1.

Define corporate finance and its importance

Corporate finance is the area of finance that deals with providing money for businesses and the
sources that provide them. These sources provide capital to corporations to pay for structural
improvements, expansion, and other value-added projects and enterprises. Capital is a good that can
be used now. For this lesson, it will primarily refer to money. The purpose of corporate finance is to
maximize shareholder value. There are many methods that a corporation can utilize to maximize
shareholder value.
IMPORTANCE
 Helps in decision making
 Helps in raising capital for project
 Helps in Research and Development
 Helps in smooth running of the business
 Brings coordination between various activities
 Promotes expansion and diversification’
 Managing risk
 Replace old assets
 Payment of dividend and interests
 Payment of taxes and fees
2. What is the relation between risk and return?

Relationship between risk and return means to study the effect of both elements on each other. We
measures the effect of increase or decrease risk on return of investment. Following is the main type of
relationship of risk and return
1. Direct Relationship between Risk and Return

(A) High Risk - High Return 

According to this type of relationship, if investor will take more risk, he will get more reward.
So, he invested million, it means his risk of loss is million dollar. Suppose, he is earning 10%
return. It means, his return is Lakh but he invests more million, it means his risk of loss of money
is million. Now, he will get Lakh return.

(B) Low Risk - Low Return 

It is also direct relationship between risk and return. If investor decreases investment. It means,
he is decreasing his risk of loss, at that time, his return will also decrease.

2. Negative Relationship between Risk and Return

(A) High Risk Low Return

Sometime, investor increases investment amount for getting high return but with increasing
return, he faces low return because it is nature of that project. There is no benefit to increase
investment in such project. Suppose, there are 1,00,000 lotteries in which you will earn the prize
of You have bought 50% of total lotteries. But, if you buy 75% of lotteries. Prize will same but at
increasing of risk, your return will decrease.
 (B) Low Risk High Return 

There are some projects, if you invest low amount, you can earn high return. For example, Govt.
of India need money. Because, govt. needs this money in emergency and Govt. is giving high
return on small investment. If you get this opportunity and invest your money, you will get high
return on your small risk of loss of money.

3. Explain the different sources of finance?

 1 Long-Term Sources of Finance

 2 Medium Term Sources of Finance
 3 Short Term Sources of Finance
 4 Owned Capital
 5 Borrowed Capital
 6 Internal Sources
 7 External Sources
Long-Term Sources of Finance
Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe
more depending on other factors. Long-term financing sources can be in the form of any of them:

 Share Capital or Equity Shares

 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals
 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR, etc.
Medium Term Sources of Finance
Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. Medium
term financing sources can in the form of one of them:

 Preference Capital or Preference Shares

 Debenture / Bonds
 Medium Term Loans from
 Financial Institutes
 Government, and
 Commercial Banks
 Lease Finance
 Hire Purchase Finance
Short Term Sources of Finance
Short term financing means financing for a period of less than 1 year. Short-term financing is also named as working
capital financing. Short term finances are available in the form of:

 Trade Credit
 Short Term Loans like Working Capital Loans from Commercial Banks
 Fixed Deposits for a period of 1 year or less
  Advances received from customers
 Creditors
 Payables
 Factoring Services
 Bill Discounting etc.
Owned Capital

Owned capital also refers to equity. It is sourced from promoters of the company or from the general public by
issuing new equity shares. Promoters start the business by bringing in the required money for a startup. Following
are the sources of Owned Capital:

 Equity
 Preference
 Retained Earnings
 Convertible Debentures
 Venture Fund or Private Equity
Borrowed Capital
Borrowed or debt capital is the finance arranged from outside sources. These sources of debt financing include the
following:

 Financial institutions,
 Commercial banks or
 The general public in case of debentures

 In this type of capital, the borrower has a charge on the assets of the business which means the company
will pay the borrower by selling the assets in case of liquidation.
 Another feature of the borrowed fund is a regular payment of fixed interest and repayment of capital

Internal Sources
The internal source of capital is the one which is generated internally by the business. These are as follows:

 Retained profits
 Reduction or controlling of working capital
 Sale of assets etc.
The internal source of funds has the same characteristics of owned capital.

External Sources

 An external source of finance is the capital generated from outside the business.
 Apart from the internal sources of funds, all the sources are external sources.
 Deciding the right source of funds is a crucial business decision taken by top-level finance managers.
 Equity, Debt from banks etc
 4.Differentiate shares and debentures

5.Define merger. Mention its types

Definition: The term ‘merger’ is used to mean the unification of two or more business houses to form
an entirely new entity. It leads to the dissolution of more or more entities, to get absorbed into another
undertaking, which is relatively bigger in size.

Types of Merger
1. Horizontal Merger: The merger is said to be horizontal when the companies that are combined operate in the
same industry or deal in similar lines of business. The market share of the newly formed company is greater than
the individual entities. It is aimed at reducing competition, increasing market share, economies of scale and research
and development.
2. Vertical Merger: Vertical merger takes place when companies are having ‘buyer-seller relationship’, join to create
a new company. It is an integration of two companies that are working in the same industry, though at a
different stage of production and distribution. It can be upstream or downstream, i.e. where the business takes
over its suppliers, then it is an upstream merger while if the company extend to its distribution entities, the merger is
termed as downstream.
3. Conglomerate Merger: A type of business integration, in which the merging companies are not related to each
other, i.e. neither horizontally nor vertically. In a conglomerate merger, two or more companies operating in
different business lines combine under one flagship company. This is further divided into, managerial conglomerate,
financial conglomerate and concentric conglomerate.
4. Co-generic Merger: Co-generic merger is when the companies undergoing merger operate in the same or
related industry. However, their product lines are different, as in they do not offer same products but related
one. The acquired and target company share similar distribution channels.
5. Reverse Merger: A merger wherein a publicly listed company is taken over by a privately held company and
provides an opportunity, to the private company to go public, without going through the complex and lengthy
process of getting listed on the stock exchange. In this type of amalgamation, the unlisted company acquires
majority shares in the listed company.
6. How does merger differ from acquisition?
 7.Explain the difference between merger and takeover

8.Explain the basic financial decisions of a firm

Financial decisions are the decisions that managers take with regard to the finances of a company. These
are crucial decisions for the financial well-being of the company. These decisions can be in terms
of acquisition of assets, financing and raising funds, day-to-day capital and expenditure management, etc. 

