles are bonds or preferred stock that can be converted
into common stock at the holder’s discretion. They offer
What is lease financing?
flexibility and potential for appreciation. Convertibles balance
Lease financing allows companies to use assets without debt and equity characteristics.
purchasing them outright. They pay a series of payments over
time to lease the asset. Leasing can be operational or financial. Module II: Capital Structure
Explain hybrid financing. What is the cost of capital?

Hybrid financing combines features of both debt and equity, like The cost of capital is the return required by investors to
convertible bonds or preferred shares. It provides flexibility in compensate for the risk of an investment. It’s a crucial metric for
capital structure. Hybrid financing offers different benefits to companies when deciding on funding options. It includes debt
investors. and equity costs.

What is venture capital? Define debenture capital.

Venture capital is funding provided by investors to startups with Debenture capital is long-term financing obtained through the
high growth potential. Investors expect high returns in exchange issuance of debentures. It requires regular interest payments.
for taking on risk. It often involves mentoring and strategic Debentures do not grant ownership in the company.
advice. What is preferential capital?
Define angel investing. Preferential capital represents funds raised through the issuance
Angel investing involves individuals providing capital to startups of preferred stock. Preferred shareholders receive fixed
in exchange for ownership equity. Angels are often high-net- dividends before common shareholders. They have priority
worth individuals. They help in the early stages of business during liquidation.
growth. Explain the cost of term loans.
What is private equity? The cost of term loans is the interest expense associated with
Private equity involves investments in private companies, often loans that have fixed payment schedules. It’s an essential part of
to restructure or grow the company. It is typically provided by the company’s overall cost of capital. Interest rates depend on
specialized funds. Investors seek to add value and eventually exit credit risk.
for profit. What is the cost of equity capital?
Explain warrants. The cost of equity is the return required by equity investors,
Warrants are derivatives that give the holder the right to buy calculated based on dividend payouts and capital gains. It
company stock at a specific price before expiration. They are represents the opportunity cost for shareholders. Companies can
often issued with bonds or preferred stock. Warrants can be use the CAPM model to calculate it.
traded separately. Explain the Dividend Discount Model.
What are convertibles? The Dividend Discount Model (DDM) values a company’s stock
by discounting predicted dividends. It’s based on the premise
that dividends reflect a stock's intrinsic value. The model CAPM offers a structured approach to evaluating investment
assumes stable or growing dividends. risks and expected returns. It helps companies decide on
acceptable equity financing costs. CAPM is a common tool for
What is the CAPM model?
portfolio management.
The Capital Asset Pricing Model (CAPM) calculates expected
What is the role of dividend policy in cost of equity?
returns on equity using risk-free rates, market returns, and beta.
It’s widely used to estimate the cost of equity. CAPM assumes a Dividend policy affects investors' required returns, influencing
linear relationship between risk and return. the cost of equity. Stable or growing dividends attract investors.
High dividends may indicate lower reinvestment in growth.
Define retained earnings.
How do retained earnings contribute to internal financing?
Retained earnings are profits that a company reinvests rather
than distributing as dividends. They provide internal financing for Retained earnings are an internal source of financing, reducing
growth. Retained earnings contribute to shareholders’ equity. dependency on external debt or equity. They enable
reinvestment in growth projects. Accumulated earnings reflect
What is the significance of retained earnings in capital
company profitability.
structure?
What is the risk associated with using debentures?
Retained earnings reduce reliance on external funding, lowering
cost of capital. They indicate company profitability and growth Debentures increase financial risk by creating fixed debt
capacity. Reinvestment can enhance shareholder value. obligations. They require consistent interest payments. Failure to
meet these can lead to bankruptcy.
How does debenture capital affect company debt?
What is dividend discounting?
Debenture capital increases a company’s debt obligations and
requires regular interest payments. It can leverage returns if Dividend discounting estimates a stock’s value based on
managed well. However, excessive debt can increase financial expected future dividends. It’s used in valuing income-
risk. generating stocks. This model assumes dividends reflect the
company’s financial health.
What are the advantages of using preferential capital?
What are the limitations of CAPM?
Preferential capital provides fixed dividends, making it less risky
than equity. It doesn't dilute ownership as it lacks voting rights. CAPM assumes a linear risk-return relationship, which may not
Preferred stockholders are prioritized during liquidation. hold in volatile markets. It relies on historical data for beta, which
may not predict future risk accurately. Market return
Why is the cost of equity important?
assumptions may also vary.
The cost of equity represents the return required to attract
How do angel investors impact startups?
investors. It helps assess the feasibility of equity financing.
Companies balance this cost with debt to optimize capital Angel investors provide early-stage funding for startups, filling
structure. gaps before venture capital involvement. They bring expertise
and networks. This support helps startups develop before larger
How does CAPM model benefit financial planning?
funding rounds.
 What is the Modigliani-Miller approach?

