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MBA FINANCE QUESTION AND ANSWER BY BABASAB PATIL(KARRISATTE)
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MBA FINANCE QUESTION AND ANSWER BY BABASAB PATIL(KARRISATTE)

MBA FINANCE QUESTION AND ANSWER BY BABASAB PATIL(KARRISATTE)

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MBA FINANCE QUESTION AND ANSWER BY BABASAB PATIL(KARRISATTE) Document Transcript

  • 1. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 1 Book-Keeping & Accountancy 1. What is General Ledger ? Ans:-General Ledger is a book containing all the accounts for recording transactions relating to a company's 1.Assets 2.Liabilities 3.Owners' equity 4.Revenue 5Expenses 6.Gains and losses. Which is known as “General Ledger” Difference between Journal & Ledger: Journal : The record of journal entries appearing in order by date. Some refer to the journal as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal. Ledger :A "book" containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. 2.What is BRS ? Ans:- BRS means Bank Reconcilation Statement Which shows the differentiation between Cash book and Pass book That statement is known as Bank Reconciliation Statement 3.What is Petty cash? Ans:-An accessible store of money kept by an organization for expenditure on small items. 4.What are the 3 basic rules in Accounting ? Ans:- Real Accounts :Debit what comes in :Credit what goes out Personal Accounts :Debit the receiver :Credit the giver Nominal Account :Debit all expenses and losses :Credit all incomes and gains 5.What is Journalizing? What are the five columns of a Journal? Journalizing:- Ans:- Entering of Financial Data which is known as Journalizing
  • 2. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 2 The five columns of Journal are 1. Date 2. Ledger account to be debited and amount 3. Ledger account to be credit and amount 4. Brief description of the Transaction 5. Cross-Reference to the General ledger 6.List the Type of Transactions entered in Journal Ans:- There are seven Types of Enteries 1.Opening entries 2.Closing entries 3.Transfer entries 4.Adjustment entries 5.Rectification entries 6.Entries for rare transactions 7.Entries for which there is no special journal 7.What is Trial Balance? Ans:- A “Trial balance” is a list of Debit and Credit Or A list of debit & credit balance of all the ledger accounts prepared on any particular date. Which is known as Trail Balance 8.What is fixed Asset? Ans:- Fixed Asset is a long term Asset. Tangible asset held for business use and not expected to be converted to cash in the current or upcoming Fiscal year. Example:- Land, Machine, and Furniture Etc. 9.Explain about Accounts Payable
  • 3. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 3 Ans:- Accounts payable is a form of Credit. When an invoice is Received you would add it to this file, and it would be removed once the payment has been made Ex:- payment to the creditor 10.What are the Types of Assets? Ans:- Types of asset are 1. Fixed asset  Tengible Asset  Intengible asset 2. Current Asset 3. Fictitious Asset 11.What is the meaning of Invoice? Ans:-Invoice is also known as Bill Which is a commercial document issued by a seller to buyer The Bill may be for the Product or service 12.Explain about Accounts Receivable. Ans:- Accounts Recievable is form of Debet. Money owned by the company or Organization from the customer by selling a product(can add more if required.) 13 What is a Credit Memo? Ans:- Credit memo means Credit memorandam. A sales document created on the basis of a customer complaint. This will be reduced in Accounts receivables in Financial Accounting Which is known as Credit Memo 14.What is a Credit? Ans:-Credit which may be in the form of money or some valuable thing from customer to the organization 15.What are Bad Debts? Ans:-Bad debt is when a customer or client fails to pay for their service or goods. The cost of that lingering debt to the company can become a tax deduction depending on whether you are set up on an accrual or cash basis.Which is known as the Bad Debts 16.What is the Difference between Accounts Payable & Accounts Receivable? Ans:- Accounts payable is money owed by a business to its suppliers or Creditor and shown on its Balance Sheet as a liability. Ex:- Payments to the Suppliers And Creditor
  • 4. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 4 Accounts receivable also known as Debt money owed to a business by its clients (customers) and shown on its balance sheet as an asset. Ex:- Payments from Customer side Reconciliation is the adjusting of the difference between two items (e.g., balances, amounts, statements, or accounts) so that the figures are in agreement. Often the reasons for the differences must be explained. One example would be reconciling a checking account (bringing the checking ledger and bank balance statement into agreement). Reasons for Reconciliation: 1) Cheques deposited into bank but not recorded in the bank book. 2) Cheques issued but not presented in bank. 3) Bank charges directly debited from bank account not mentioned in bank book. 4) ECS, not mentioned in bank book. 5) Interested credited into bank account not mentioned in bank book. 6) Cheques deposited not cleared. Difference between A/P and A/R: Accounts Payable :- This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. Accounts Receivable :-A current asset resulting from selling goods or services on credit (on account) • What are the three main financial statements? Balance sheet, income statement, and cash-flow statement • Where is Profit and Loss posted in a balance sheet? Profit – Liabilities, Loss- Assets. • What kinds of items are posted in the Income statement? Net Sales , Cost of Sales Gross Income , Operating Expenses (SG&A) , Operating Income ,Other Income (Expense), Extraordinary Gain (Loss) , Interest Expense , Net Profit Before Taxes (Pretax Income) , Taxes. 1What are the three main financial statements and what kind of items are posted in each? a) Income Statement b) Balance Sheet c) Statement of Cash Flow 1Name the five categories which all the accounts are grouped? Assets ,Liability, Owner's equity, Revenue, Expense,Gains,(Loss) 1Accounting Equation ? Can be expressed in three ways :- Assets = Liabilities + (Shareholders or Owners' Equity Liabilities = Assets – Shareholders or Owners' Equity Shareholders or Owners' Equity = Assets – Liabilities