Basic Financial Decisions that financial managers need to take:

 Investment Decision
 Financing Decision and
 Dividend Decision
Investment Decision

 Also known as the Capital Budgeting Decisions.

 A company’s assets and resources are very rare and thus must be put to use with much analysis.
 A firm should pick those investments where he can gain the highest conceivable returns.
 Investment decision involves careful selection of the assets where funds will be invested by the
corporates. 
Financing Decision

 Financial decision is the utmost important decision which is to be made by business individuals.
 These are wise decisions indeed that are to be chalked out with proper analysis. He decides when, where
and how should the business acquire the fund.
 An organization’s increase in share is not only a sign of development for the firm but also to boost the
investor’s wealth. 

Dividend Decision

 Dividends decisions relate to the distribution of profit that are earned by the organization.
 The main criteria in this decision are whether to distribute to the shareholders or to retain the earnings.
 Dividend decisions are affected by the earnings of the business, dependency on earnings.

9.What are the different sources of short term finances

 short-term financing may be defined as the credit or loan facility extended to an enterprise for a period of
less than one year.
 It is a credit arrangement provided to an enterprise to bridge the gap between income and expenses in the
short run.
 It helps the enterprise to manage its current liabilities, such as payment of salaries and wages to labors and
procurement of raw materials and inventory.
 The availability of short-term funds ensures the sufficient liquidity in the enterprise. It facilitates the
smooth functioning of the enterprise’s day-to-day activities.
The short-term sources of finance for a firm are:-

1. Trade Credit

Trade credit is the loan extended by one trader to another when the goods and services are bought on credit.
Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly
used by business organizations as a source of short-term financing

2. Commercial Paper

Commercial paper is a common form of unsecured, short-term debt issued by a corporation. Commercial
paper is typically issued for the financing of payroll, accounts payable, inventories, and meeting other
short-term liabilities. Maturities on most commercial paper ranges from a few weeks to months.

3. Unsecured Short-Term Bank Loans

 Unsecured loans are made on the basis of the firm's creditworthiness and the lender's previous experience
with the firm. An unsecured borrower does not have to pledge specific assets as security.

4. Secured Forms of Credit

Secured loans are business or personal loans that require some type of collateral as a condition of
borrowing. A bank or lender can request collateral for large loans for which the money is being used to
purchase a specific asset or in cases where your credit scores aren't sufficient to qualify for an unsecured
loan.

5. Customer Advances

Customer advances may be defined as the part of payment made in advance by the customer to the
enterprise for the procurement of goods and services in the future. It is also called Cash before Delivery
(CBD). The customers pay the amount of advance, when they place the order of goods and services
required by them.

6. Installment Credit

Installment credit is another source of short-term financing, in which the borrowed amount is paid in equal
installments with interest. It is also called installment plan or hire-purchase plan. Installment credit is
granted to the enterprise by the suppliers on the assurance that the repayment would be done in fixed
installment at regular intervals of time. It is mostly used to acquire long-term assets used in production
processes

7. Bank Loan

Bank loan may be defined as the amount of money granted by the bank at a specified rate of interest for a
fixed period of time. The commercial bank needs to follow certain guidelines to extend bank loans to a
client. For example, the bank requires the copy of identity and income proofs of the client and a guarantor
to sanction bank loan.

8. Cash Credit
 Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding
their account limit. The cash credit facility is generally sanctioned for one year, but it may extend up to
three years in some cases. 

9. Certificates of Deposit

Certificate of deposit is a type of promissory note issued by the bank to the investors for depositing funds in
the bank for a fixed period of time. The maturity period of certificates of deposit is designed in accordance
with the necessity of investors.

10. Bill of Exchange

A bill of exchange is a document in which an individual asks the recipient to make payment for goods and
services received to a third party at a future date

11. Factoring

Factoring comprises complementary financial services, which is provided to the borrowers. The borrower
has freedom to select the set of services provided by the factoring enterprise. Factoring is a transaction
whereby a business sells its statement of receivable to a factor at a discount rate, to raise fund for financing
short-term projects.

12. Bank Overdraft.

Bank overdraft is a temporary arrangement with the bank that allows the organization to overdraw from its
current deposit account with the bank up to a certain limit. The overdraft facility is granted against
securities, such as promissory notes, goods in stock, or marketable securities. The rate of interest charged
on overdraft and cash credit is comparatively much higher than the rate of interest on bank deposits.

10.Mention the different long term sources of finance

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe
more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building,
etc of business are funded using long-term sources of finance

The following are the sources from, or through which long-term funds are raised.

(a) Capital Market

Capital market refers to the organisation and the mechanism through which the companies, other
institutions and the government raise long-term funds. So it constitutes all long-term borrowings
 from banks and financial institutions, borrowings from foreign markets and raising of capital by
issuing various securities such as shares debentures, bonds, etc
(b) Special Financial Institutions
A number of special financial institutions have been set up by the central and state governments to
provide long-term finance to the business organisations. They also offer support services in
launching of the new enterprises and so also for expansion and modernisation of existing
enterprises.
(c) Mutual Funds
Mutual fund refers to a fund established in the form of a trust by a sponsor to raise money through
one or more schemes for investing in securities. It is a special type of investment institution, which
acts as an investment intermediary that collects or pools the savings of a large number of investors
and invests them in a fairly large and well diversified portfolio of sound investments

(d) Leasing Companies

This method has become quite common among the manufacturing companies. Leasing facility is
usually provided through the mediation of leasing companies who buy the required plant and
machinery from its manufacturer and lease it to the company that needs it for a specified period on
payment of an annual rent.
(e) Foreign Sources
Foreign Sources also play an important part in meeting the long-term financial needs of the
business in India. These usually take the form of (1) external borrowings; (2) foreign investments
and; (3) deposits from NRIs.
(f) Retained Earnings
The retained profits can be used for expansion and modernization programmes by the companies.
The amount of retained earnings is determined by the quantum of profits, the dividend payout
policy followed by the management, the legal provisions for dividend payment, and the rate of
corporate taxes etc

11.Define factoring

Factoring is a financial arrangement between the company and financial institute, in which company get money in
form of advance in return for receivables from financial institution. In this, company is called client and financial
institution is called factor. Factoring agreements involves the factor, the client and a customer..