The Modigliani-Miller theorem posits that, under certain

conditions, a firm’s value is unaffected by its capital structure. It
What is the significance of lease financing?
assumes no taxes, bankruptcy costs, or asymmetric information.
Lease financing allows businesses to use assets without large This approach laid the foundation for modern capital structure
initial investments. It’s beneficial for companies needing flexible theory.
financing options. Leasing can improve cash flow management.
What is the traditional approach to capital structure?
Explain the term ‘convertibles’ in capital structure.
The traditional approach suggests that a firm’s value can be
Convertibles allow debt or preferred shares to be converted into maximized by an optimal mix of debt and equity. It posits that
equity, providing flexibility. This feature reduces interest expense moderate levels of debt can enhance value but excessive debt
while offering potential for equity appreciation. increases risk. It combines elements of both the NI and NOI
approaches.
What is Weighted Average Cost of Capital (WACC)?
What is EBIT-EPS analysis?
WACC is the average rate of return a company is expected to pay
to finance its assets. It is weighted based on the proportion of EBIT-EPS analysis evaluates the impact of different financing
equity and debt. WACC is used as a hurdle rate in investment options on earnings per share (EPS). It helps determine the best
decisions. capital structure by maximizing EPS at different EBIT levels. This
analysis aids in financing decision-making.
What is marginal cost of capital?
Define ROI and ROE analysis.
The marginal cost of capital refers to the cost of obtaining an
additional dollar of new capital. It increases as more capital is Return on Investment (ROI) measures the profitability of
raised due to higher risk. Companies use it to evaluate the investments, while Return on Equity (ROE) measures profitability
feasibility of projects. relative to shareholders' equity. Both are essential in assessing a
company’s performance. ROI and ROE are common metrics for
What is the NI approach in capital structure? evaluating efficiency.
The Net Income (NI) approach suggests that a firm can reduce its
overall cost of capital by increasing debt in its capital structure.
Module III: Investment Decisions
This approach assumes a relationship between capital structure What is capital budgeting?
and firm value. It implies that debt is cheaper than equity.
Capital budgeting is the process of evaluating and selecting long-
Define the NOI approach in capital structure. term investments that are aligned with a company’s objectives.
It involves assessing potential returns and risks. Key techniques
The Net Operating Income (NOI) approach states that the capital
structure does not affect the firm’s value. According to this include NPV and IRR.
approach, the cost of capital remains constant irrespective of What are investment evaluation techniques?
debt levels. It suggests that changes in capital structure do not
influence value. Investment evaluation techniques include methods such as NPV,
IRR, payback period, and profitability index. These techniques
help determine the viability of a project. They focus on expected Define Accounting Rate of Return (ARR).
cash flows and returns.
ARR is the ratio of average annual profit to the initial investment,
expressed as a percentage. It evaluates profitability based on
accounting data. ARR is easy to calculate but does not consider
Define Net Present Value (NPV).
cash flows.
NPV is the difference between the present value of cash inflows
What is sensitivity analysis in capital budgeting?
and outflows over a project’s life. A positive NPV indicates a
profitable investment. NPV is a widely used tool for evaluating Sensitivity analysis assesses how changes in key variables affect
long-term projects. project outcomes. It helps identify factors that have the greatest
impact on profitability. This analysis is useful for risk
What is the profitability index?
management.
The profitability index (PI) is the ratio of the present value of
What is scenario analysis in capital budgeting?
future cash flows to the initial investment. A PI greater than 1
suggests the project is profitable. It helps prioritize projects Scenario analysis evaluates project outcomes under different
when resources are limited. scenarios, such as best, worst, and most likely cases. It provides
insights into project resilience. This method helps anticipate
Explain Internal Rate of Return (IRR).
risks.
IRR is the discount rate at which the NPV of a project is zero,
Explain Monte Carlo simulation in capital budgeting.
meaning cash inflows equal outflows. Projects with an IRR higher
than the cost of capital are typically accepted. IRR helps assess Monte Carlo simulation uses random sampling to estimate the
the project’s potential profitability. probability of different outcomes. It’s useful for complex projects
with uncertain variables. This technique provides a range of
What is Modified Internal Rate of Return (MIRR)?
possible outcomes.
MIRR is an adjusted version of IRR that assumes reinvestment at
What is working capital?
the firm’s cost of capital. It provides a more accurate reflection
of project profitability. MIRR helps overcome limitations of Working capital is the difference between a company’s current
traditional IRR. assets and current liabilities. It’s essential for daily operations
and liquidity. Managing working capital efficiently ensures
What is the payback period?
smooth business operations.
The payback period is the time needed to recover the initial
Why is working capital important?
investment of a project. A shorter payback period is generally
preferred as it reduces risk. It’s a simple measure of liquidity. Working capital ensures a company has enough resources to
meet short-term obligations. Proper management improves
Explain discounted payback period.
financial stability. It supports inventory management,
The discounted payback period accounts for the time value of receivables, and payables.
money, discounting future cash flows. It provides a more
What are the factors affecting working capital?
accurate picture of investment recovery. It’s useful for assessing
riskier projects.
Factors include the nature of business, operating cycle, Gordon’s model assumes a direct relationship between
production process, and credit policy. Seasonality and economic dividends and stock price. It suggests that higher dividends lead
conditions also impact working capital. Efficient management to higher stock valuations. This model is based on a company’s
depends on these variables. dividend growth rate.