  • 5. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 5 1What is GAAP? Generally Accepted Accounting Principle 1What is depreciation and what are the types? Depreciation is the wear and tear use of the asset. Types are: Straight line Method and Written down value method 1What are the types of cash flows? The Statement of Cash Flows is the third financial statement required by GAAP, for full disclosure. The Cash Flow statement shows the inflows and outflows of Cash over a period of time, usually one year. There are 3 types of cash flow (CF): 1) Operating - CF generated by normal business operations 2) Investing - CF from buying/selling assets: buildings, real estate, investment portfolios, equipment. 3) Financing - CF from investors or long-term creditors CAPTIAL-MARKET 1What is a capital market and its types? The market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. It is a place where investors come together to buy and sell shares. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. 1What are Capital Market Instruments? Stocks ,Bonds, Debentures Treasury-bills Foreign Exchange Fixed deposits, and others 1Explain a Bond and Debenture? Bonds are essentially a loan the issuing organization receives from the investor who in turn becomes the creditor. Bonds typically have a maturity period during which they cannot be normally traded for full value unless specified otherwise. The rate of return offered by bonds will be lower compared to stocks
  • 6. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 6 due to bonds offering security against turbulent markets. Debentures are long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. Debentures have some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a Bond. 1What are mutual funds? Mutual Fund is a investment company that pools money from shareholders and invests in a variety of securities, such as stocks, bonds and money market instruments Most open-end mutual funds continuously offer new shares to investors. An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. These Funds do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. A close-ended Mutual fund has ----a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. 1What is equity? Funds brought into a business by its shareholders is called equity. It is a measure of a stake of a person or group of persons starting a business 1What settlement details are required on the delivery instruction slip? On every stock exchange various settlements are effected every day such as weekly settlement, daily settlement, auction settlement etc. Each of these settlements is identified by the combination of the market type and the settlement number. You are required to mention the appropriate settlement details on the delivery instruction slip while transferring the shares to your broker's account. These settlement details are available on the contract note issued by the broker. 1What is T+2 rolling settlement cycle T+2 means that trades are settled two working days after the day the trade takes place. For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on. 1How many times can one buy and sell within a settlement cycle? It's possible to by and sell within a settlement cycle many times, which is what traders do. They settle only their net outstanding positions at the end of the cycle. In other words, the settlement is made for the
  • 7. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 7 net outstanding positions at the end of the settlement cycle. 1What are micro-cap, small-cap, mid-cap, large-cap companies? THE CO WHICH HAS MARKET CAPITALISATION OF eg -$50 - $300 million is Micro cap,--- Small Cap: $300 million - $2 billion,--- Mid Cap: $2 - $10 billion, Big Cap: $10 - 200 billion ----- Mega Cap: $200+ billion 1 Investment bankingExplain The role of the investment bank is to issue and sell securities in the primary market on behalf of the international companies. 1Explain Hedge Funds Hedge funds are basically investment funds, which charge a performance fee. Hedge funds are different from the mutual funds, pension funds and insurance companies. Hedge funds can deal with the futures, swaps and other derivative markets. 1Explain Net Present Value (NPV) Net Present Value = (Present Value of Inflow of Cash) – (Present Value of Outflow of Cash) NPV helps to measure the value of a currency today with that of the future, after taking into consideration returns and inflation 1Difference between money market and capital market? Capital markets are for long term investments, companies are selling stocks and bonds in order to borrow money from their investors whereas Money markets are more of a short term borrowing or lending market where banks borrow and lend between each other, as well as finance companies and everything that is borrowed is usually paid back within thirteen month. Capital markets the most common thing used is stocks and bonds, whereas with the Money markets the most common things used are commercial paper and certificates of deposits. 1What are Equity shares, Preference shares, Bonus shares, Bond, Debentures, Dividend, Fixed Deposit? 1Why does one need a broker?