Features of factoring are as follows −

 Clients credit is covered through advances.

 Cash advances.
 Collection services.
 Provide advice.

Some of the advantages of factoring are as follows −

 Better working capital management.

 Turnover stocks increases.
 Reduces the risk.
  Reduction in debts.
Limitation of factoring includes −

 High risk is involved.

 Uneconomical for small companies.
 Assessing the credit risk.
 Lack of professionals.
 Non-acceptance of change.
The types of factoring are given below −

12.Explain the different types of takeover strategies?

WHITE KNIGHT:
 A white knight is a hostile takeover defense whereby a ‘friendly’ individual or company acquires a
company/corporation at fair consideration that is on the verge of being taken over by an ‘unfriendly’ bidder or
acquirer, who is known as the black knight.
 Although the target company does not remain independent, acquisition by a white knight is still preferred as
compared to a hostile takeover.
 Unlike a hostile takeover, current management typically remains in place in a white knight scenario,
and investors receive better compensation for their shares.
PAC-MAN DEFENSE:
 The Pac-Man defense is a defensive business strategy used to stave off a hostile takeover, in which a company that
is threatened with a hostile takeover “turns the tables” by attempting to acquire its would-be buyer. Further, the Pac-
Man defense is an expensive strategy that may increase debts for the target company which in turn may result in
losses or lower dividends in future years.
STAGGERED BOARD:
 A staggered board of directors is a practice in which groups of directors are elected at different times for multiyear
terms. In the presence of a staggered board, a hostile bidder must wait several years to entirely replace the board
with one of its own choosing, particularly because it must win proxy fights at successive shareholder meetings.
GOLDEN PARACHUTE:
 A Golden parachute consists of substantial benefits given to top executives if the company is taken over by another
company and the executives are terminated as a result of the takeover.
 Golden parachute clauses are present in the employment contracts as any other employment related clauses.
 These clauses result in a hefty pay to the executives in the event of termination of their jobs resulting out of a hostile
takeover.
 Such a strategy makes it less lucrative for the predator to continue with the acquisition.
POISSON PILL:
 This is the most popular and effective defense to combat the hostile takeovers. Using this method the target
company gives existing shareholders the right to buy stock at a price lower than the prevailing market price if a
hostile acquirer purchases more than a predetermined amount of the target company’s stock.
 The purpose of this move is to devalue the stock worth of the target company and dilute the percentage of the target
company equity owned by the hostile acquirer to an extent that makes any further acquisition prohibitively
expensive for the predator.
BRAND PILL:
 An Indian version of Poisson Pill is devised by the Indian conglomerate Tata’s which is often referred to as ‘Brand
Pill’.
 Tata group companies have a brand licensing agreement with the holding company and owner of Tata brand, the
Tata Sons whereby any hostile (or otherwise) acquirer of any of the Tata entities is not permitted to make use of the
established Tata brand name. Consequently, the bidder in a hostile takeover has to change the name of the company
immediately after the takeover thereby losing the much-valued brand name which may in turn result in loss of
valuation.
CROWN JEWEL: 
 Crown Jewel is a Defense strategy wherein the target company of a hostile takeover resorts to selling its most
valuable assets in order to reduce its attractiveness to the hostile bidder.
 The crown jewel defense is always considered the last-resort defense since the target company will be intentionally
destroying part of its value, with the hope that the acquirer drops its hostile bid.
 It is popularly referred to as a Self-Destructive Strategy.

13.What is capital budgeting? Explain its importance

Capital budgeting is the process a business undertakes to evaluate potential major projects or investments .
Construction of a new plant or a big investment in an outside venture are examples of projects that would require
capital budgeting before they are approved or rejected.

Here is the top 10 importance of capital budgeting –

 #1 – Long Term Effect on Profitability

 #2 – Huge Investments
 #3 – Decision cannot be Undone
 #4 – Expenditure Control
 #5 – Information Flow
 #6 – Helps in Investment Decision
 #7 – Wealth Maximization
 #8 – Risk and Uncertainty
 #9 – Complicacies of Investment Decisions
 #10 – National Importance

14.State the importance of investment decision?

The Investment Decision relates to the decision made by the investors or the top level management with respect
to the amount of funds to be deployed in the investment opportunities. 

Need and importance/Nature

 
(1) Large investment
-   Involve large investment of funds
-   Fund available is limited and the demand for funds exceeds the existing resources
-   Important for firm to plan and control capital expenditure
 
(2) Long term commitment of funds
-         Involves not only large amount of fund but also long term on permanent basis.
 
-         It increases financial risk involved in investment decision.
 
-         Greater the risk greater the need for planning capital expenditure.
 
(3) Irreversible Nature
 
-   Capital expenditure decision are irreversible
 
-         Once decision for acquiring permanent asset is taken, it become very difficult to dispose of these assets
without heavy losses.
 
(4) Long-term effect on profitability
 
-         Capital expenditure decision are long-term and have effect on profitability of a concern
 
-         Not only present earning but also the future growth and profitability of the firm depends on investment
decision taken today
 
-         Capital budgeting is needed to avoid over investment or under investment in fixed assets.
 
(5) Difficulties of investment decision
 
 
-         Long term investment decision are difficult to take because (i) decision extends to a series of year beyond the
current accounting period
 
-         (ii) uncertainties of future
 
-         (iii) higher degree of risk
 
(6) National importance
 
-         Investment decision taken by individual concern is of national importance because it determines employment,
economic activities and economic growth.
 15.Define payback. What are its merits?

Payback method helps in revealing the payback period of an investment.  Payback period (PBP) is the time (number
of years) it takes for the cash flows of incomes from a particular project to cover the initial investment. When a CFO
faces a choice, he will prefer the project with the shortest payback period.