Module IV: Dividend Decisions

What is a dividend policy? Describe the Modigliani and Miller approach to dividends.

A dividend policy outlines how a company decides to distribute The Modigliani and Miller approach states that dividends are
profits to shareholders. It balances paying dividends with irrelevant in perfect markets. According to this theory, dividend
retaining earnings for growth. Dividend policies can vary based policy has no impact on firm value. They argue that investment
on company goals. decisions drive value, not dividends.

What are the types of dividend policies? What is a stable dividend policy?

Types include stable, constant, and residual dividend policies. A stable dividend policy maintains consistent payments,
Stable policies maintain regular payments, while residual regardless of profit fluctuations. It aims to build shareholder
depends on available profits. Each type reflects a company’s confidence. Companies with predictable cash flows often adopt
financial strategy. this approach.

What factors influence dividend decisions? What is a constant dividend payout ratio?

Factors include profitability, liquidity, growth opportunities, and This policy maintains a fixed percentage of earnings as dividends.
shareholder preferences. Legal restrictions and tax It causes dividends to vary with profits. It aligns dividend
considerations also play a role. Companies weigh these factors to payments with company performance.
decide on dividend payments. What is a residual dividend policy?
What is the relevance of dividend decisions? A residual policy pays dividends after funding all profitable
Dividend decisions impact shareholder satisfaction and company investments. It prioritizes growth over payouts. Dividends may
reputation. Consistent dividends indicate financial stability. They be irregular based on investment opportunities.
affect stock prices and investor perceptions. Why do companies retain earnings?
Explain Walter’s model of dividend policy. Retained earnings provide internal financing for growth and
Walter’s model suggests that dividends and investments are expansion. They reduce the need for external borrowing.
interdependent, and the choice affects firm value. It proposes an Retained earnings reflect company profitability and
optimal dividend policy based on the relationship between IRR reinvestment.
and cost of capital. This model emphasizes the retention of What is the effect of high dividends on stock prices?
profits for growth.
High dividends can increase stock prices as they attract income-
What is Gordon’s model? seeking investors. It signals financial strength. However,
excessive dividends may reduce funds for growth.
How does dividend policy affect shareholder wealth? Share buybacks reduce the number of outstanding shares,
boosting earnings per share. They return value to shareholders.
Dividend policy can impact stock prices and investor satisfaction.
Buybacks also signal confidence in company performance.
Consistent policies build trust. Investors often view dividends as
a sign of company stability. What is a special dividend?