  • 8. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 8 As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can operate in the stock market. Deal can be done only through a registered broker of a recognised Stock Exchange or through a SEBI- registered sub-broker 1What are Blue-Chip companies? A blue chip stock is the stock of a well-established company having stable earnings and no extensive liabilities. 1How is SENSEX calculated? Sensex is an index which shows whether the stocks have gone up or gone down and accordingly the sensex is calculated. 1What is a Split and buy-back? Split is book entry wherein the face value of the share is altered to create more number of shares outstanding without calling for fresh capital or without altering the share capital account. For example if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into two shares of face value Rs.five each and a person holding one share now holds two shares. Buy-back t is a process by which a company can buy-back its shares from shareholders. A company may buy-back its shares in various ways from existing shareholders on a proportionate basis through a tender offer. What is an IPO? An IPO is an abbreviation for Initial Public Offer. When a company goes public for the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in the primary market. The primary market is where a company makes its first contact with the public at large. What is Arbitrage? Arbitrage is an act of buying assets (or securities) in one market and selling in another at higher prices What are the various kinds of financial ratios? There are many financial ratios. Some of the better known include:Liquidity Ratios: Liquidity ratio measures the ability of a firm to meet its current obligations. Liquidity ratios by establishing a relationship between cash and other current assets to current obligations give measure of liquidity. e.g. Current ratio [CR] = Current Assets/Current liabilities. A high CR ratio (>2.5) indicates that a company can meets its short term liabilities.Leverage Ratios: Leverage ratio indicates the proportion of debt and equity in financing the firm's assets. They indicate the funds provided by owners and lenders. e.g -----Debt-equity ratio (D-E ratio) total long term debt/net worth. A high D-E ratio indicates that the company's credit profile is bad. Activity Ratios: Activity ratios are employed to evaluate the efficiency with which firms manage and run their assets. They are also called turnover ratios. e.g-- Sales Turnover ratio = sales/total assets .A Sales Turnover ratio indicates how much business a company generates for every additional rupee invested. Profitability Ratios: These ratios indicate the level of profitability of the business with relation to the inputs or capital employed. Some better-known profit ratios include operating profit margin (OPM). Operating profit margin is a measure of the company's efficiency, either in isolation or in comparison to its peers.
  • 9. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 9 What is EPS, P/E, BV and MV/BV? Earning Per Share (EPS): EPS represents the portion of a company's profit allocated to each outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by the total number of shares outstanding during that period. It is one of the measures of the profitability of common shareholder's investments. It is given by profit after tax (PAT) divided by number of common shares outstanding. Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and earning per share. Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital + reserves & surplus) divided by number of shares outstanding. Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a security and Book Value of the security. What is technical analysis? Technical analysis is the study of historic price movements of securities and trading volumes.Technical analysts believe that prices of the securities are determined largely by forces of demand and supply. Share prices move in patterns which are easily identifiable. Crucial insights into these patterns can be obtained by keeping track of price charts, leading to predictions that a stock price may move up or down. The belief is that by knowing the past, future prices can predicted. What is equity? Funds brought into a business by its shareholders is called equity. It is a measure of a stake of a person or group of persons starting a business What is a Stock Exchange? A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physical entity where brokers trade on a physical trading floor via an "open outcry" system or a virtual environment. What is electronic trading? Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fully automated screen-based processes. Their workstations are connected to a Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's central computer and are matched electronically. What Does Reverse Stock Split Mean? A reduction in the number of a corporation's shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.