Advantages of Payback

 It Is a Simple Process.
 Fewer Numbers to Crunch.
 Can Help Small Businesses.
 Reinvest Earnings Faster.
 Can Tip the Scales for a Difficult Decision.
 Keeps Financial Liquidity.
 Can Prevent Major Losses.
 Manage Multiple Options.
 Short-Term and Long-Term Opportunities.

16.Differentiate NPV and IRR

17.What is profitability index? Which is a superior ranking criterion, profitability index or

the net present value?

The profitability index (PI), alternatively referred to as value investment ratio (VIR) or profit investment ratio
(PIR), describes an index that represents the relationship between the costs and benefits of a proposed project. It is
calculated as the ratio between the present value of future expected cash flows and the initial amount invested in
the project. A higher PI means that a project will be considered more attractive.

Profitability index serves as a tool to classify projects. If the value of the index is bigger, then the project would be

more attractive.

The acceptable measure of profitability index for a single project is 1.0 or more. This suggests that the business will

move forward. But if it is lower than 1.0, the project would be dismissed. The index can serve as a substitute for

NPV when determining the profits per dollar of investment.

NPV or Net Present Value is one of the primary methods or techniques for evaluating an investment.

When using this method, it is essential to choose a proper discount rate. Usually, the weighted average cost of

capital or the return rate on unconventional investments is used.

If the NPV is lower, the discount rate would be higher. Investments with higher risk, have a higher discount rate

than risk-free investments.

Net Present Value is considered as one of the most desirable types of evaluation, analysis, and selection of great

investments. However, we should note that we have to be very careful when estimating cash flows, since an

incorrect cash flow estimation may lead to deceptive NPV.

Another thing you should take into account is that the discount rate is the same for both cash inflows and outflows,

and the thing here is that the rates are different when lending or borrowing.

Still, NPV is the first and foremost measure of investment evaluation, compared to other methods such as

determining the rate of return, payback period, internal rate of return (and Profitability Index). In fact, profitability

index is related toNet Present Value, where the value presents an absolute measure, and the index presents a relative

measure.

Proprietors raise investors’ wealth by welcoming projects that have a higher value than they actually cost, that has

a positive expected Net Present Value. Sometimes the investment can be postponed and choose a time that is the

most suitable for investment, and thus improve the cash flow.

18.Differentiate Ordinary share and Preference share

19.Compare preference share and debenture

Preference Shares vs Debentures (Comparative Table):

Basis of Comparision Preference Share Debenture

Types of Funds Equity Based Funds Debt Funds

Company has to Dilute Ownership Require Collateral

Facilitates Long-term requirement of funds short to medium term

Ownership Partial Owners Creditors

Returns Dividend Interest

Security Unsecured Secured

Maturity Period Uncertain Fixed

Capital Gain Yes NO

 Basis of Comparision Preference Share Debenture

Addition Returns Possible NO

Convertibility cannot converted to debentures can be converted to shares

Liquidity No Prefered over preference shares

20.Who is called as owners of residue?

Equity shares are the vital source for raising long-term capital.Equity shareholders do not get a fixed dividend, but
are paid only when tax to the government , interest on loans and debentures and preferences dividend have been
paid. So, they are referred to as ' residual owners " They receive what is left after all other claims on the company's
income and assets have been settled.

 A way to refer to shareholders in a corporation which reinforces the fact that if the company goes out of business
they will only get what’s left after every one else is paid the money they are owed.

Example: FAIL Corporation’s shareholders were loving life when the company’s stock was flying high and it was
paying its owners a nice quarterly dividend. Just a few short years later, the company was left in the dust by
competitors with superior new products. FAIL realized that it was doomed, so it chose to close down. It liquidated
its $5 million in assets and paid off the nearly $5 million it owed suppliers. FAIL’s shareholders, as residual owners,
received just pennies to distribute amongst themselves.

21.Differentiate book value and market value

BASIS FOR
BOOK VALUE MARKET VALUE
COMPARISON

Meaning Book Value means the Market Value is that

value recorded in the maximum price at which an
books of the firm for any asset or security can be sold
asset. in the market.

What is it? It is the actual worth of It is a the highest estimated

the asset or company. value of the asset or
company.

Reflects Firm's equity Current market price

Frequency of Infrequent, i.e. at Frequent

Fluctuations periodical interval
 BASIS FOR
BOOK VALUE MARKET VALUE
COMPARISON

Basis of Tangible assets present Tangible and intangible

calculation with the company. assets, which the company
possesses.

Readily Available Yes No

22.What is called as dividend?

Dividends are a portion of a company's earnings which it returns to investors, usually as a cash payment. The
company has a choice of returning some portion of its earnings to investors as dividends, or of retaining the
cash to fund internal development projects or acquisitions.

 A dividend is the distribution of corporate profits to eligible shareholders.

 Dividend payments and amounts are determined by a company's board of directors.
 Dividends are payments made by publicly listed companies as a reward to investors for putting their
money into the venture.
 Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in
a company's stock price.
 Many companies do not pay dividends and instead retain earnings to be invested back into the company.

There are various types of dividends a company can pay to its shareholders.  Below is a list and a brief description of
the most common types that shareholders receive.

Types include:

 Cash – this is the payment of actual cash from the company directly to the shareholders and is the most
common type of payment. The payment is usually made electronically (wire transfer), but may also be paid
by check or cash.
 Stock – stock dividends are paid out to shareholders by issuing new shares in the company. These are paid
out pro-rata, based on the number of shares the investor already owns.
 Assets – a company is not limited to paying distributions to its shareholders in the form of cash or shares. 
A company may also pay out other assets such as investment securities, physical assets, and real estate,
although this is not a common practice.
 Special – a special dividend is one that’s paid outside of a company’s regular policy (i.e., quarterly, annual,
etc.). It is usually the result of having excess cash on hand for one reason or another.
 Common – this refers to the class of shareholders (i.e., common shareholders), not what’s actually being
received as payment.
 Preferred – this also refers to the class of shareholders receiving the payment.
 Other – other, less common, types of financial assets can be paid out as dividends, such as options,
warrants, shares in a new spin-out company, etc.
23. Differentiate Payout ratio and retention ratio

 The retention ratio is the portion of earnings kept back in a firm to grow the business as opposed to being
paid out as dividends to shareholders.
  The payout ratio is the opposite of the retention ratio which measures the percentage of profits paid out as
dividends to shareholders.
 After dividends have been paid out, the amount of profit left over is known as retained earnings.
 The retention ratio helps investors determine how much money a company is keeping to reinvest in the
company's operations.
 Growing companies typically have high retention ratios as they are investing earnings back into the
company to grow rapidly.
 The payout ratio, also known as the dividend payout ratio, shows the percentage of a company's earnings
paid out as dividends to shareholders.
 A low payout ratio can signal that a company is reinvesting the bulk of its earnings into expanding
operations.
 A payout ratio over 100% indicates that the company is paying out more in dividends than its earning can
support, which some view as an unsustainable practice.