A special dividend is a one-time payment to shareholders, often

after a windfall. It’s separate from regular dividends. Special
What is a dividend reinvestment plan (DRIP)?
dividends can boost stock prices temporarily.
DRIPs allow shareholders to reinvest dividends to purchase more
How do retained earnings impact growth?
shares. It encourages long-term investment. This plan often has
no transaction fees. Retained earnings provide internal funds for expansion. They
reduce dependency on external financing. Consistent retention
How do taxes influence dividend policy?
supports sustainable growth.
High tax rates on dividends may discourage companies from
What are interim dividends?
paying them. Investors may prefer capital gains if taxes are lower.
Tax considerations shape dividend decisions. Interim dividends are declared and paid before the final profit
figures for the year are available. They show confidence in
What is the signaling effect of dividends?
anticipated profits. Interim dividends offer early returns to
Dividends signal management’s confidence in future earnings. shareholders.
Changes in dividends may imply financial health. Investors
What is the impact of dividend stability?
interpret increases as positive signals.
Stable dividends build investor confidence and reduce
What is the clientele effect?
uncertainty. They appeal to conservative investors. Stability in
The clientele effect suggests that companies attract investors dividends may enhance stock value.
with specific dividend preferences. Income-seeking investors
What is dividend yield?
prefer high dividends. Companies adjust policies to meet
investor preferences. Dividend yield is the ratio of annual dividends per share to the
stock price. It measures the return on investment from
What are stock dividends?
dividends. A higher yield attracts income-focused investors.
Stock dividends distribute additional shares to shareholders
What is the ex-dividend date?
instead of cash. They increase share count but not shareholder
equity. They’re often used to conserve cash. The ex-dividend date is the cutoff date for eligibility to receive
declared dividends. Investors buying on or after this date do not
What are stock splits?
receive dividends. It impacts stock prices temporarily.
Stock splits increase the number of shares while decreasing the
What is a payout ratio?
price per share. They make shares more affordable without
affecting total value. Stock splits can attract more investors.

Why do companies buy back shares?

The payout ratio is the percentage of earnings paid out as capital gains if taxed lower than dividends. Both contribute to
dividends. It indicates a company’s dividend policy. A high ratio total shareholder returns.
means most earnings are distributed.
What are cumulative dividends?
How does growth affect dividend policy?
Cumulative dividends accumulate if not paid in a given period.
Growth-focused firms often retain earnings for reinvestment. Preferred shareholders have rights to missed payments before
Mature firms with stable profits tend to pay higher dividends. common shareholders. Cumulative dividends protect investor
Dividend policy adapts to growth stages. returns.

What is dividend smoothing? What is a dividend payout ratio?

Dividend smoothing maintains a consistent payout ratio over The payout ratio shows the percentage of earnings paid as
time. It avoids drastic changes despite profit fluctuations. dividends. It helps assess a company’s sustainability in paying
Smoothing appeals to risk-averse investors. dividends. A high payout ratio may indicate less reinvestment.

Why might a company reduce dividends? What is the effect of dividends on stock price?

Companies may cut dividends to conserve cash during financial Dividend declarations often cause stock price changes. Increases
challenges. Reductions often signal weaker earnings. Investors attract buyers, boosting prices. Dividends are a key factor in stock
may react negatively to cuts. market valuations.

What is the bird-in-the-hand theory?

This theory suggests investors prefer certain dividends over

potential future gains. They view dividends as less risky. It
emphasizes regular dividends for investor satisfaction.

How does inflation impact dividends?

High inflation erodes purchasing power, prompting companies to

increase dividends. Investors seek higher payouts to offset
inflation. Inflation-adjusted dividends retain value.

What is dividend signaling?

Dividend signaling suggests that changes in dividends reveal

management’s expectations. Increases signal confidence in
future earnings. Reductions may signal financial concerns.

How do capital gains compare to dividends?

Capital gains are profits from selling assets at a higher price,

while dividends are cash distributions. Investors may prefer