  • 10. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 10 Preference Shares usually, non-voting capital stock that pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of assets. Debenture A bond issued by a corporation which is secured by the general credit or promise to pay of the issuer. It is not backed by collateral such as tangible assets. Example: 1. A certificate or voucher acknowledging a debt. 2. An unsecured bond issued by a civil or governmental corporation or agency and backed only by the credit standing of the issuer. Derivatives: Financial instruments, such as futures and options, which derive their value from underlying securities including bonds, bills, currencies, and equities. Equity derivatives are financial derivative products whose value is dependent on the value of an underlying share or group of shares. Underlying Security The security that must be delivered when another security is exercised. For example, if a call option is exercised, then the underlying stock is delivered to the call owner. Warrants, rights, options, and convertible securities all have underlying securities. For futures options, futures are the underlying security. Futures Investment contracts which specify the quantity and price of a commodity to be purchased or sold at a later date. On contract date, the buyer must take physical possession or make delivery of the commodity, which can only be avoided by closing out the contract(s) before that date. Futures can be used for speculation or hedging. Option A contract that gives the owner the right, if exercised, to buy or sell a security or basket of securities (index) at a specific price within a specific time limit. Usually, they are traded as securities themselves, with buyers and sellers trying to profit from price changes. They are generally available for 1 to 9 months, with some longer term options (called LEAPS) also available for selected securities. Stock option contracts are generally for the right to buy or sell 100 shares of the underlying stock (100 is the multiplier). Trading in options should only be undertaken by sophisticated investors. Call Option A call option gives the owner the right, but not the obligation, to buy the underlying stock at a given price (the strike price) by a given time (the expiration date). The owner of the call is speculating that the underlying stock will go up in value, hence, increasing the value of the option. The purpose can be to speculate with the option (hope it goes up and sell for a profit), to invest in the underlying stock at a locked in price if the stock price goes high enough, or to generate income. Each option contract equals 100 shares of stock. For example, an AAA MAR 65 call, would give the owner the right to buy 100 shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date). Put Option A put option gives the owner the right, but not the obligation, to sell the underlying stock at a given price (the strike price ) by a given time (the expiration date). The owner is speculating that the option will go up in value and the underlying stock will go down in value. The purpose can be to either speculate with the option (hope it goes up and sell for a profit) or trade the underlying stock at a locked in price if the stock price goes down enough. For example, an AAA MAR 65 put would give the owner the right to sell 100
  • 11. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 11 shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date). Hedging An investment strategy of lowering risk by buying securities that have offsetting risk characteristics. A perfect hedge eliminates risk entirely. Hedging strategies lower return since there is a cost involved in hedging. For example, a portfolio manager could short a futures contract which will perfectly offset any decrease in the value of the portfolio. Options and short selling stock can also be used for hedging. Hedge funds are investment pools that are free to use any hedging techniques they desire and they often make large bets in a relatively small number of different holdings. Intraday Trading Intraday share trading refers to the buying and selling (or vise versa) of the same script in the same trading session ( on the same day). Portfolio Management: Where assets are combined into a portfolio that fits the investor's preferences (eg, level of risk) and needs (eg, regular dividends). The aim of Portfolio Management is to achieve the maximum return from a portfolio which has been delegated to be managed by an individual manager or financial institution. The manager has to balance the parameters which define a good investment ie security, liquidity and return. The goal is to obtain the highest return for the client of the managed portfolio. Blue Chip Companies: A blue chip stock is the stock of a well-established company having stable earnings and no extensive liabilities. Most blue chip stocks pay regular dividends, even when business is faring worse than usual. They are valued by investors seeking relative safety and stability, though prices per share are usually high. Bond A long-term debt instrument on which the issuer pays interest periodically, known as „Coupon‟. Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a definite MATURITY, „Perpetual Bonds‟ are securities without any maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are not secured by specific collateral, so as to distinguish them from bonds. NASDAQ An acronym for National Association of Security Dealers Automated Quotations System, which is a nationwide network of computers and other electronic equipment that connects dealers in the over- the-counter market across the U.S. The system provides the latest BID and ASKING PRICES quoted for any security by different dealers. This enables an investor to have his or her transaction done at the best price. Due to NASDAQ, the over-the-counter market in the U.S. is like a vast but convenient trading floor on which several thousand stocks are traded. National Stock Exchange (NSE) It is a nationwide screen-based trading network using computers, satellite link and electronic media that facilitate transactions in securities by investors across India. The idea of this model exchange (traced to the Pherwani Committee recommendations) was an answer to the deficiencies of the older stock exchanges as reflected in settlement delays, price rigging and a lack of transparency.