24.What is called as stock split?

 A stock split is a corporate action in which a company divides its existing shares into multiple shares. A
stock split is when a company divides the existing shares of its stock into multiple new shares to boost the
stock's liquidity.
 A stock split causes a decrease of market price of individual shares, not causing a change of total market
capitalization of the company. Stock dilution does not occur.

 The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or
three shares, respectively, for every share held earlier.

TYPES:

Forward Stock Split

In simple words, it is nothing but dividing a high price share into multiple low price shares to reduce their
price.

Reverse Stock Split

Unlike forward stock split, in reverse stock split, the shares of the company are reduced in number by
merging some shares into a single unit.
25.What is meant by bonus share?

Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based
upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given
out in the form of dividends, but are converted into free shares.

Bonus Shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.[1]

 to capitalise a part of the company's retained earnings

 for conversion of its share premium account, or
 distribution of treasury shares.
An issue of bonus shares is referred to as a bonus share issue.
26.What are the different forms of dividend?

Definition: The Dividends are the proportion of revenues paid to the shareholders. The amount to be distributed
among the shareholders depends on the earnings of the firm and is decided by the board of directors.

Cash Dividend
A Cash dividend is the most common form of the dividend. The shareholders are paid in cash per share.

Bonus Share
Bonus share is also called as the stock dividend. These are issued by the company when they have low operating
cash.

Share Repurchase
Share repurchase occurs when a company buys back its own shares from the market and reduces the number of
shares outstanding.

Property Dividend
The company makes the payment in the form of assets in the property dividend. The asset could be any of this
equipment, inventory, vehicle or any other asset.

Scrip Dividend
Scrip dividend is a promissory note to pay the shareholders later. This type of dividend is used when the company
does not have sufficient funds for the issuance of dividends.

Liquidating Dividend
When the company returns the original capital contributed by the equity shareholders as a dividend, it is termed as
liquidating dividend. 

27.Define share buyback

 A share buyback, is a decision by a company to buy back its own shares from the marketplace.
 A company might buy back its shares to boost the value of the stock and to improve the financial
statements.
 Companies tend to repurchase shares when they have cash on hand and the stock market is on an upswing.
 There is a risk that the stock price could fall after a share repurchase.
 Also known as share repurchase.

PURPOSE FOR SHARE BUYBACK:

 Distribution of extra cash

 Support the under evaluation of the stock
  Boosting financial ratio
 Managing dilution
 Changing capital structure
 Avoid hostile takeovers

28.What is stable dividend policy?

Stable Dividend Policy

 A stable dividend policy is the easiest and most commonly used.

 The goal of the policy is a steady and predictable dividend payout each year, which is what most
investors seek.

 Whether earnings are up or down, investors receive a dividend.

 The goal is to align the dividend policy with the long-term growth of the company rather than with
quarterly earnings volatility.
Benfits of Stable Dividend Policy:
(a) It is sign of continued normal operations of the company
(b) It stabilises the market value of shares.
(c) It creates confidence among the investors.
(d) It provides a source of livelihood to those investors who view dividends as a source of funds to meet day-
to-day expenses.
(e)  It meets the requirements of institutional investors who prefer companies with stable dividends.
(f) It improves the credit standing and makes financing easier.
(g) It results in a continuous flow to the national income stream and thus helps in the stabilisation of national
economy.

29.What are the different theories of dividend.

 Walter’s Model:
Walter’s Dividend model measures the effect of dividend on common stock value by making a comparison of the
actual and normal capitalisation rates

 for a growth firm (r > k) is nil

 declining firm (r > k) is 100 percen
  for a normal firm (r = k) is irrelevant.

Gordon’s Model:
 According to Gordon’s Model, the value of the share is given by the following equation: 

1. MM Theory:
According to MM approach, the dividend policy of a firm has no effect on the value of the firm.

This approach is based on certain assumptions which are as follows:

Assumptions:
(a) There are perfect capital markets and investors are rational.

(b) Information is freely available and there are numerous transactions.

(c) An investor cannot influence prices.

(d) Flotation costs are nil.

(e) There are no taxes.

(f) The firm has a fixed investment policy.

(g) Risk of uncertainty does not exist.

30.Contrast Walter and Gordon model of dividend

31.What are the different types of investment proposal?

An investment proposal is a type of document that is prepared with the goal of motivating potential investors to
enter into a mutually beneficial business relationship with a firm or project. 
32.Mention the different methods of analyzing investment proposals

The methods are:

 Payback Period Method

 The Payback Period helps to determine the length of time required to recover the initial
cash outlay in the project.
 Accounting Rate of Return Method
 The Accounting Rate of Return or ARR, measures the profitability of the investments
on the basis of the information taken from the financial statements rather than the cash
flows. It is also called as Average Rate of Return
 Net Present Value Method
 The Net Present Value or NPV is a discounting technique of capital budgeting wherein
the profitability of investment is measured through the difference between the cash
inflows generated out of the cash outflows or the investments made in the project.
 Internal Rate of Return Method
 The Internal Rate of Return or IRR is a rate that makes the net present value of any
project equal to zero.
 Profitability Index Method
 The Profitability Index measures the present value of returns derived from per rupee
invested.
 It shows the relationship between the benefits and cost of the project and therefore, it is
also called as, Benefit-Cost Ratio.
 Discounted Payback Period Method
 In this method the cash flows involved in a project are discounted back to present value terms
as discussed above.
 The cash inflows are then directly compared to the original investment in order to identify the
period taken to payback the original investment in present values terms.

 Modified internal rate of return

 The Modified Internal Rate of Return or MIRR is a distinct improvement over the
internal rate of return that assumes the cash flows generated from the project are
reinvested at the firm’s cost of capital rather that at the company’s internal rate of return.
 33.What is primary market?

In a primary market, securities are created for the first time for investors to purchase. New securities are
issued in this market through a stock exchange , enabling the government as well as companies to raise capital.

The main function of the primary market is to facilitate the company to raise long term funds by making fresh issues
of shares or debentures.

1. Origination –  Origination refers to the identification, assessment, and processing of newly issued
securities.
2. Underwriting – The banking institution acts as a middleman between securities issuing companies and
investors. Underwriters example, JP Morgan, Goldman Sachs, Morgan Stanley, etc.
3. Distribution – Distribution is selling securities to investors.

Advantages of Primary Market

 
 
 A Cost-Effective Way to Raise Capital
 
 
 Less Chances of Price Manipulation
 
 
 Offers Diversification
 
 
Disadvantages of Primary Market
  
 Limited Information Available to Investors
 
 
 No Historical Trading Data

34.What is capital market?

Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.

Types of Capital Market

Capital market consists of two types i.e. Primary and Secondary.

1. Primary Market

Primary market is the market for new shares or securities. A primary market is one in which a company
issues new securities in exchange for cash from an investor (buyer).It deals with trade of new issues of
stocks and other securities sold to the investors.

2. Secondary Market

Secondary market deals with the exchange of prevailing or previously-issued securities among investors.
Once new securities have been sold in the primary market, an efficient manner must exist for their resale.
Functions of the Capital Market

 Enhance trading of securities

 Provides a common platform to both investors and savers
 Accumulation of capital for companies that need them
 Stimulates economic growth
 It improves the process of allocation of capital
 Prepares for continuity of funds availability
 It reduces information and transaction charges significantly.
 Faster valuation of securities.
 Provides proper channelling of funds to be used productively.

Advantages

 Facilitates Transactions
 Liquidity
 Helps in Diversification

Disadvantages

 Risky
 Additional Costs
 Complex
35.What credit rating?

 A credit rating is a measurement of a person or business entity’s ability to repay a financial obligation
based on income and past repayment histories.
 Usually expressed as a credit score, banks and lenders use a credit rating as one of the factors to determine
whether to lend money.
Advantages of Credit Rating

Credit rating offers various types of benefits:

1. Information Service

2. Systematic Risk Evaluation

3. Professional Competency

4. Easy to Understand

5. Low Cost

6. Efficient Portfolio Management

7. Index of Faith

8. Wider Investor Base

9. Benchmark

10. Efficient Practice

11. Effective Monitoring

Disadvantages of Credit Rating

Following are cons of the credit rating:

1. Guidance, not Recommendation

2. Based on Assumptions

3. Competitive Ratings
36.Define IPO

An initial public offering (IPO) refers to the process of offering shares of a private
corporation to the public in a new stock issuance. An IPO allows a company to raise capital
from public investors.
37.What is called as stock exchange?

38.Mention the important stock exchanges in the World.

39.List some important functions of stock exchange

40.What is NSE?
41.What is BSE?
42.Mention some of the important capital market instruments.

43.Mention some of the important money market instruments

44.Define SEBI. Mention its important functions.

SEBI is a statutory regulatory body established on the 12th of April, 1992. It monitors and regulates the Indian
capital and securities market while ensuring to protect the interests of the investors, formulating regulations and
guidelines. The head office of SEBI is at Bandra Kurla Complex, Mumbai.

45.What is commercial paper?

46.What is ordinary share?
FEATURES:
47.What is preference share? Mention its types
48.What are the present functions of Indian Capital Market?

The capital market provides the support to the system of capitalism of the country. The Securities and Exchange Board of
India (SEBI), along with the Reserve Bank of India are the two regulatory authority for Indian securities market, to protect
investors and improve the microstructure of capital markets in India.

FUNCTIONS:
49.What are the guidelines of SEBI with respect to debenture issue?

Guidelines of SEBI for the issue of debentures

1. Guidelines will be applicable for the issue of convertible and nonconvertible debentures by public limited as well
as public sector companies.
2. Debentures can be issued for the following purposes:

 For starting new undertakings

 Expansion or diversification
 For modernization
 Merger/amalgamation which has been approved by financial institutions
 Restructuring of capital
 For acquiring assets
 For increasing resources of long-term finance.
3. Issue of debentures should not exceed more than 20% of gross current assets and also loans and advances.

4. Debt-equity ratio in issue of debentures should not exceed 2:1. But this condition will be relaxed for capital
intensive projects.

5. Any redemption of debentures will not commence before 7 years since the commencement of the company.

6. For small investors for value such as Rs. 5,000, payments should be made in one installment.

7. With the consent of SEBI, even non-convertible debentures can be converted into equity.

8. A premium of 5% on the face value is allowed at the time of redemption and in case of non-convertible
debentures only.

9. The face value of debenture will be Rs. 100 and it will be listed in one or more stock exchanges in the country.
10. Secured debentures will be permitted for public subscription.

50.Mention the kinds of speculators in the stock market.

 Speculators are the one who work with stock exchanges for earning profit through speculation.
 Speculators use several economic calculations and market forecasts for anticipating future price
movements.
 Speculators have an important role in maintaining an efficient market as they undertake those risks which
other participants do not.

Bull
Bull is a speculator who is optimistic in nature. He is the one who anticipates a rise in securities price. Bull buys the
securities in order to gain from price rise in future expected by him.
Bear
Bear is a speculator who is pessimistic in nature. These speculators anticipate fall in prices of securities. Bear sells
the securities which he does not possess for future delivery. He sells them in order to take benefit of buying these
securities at a low price in future.
Jobber
Jobbers are professional speculators who perform important functions as a member of the stock exchange. He has
complete information regarding the securities he deals in.

Broker
Brokers are a public agent who acts as an intermediary between the public and jobbers working at the stock
exchange. They do the work of linking the jobbers with outside public. Brokers are bonafide members of the stock
exchange.