  • 12. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 12 Volatility The measure of the tendency of prices to fluctuate widely. Prices of small companies tend to be more volatile than those of large corporations. Beta is a measure of volatility. Liquidity The ability to turn an asset into cash. A highly liquid asset is easy to sell because an active market exists that sets prices which are continuously adjusted for supply and demand. An example is a listed stock or mutual fund. A less liquid asset is real estate or a collectible Lot A group of identical UNITS (for securities) or nearly identical units (for collectibles) of an investment that are traded at the same time and price. Open lots are the contents of open investments and can be long (buys) or short (short sell). Closed lots are the contents of closed investments and can be long (sell) or short (buy to cover). Depository A system of computerized book-entry of securities. This arrangement enables a transfer of shares through a mere book-entry rather than the physical movement of certificates. This is because the scrips are „dematerialized‟ or alternatively, „immobilized‟ under the system. Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT SALES. Bear Market A long period of declining security prices. Widespread expectations of a fall in corporate profits or a slowdown in general economic activity can bring about a bear market. Bull A person who expects share prices in general to move up and who is likely to take a long position in the stock market Transfer agent: The person or firm that cancels the shares in the name of the seller and The complete lifecycle of a U.S equity trade : Order Capture, its execution in the market, affirmation/confirmation, foreign exchange, clearing, settlement, and reporting. Mutual Fund Fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities or money market securities. The sum of the collected amount is called „Corpus‟. Retained Earnings Net profits kept to accumulate in a business after dividends are paid. Custodian A financial institution that has the legal responsibility for a customer's securities. This implies management as well as safekeeping. Capital Markets : The capital market (securities markets) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. It is a place where investors come together to buy and sell shares. Primary Markets: The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the
  • 13. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 13 security offering, though it can be found in the prospectus Secondary Market: The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Q) What is the difference between stocks and shares? Ans: “Stock” is a general term used to describe the shares of any company and "shares" refers to a specific stock of a particular company. So, if investors say they own stocks, they are generally referring to their overall ownership in one or more companies. If investors say they own shares - the question then becomes - shares in what company? Stocks : A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. Shares : A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares. A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders. Purpose The primary reasons for companies to use corporate actions are: Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed. Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price. Corporate Restructuring : Corporations re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability. Spin-offs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies. Corporate actions includes, name changes, spin-offs, cash stock mergers, forward and reverse stock splits. Corporate Actions are the benefits given to the shareholders by their companies. Types Corporate actions are classified as Voluntary, Mandatory and Mandatory with Choice corporate actions.
  • 14. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 14 Mandatory Corporate Action : A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spinoffs. Strictly speaking the word mandatory is not appropriate because the share holder per se doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action. Voluntary Corporate Action : A voluntary corporate action is an action where the share holders elect to participate in the action. A response is required by the corporation to process the action. An example of a voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporations agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate. Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash/stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc. Mandatory with Choice Corporate Action : A Mandatory with Choice corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash/stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied. Corporate Actions Information When a company announces a corporate action, registered shareholders are told of the event by the company's registrar. Financial data vendors collect such information and disseminate it either via their own services to institutional investors or via online portals in the case of individual investors. Stock split A stock split or stock divide increases or decreases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included. Spin-Offs A spin-off is a new organization or entity formed by a split from a larger one, such as a television series based on a pre-existing one, or a new company formed from a university research group or business incubator. In literature, especially in milieu-based popular fictional book series like mysteries, westerns, fantasy or science fiction, the term sub-series is generally used instead of spin-off, but with essentially the same meaning. Spin-offs as a descriptive term can also include a dissenting faction of a membership organization, a sect of a cult, or a denomination of a church. In business, a spin-off is essentially the opposite of a merger. In computing, a spin-off from a software project is often called a fork. A spin-off product is a product deriving elements of design, branding or function from an existing