Stag
Stag are speculators who are bullish in nature. These are cautious speculators and are termed as premium hunters as
they transact in securities solely for earning premium. companies whose value are likely to risk and will carry a
premium in future. In case if the value of shares falls, then stag suffers losses.

Lame Duck
Lame duck are speculators who are not able to fulfil their commitments. These are bear speculators who struggles
like a lame duck and suffers heavy financial losses. Bear speculators sell securities for the future delivery date which
they do not possesses
51.What are the important stock market indices?
52.Who are all the intermediaries in the capital market?

Entities that help the issuing company and investing investors to perform various transactions in capital market are
called as capital market intermediaries.

Kinds of Capital Market Intermediaries:

1. Merchant banker

 He is the person who Is engaged in the business of issue management or Acts as a manager, advisor or
consultant in relation to issue management.

2. Lead Merchant banker / Lead Manager

 An issue can be managed by a merchant banker as said before. But all public issues and rights issues should
be managed by Lead merchant banker / Lead manager

3. Registrars and Share Transfer agents (RTA)

 RTA is a combination of two expressions:

➢ Registrar to an issue (Primary market)

➢ Share transfer agent (Secondary market)

 A category of RTA can act as both registrar and share transfer agent.

4. Underwriters

 Underwriter is a person who engages in the business of underwriting an issue of securities of a company.
Banks, Financial institutions, merchant bankers, etc do the work of underwriting.

5. Debenture trustee

 It means a trustee of a trust deed for securing the issue of debentures of a company.
 Scheduled commercial banks, PFI, Insurance Company, a body corporate do the work of a debenture
trustee

6. Bankers to an issue

Bankers to an issue means any scheduled bank which

 Accepts application money

 Accepts allotment and call money
 Refunds the application money
 Pays the dividend / interest

7. Portfolio Manager

 He is the person who advices, directs and manages the portfolio of securities of his client.
✓Discretionary PM: He manages the portfolio of his client independently and with his full discretion.

✓ Non-discretionary PM: He manages the portfolio of his client by the instructions of his client.

8. Stock broker and Sub broker

 Stock broker is a person registered with SEBI, as a member, to help both seller and buyer of securities to
enter into a transaction. This means he acts as a communication channel between company and the
investor.
 Sub broker is a person, not registered with SEBI as a member, but authorized by SEBI to assist stock
broker in executing his broking services

9.Investment advisers:

 Investment advisers are those, who guide one about his or her financial dealings and investments.
 Basically Investment adviser give advice and provide services related to the investment management
process.
 The Investment adviser shall done the risk profiling for clients to assess their risks

53.What is a mutual fund? Mention its types

A mutual fund is a company that pools money from many investors and invests the money in securities such as
stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors
buy shares in mutual funds.

 A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other
securities. 
 Mutual funds give small or individual investors access to diversified, professionally managed portfolios at
a low price.
 Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest
in, their investment objectives, and the type of returns they seek.
 Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can
affect their overall returns.
 The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.
54.Differentiate futures and options

55.What is leasing? Mention its types

56.What is future contract?
TYPES

57.Define options Mention its types

Advantages

 Leverage.

 Risk/reward ratio..

 Unique Strategies

 Low capital requirements

Disadvantages

 Lower liquidity

 Higher spreads.

 Higher commissions.

 Complicated.

 Time Decay
 Less information
 Options not available for all stocks.
 58.Distinguish between open ended and closed ended schemes of mutual funds.

59.What is a open ended mutual fund scheme?

60.Define venture capital

Venture Capital is a mechanism wherein investors support entrepreneurial talent by

providing finance and business skills in order to obtain long–term capital gains by
exploiting market opportunities.
61.Mention the steps in venture capital process.The process of Venture Capital

 Deal Origination

In deal origination there is a continuous flow of deals is essential for venture capital business.

 Screening
Screening is the process by which the venture capitalist scrutinises all the projects in which he could
invest. 

 Evaluation
The proposal is evaluated after the screening and a detailed study is done.

 Deal Negotiation
Deal negotiation is a process by which the terms and conditions of the deal are so formulated so as to make
it mutually beneficial. 
  Post Investment Activity
Once the deal is finalised, the venture capitalist becomes a part of the venture and takes up certain rights
and duties.
 Exit Plan
The last stage of venture capital process is to make the exit plan based on the nature of investment, extent
and type of financial stake etc.

62.What are the methods to measure performance of mutual funds?

Experts suggest investing in top-performing mutual funds to improve upon chances of higher returns. There are
below documents that can be referred to estimate the performance of a fund:

 KIM (Key Information Memorandum)

It is a document that mentions the information relevant to a prospective investor. You may refer to this
document before investing.

 Fund Fact Sheet

It is a fact sheet that mentions statistical ratios relevant to the fund's performance and compares it with
similar funds in the market. The sheet is uploaded every month and can be downloaded from your AMCs
website.

TOP 5 MEASURES TO EVALUATE A MUTUAL FUND’S PERFORMANCE

1. Alpha:

 A market benchmark is a set standard used to measure mutual fund performance.

 Alpha is a financial ratio that reflects the returns generated by the fund over and above the returns
generated by the benchmark index.
 The Alpha value of 0 would indicate that the fund has performed in line with the benchmark.
 While a negative value would mean it has underperformed as compared to its benchmark index..

2. Beta:

 Beta is another statistical measure calculated using regression analysis, reflecting the volatility of a
portfolio compared to the market.
 It shows the tendency of a portfolio's return to fluctuate as per the market movements.
 Beta value of 1 indicates that the mutual fund is as volatile as its benchmark.
 While a value above 1 indicates that the fund is more volatile, a value below represents that the
fund reacts lesser than its benchmark.
 3. Expense Ratio:

 The expense ratio is the ratio of the total fund’s expenses to its assets and reflects the per-unit cost
of managing a fund.
 Subtracted from the funds' total earnings before it is distributed to the investors, the expense ratio
is inversely proportional to the AUM (Asset Under Management) of the fund.
 It is an essential factor to be considered while selecting a fund since the higher the expense ratio,
the lower is the return and vice versa.