  • 15. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 15 product, but which is itself a new distinct product. Corporate spin-off The common definition of spin out is a division of a company or organization that becomes an independent business. Government spin-off Civilian goods which are the result of military or governmental research are also known as spinoffs. Media spin-off Media spin-off is the process of deriving new radio, video game, film series, book series or television programs from existing ones. Net Asset Value (NAV) The per share price of a mutual fund. For a no-load fund, NAV is the price received by both buyers and sellers. For front loaded mutual funds, NAV is equivalent of the bid price (what shareholders can get for selling a share), while the offering price is the price buyers must pay per share (and includes front load). The NAV is usually calculated at the end of each trading day by taking the closing prices of all securities owned plus cash and equivalents and subtracting all liabilities then dividing by the number of shares outstanding, which for open-end funds, fluctuates depending on daily number of redemptions and purchases. Many new funds are issued at a NAV of $10. After a distribution, the NAV falls by the amount equal to the distribution.  Types of Shares  Equity Shares: It is also known as Ordinary Shares. Equity Shares have voting rights, but dividend is paid at last.  Preference Shares: Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. Mutual Fund A Mutual Fund is a pool of money collected from investors and is invested according to stated investment objectives such as portfolio diversification, reduction in risk, professional management, tax benefits etc…
  • 16. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 16 Derivatives Financial instruments such as futures and options, which derive their value from underlying securities including bonds, bills, currencies, and equities.  Futures / Forwards: Investment contracts which specify the quantity and price of a commodity to be purchased or sold at a later date.  Options: A contract that gives the owner the right to buy or sell a security at a specific price within a specific time limit. Options can be further classified as call option and put option. • Call option: An option to buy a certain asset by a certain date for a certain price • Put option: An option to sell a certain asset by a certain date for a certain price  Hedging: An investment strategy of lowering risk by buying securities that have off-setting risk characteristics  Arbitrage: An act of buying securities in one market and selling in another at higher prices. It takes advantage of a price differential existing in the prices of the same commodity or security in two or more different markets.  Speculation: An act to take high risks for high return. It gives liquidity to the market. Collateral Management: Collateral management services are a method of securing a loan with physical commodities. They are deposited as a pledge or guarantee that the loan will be repaid at maturity; if not paid the commodities may be sold to reimburse the lender 1 Merger Merger involves dissolving of two firms and creating one new entity or continuing of one of the old entity names. Mergers represent a very important form of corporate restructuring. Mergers, as used in financial literature, subsume both absorption and consolidation. Example of
  • 17. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 17 absorption : Hindustan Lever and Ponds merged but the resultant entity remained Hindustan Lever. A consolidation involves a combination of two or more firms as a result of which a new firm comes into being and the existing firms are dissolved. E.g. Hindustan Ciba Geigy and Sandoz merged to form Novartis 2 Takeover A takeover involves the acquisition of a certain or entire block of equity capital of a company, which enables the acquirer to exercise control over the affairs of the company. SEBI has specified a takeover code, which the acquiring company has to follow so that investor interests are protected. 3 SWAP RATIO When two or more companies merge or demerge, a consideration is payable to shareholders of merged entity. For example, company A is merging into Company B, then company B has to pay consideration to shareholders of company A. This may be in cash or by shares of the company B. When the shares are being issued to shareholders of company A, a reasonable ratio is worked out by valuation experts. This ratio is called swap ratio. Consider following examples: • 1. A and B company merge to make company C and shares of company C are given to shareholders of A and B based on individual ratio worked out for each company. • E.g. Hindustan Ciba and Sandoz merged to form the new entity Novartis. The ratio in which the shares of Novartis were issued to Hindustan Ciba and Sandoz is called SWAP RATIO. • 2. Company A merges into B and shares of B are given to shareholders of A on a fixed ratio. • E.g. Times Bank has merged into HDFC Bank. The Swap Ratio decided was 5.75 : 1. ie. for every 5.75 shares held in Times Bank by it's shareholder 1 Equity share of HDFC Bank was alloted. • 3. A merges into B and shareholders of A are given shares of C, held as investments by B in a fixed ratio. • 4. Company A divests its one division into separate company and existing shareholders are given shares in the new company. • E.g. Recently Sterlite Industries has decided to split into 3 units viz. Copper , aluminium and telecom cables. 4 Employee Stock Option Plan (ESOP) The companies in order to reward and retain its employees offer them option to buy
  • 18. The Finance Interwive Questoins and Answer Babasabpatilfreepptmba.com Page 18 the shares of the company. This is known as Employee Stock Option Plan (ESOP). Usually the options are exercisable at a price lower then the market price. They are regulated by SEBI and have Tax Implications as prescribed by the act from time to time.