4. Allocations in the Fund’s Portfolio:

 One of the benefits of investing in mutual funds is the diversification of assets in the portfolio.
 A well-diversified portfolio is expected to generate better returns since volatile assets are balanced
out with stable ones.

5. Rolling Returns:

 Rolling returns are average annual returns for a specified timeframe with returns taken into
account till the last day of the duration.
 It reflects the relative and absolute performance of the fund at regular intervals.
 Rolling returns can be more effective, accurate, and unbiased as they show how the fund
performed during the entire duration.

63.Define NAV?

 Net asset value (NAV) represents a fund's per share market value.
 NAV is calculated by dividing the total value of all the cash and securities in a fund's portfolio, minus any
liabilities, by the number of outstanding shares.
 The NAV calculation is important because it tells us how much one share of the fund is worth.
 Net asset value is the value of a fund’s assets minus any liabilities and expenses.
 The NAV (on a per-share basis) represents the price at which investors can buy or sell units of the fund.
 When the value of the securities in the fund increases, the NAV increases.
 When the value of the securities in the fund decreases, the NAV decreases.
 The NAV number alone offers no insight as to how “good” or “bad” the fund is.
 The NAV of a fund should be looked at over a timeframe to assess fund performance.


 IMPORTANCE:

64.Define MNC
65.W hat is meant by foreign collaboration?
66.Mention some of the international financial institutions.
67.Explain the role of commercial bank for export financing?
68.Bring out your understanding on EXIM bank financing for exports in India?
69.Interpret the functions of EXIM bank?

The Export and Import Bank of India, popularly known as the EXIM Bank was set up in 1982. It is the principal financial
institution in India for foreign and international trade. 

Functions of the EXIM Bank

1. Finances import and export of goods and services from India

2. It also finances the import and export of goods and services from countries other than India.

3. It finances the import or export of machines and machinery on lease or hires purchase basis as well.

4. Provides refinancing services to banks and other financial institutes for their financing of foreign trade

5. EXIM bank will also provide financial assistance to businesses joining a joint venture in a foreign country.

6. The bank also provides technical and other assistance to importers and exporters. Depending n the country of
origin there are a lot of processes and procedures involved in the import-export of goods. The EXIM bank will
provide guidance and assistance in administrative matters as well.

7. Undertakes functions of a merchant bank for the importer or exporter in transactions of foreign trade.

8. Will also underwrite shares/debentures/stocks/bonds of companies engaged in foreign trade.

9. Will offer short-term loans or lines of credit to foreign banks and governments.

10. EXIM bank can also provide business advisory services and expert knowledge to Indian exporters in respect of
multi-funded projects in foreign countries

70.What is meant by corporate governance?

71.What is meant by CSR
72.What is meant byEXIM bank?

 EXIM Bank or Export-Import Bank of India is India’s leading export financing institute that engages in
integrating foreign trade and investment with the country’s economic growth.
 Founded in 1982 by the Government of India, EXIM Bank is a wholly-owned subsidiary of the Indian
Government.
 The current Managing Director is David Rasquinha.
 It is headquartered in Mumbai, Maharashtra.

 It is the principal financial institution in India for foreign and international trade. 

Functions of the EXIM Bankb

1. Finances import and export of goods and services from India

2. It also finances the import and export of goods and services from countries other than India.

3. It finances the import or export of machines and machinery on lease or hires purchase basis as well.

4. Provides refinancing services to banks and other financial institutes for their financing of foreign trade

5. EXIM bank will also provide financial assistance to businesses joining a joint venture in a foreign country.

6. The bank also provides technical and other assistance to importers and exporters. Depending n the country of
origin there are a lot of processes and procedures involved in the import-export of goods. The EXIM bank will
provide guidance and assistance in administrative matters as well.

7. Undertakes functions of a merchant bank for the importer or exporter in transactions of foreign trade.

8. Will also underwrite shares/debentures/stocks/bonds of companies engaged in foreign trade.

9. Will offer short-term loans or lines of credit to foreign banks and governments.

10. EXIM bank can also provide business advisory services and expert knowledge to Indian exporters in respect of
multi-funded projects in foreign countries
Importance of the EXIM Bank

 Other than providing financial assistance, the Export and Import Bank of India bank is always looking for ways
to promote the foreign trade sector in India.
 In the early 1990s, EXIM introduced a program in India known as the Clusters of Excellence.The aim was to
improve the quality standards of our imports and exports
 . It also has a tie-up with the European Bank for Reconstruction and Development.
 It has agreed to co-finance programs with them in eastern Europe.
 In order to promote exports EXIM bank also has schemes such as production equipment finance program,
export marketing finance, vendor development finance, etc.

73.Define joint venture

A joint venture is a type of business arrangement in which more than two or two parties agree to pool their resources
for the purpose of fulfilling a specific task which can be a new project or any business activity.

Types of Joint Venture

 
In this section we are going to talk about few, most common types of joint ventures:
1. Limited Co-Operation Type JV
Collaboration is done with another business in a specific way like when a small business with a new product wants
to sell it through a larger company's distribution network this leads to merging of business.
2. Separate Joint Venture Business
When separate joint venture business is set up by a new company by handling a contract, separate joint venture
business is formed. 
3. Business Partnerships
Joining business partnership or a limited liability partnership is a type of merger of two businesses. 
Corporations, Partnerships, and Limited Liability Companies.

Advantages of Joint Venture 

 Access to new markets and enlarge their audience.  
 Increased the capacity
 Sharing of risks and costs on a wide surface basis. 
 Access to new knowledge and expertise in business which includes specialised staffing necessity. 
 Access to higher resources, for example the technology and the finance
 Joint venture partner's help in providing a huge pool of resources together.

Disadvantages of Joint Venture 

 The communication between partners is not great as they belong to different societal classes. 
 The partners expect different things from the joint venture, their interest may clash. 
 The expertise and investment level may not match well.
 Work and Resources are not distributed equally.
 Different cultures and management styles may create barriers to the organization.
 The contractual limitations may pose risk to a partner's core business operations.

74.What are the different forms of finance available for export?

75.Give few examples for some popular MNCs in India.