Brief Contents
Part 1: Fundamental Concepts and Strategies of Corporate Finance-----------1 – 161
Chapter 1: An Overview of Financial Management and its Applied Fields--------------------------1
Chapter 2: Financial Statement, Cash Flow and Taxes------------------------------------------------50
Chapter 3: Financial Statements Analysis---------------------------------------------------------------80
Chapter 4: Financial Planning and Applied Financial Formulas -----------------------------------101
Part 2: Time Value of Money --------------------------------------------------------162 – 306
Chapter 5: An Overview of the Time Value of Money-----------------------------------------------162
Chapter 6: Onetime Investment – Certificate or Fixed Deposit-------------------------------------216
Chapter 7: Several Times Equal Investments- ---------------------------------------------------------243
Chapter 8: Financial Credit and its Recovery ---------------------------------------------------------279
Part 3: Projects and Their Valuation ----------------------------------------------307 – 447
Chapter 9: The Sources of Capital-----------------------------------------------------------------------307
Chapter 10: The Cost of Capital and Its Analysis-----------------------------------------------------331
Chapter 11: The Techniques of Capital Budgeting – Evaluating Cash Flow----------------------377
Chapter 12: Cash Flow Estimation and Risk Analysis-----------------------------------------------424
Part 4: Securities and their Valuation----------------------------------------------448 – 576
Chapter 13: Risk, Return and Capital Assets Pricing Model----------------------------------------448
Chapter 14: Stock and Its Valuation--------------------------------------------------------------------476
Chapter 15: Option, Future and Their valuation-------------------------------------------------------505
Chapter 16: Bonds, Its valuation and Interest Rate---------------------------------------------------535
Part 5: Capital Structure, Leverage and Dividend Decision-------------------577 – 654
Chapter 17: Capital Structure and Debts Policy ------------------------------------------------------577
Chapter 18: Leverage Decision--------------------------------------------------------------------------600
Chapter 19: Dividend Decision Policy-----------------------------------------------------------------622
Part 6: Corporate Governance and Valuation -----------------------------------657 – 749
Chapter 20: Corporate Strategies and Its Valuation--------------------------------------------------657
Chapter 21: Firm Valuation------------------------------------------------------------------------------706
Part 7: Managing Global Operation------------------------------------------------750 – 773
Chapter 22: Working Capital and Global Operation Management---------------------------------750
i

Contents
Part 1: Fundamental Concepts and Strategies of Corporate Finance
Chapter 1: An Overview of Financial Management and Its Applied Fields Page No.
1.01 Introduction ---------------------------------------------------------------------------------------------1
1.02 Sources of Finance -------------------------------------------------------------------------------------3
1.03 Institutional and Non-Institutional Sources of Finance--------------------------------------------4
1.04: Financial Markets and Their Functions------------------------------------------------------------5
1.05 Reasons of Securitization with Financial Market --------------------------------------------------7
1.06 Activities and Trading Process of Financial Market-----------------------------------------------7
1.07 Stock Exchanges and its Environment---------------------------------------------------------------8
1.08 Financial Institutions-----------------------------------------------------------------------------------9
1.09 Objectives of Finance---------------------------------------------------------------------------------10
1.10 Principles of Finance----------------------------------------------------------------------------------11
1.11 Importance of Financial Management--------------------------------------------------------------13
1.12 Functions of Finance----------------------------------------------------------------------------------14
1.13 Determinant Factors of Financial Decision --------------------------------------------------------14
1.14 Techniques or Tools of Financial Management---------------------------------------------------16
1.15 Real Rate of Interest, Nominal Rate of Interest and Inflation-----------------------------------17
1.16 Capital Flow in Business -----------------------------------------------------------------------------20
1.17 Intrinsic Value of Firm -------------------------------------------------------------------------------21
1.18 Different Types of Business Firms--------------------------------------------------------------------24
1.19 Relevant Documents for the Formation of a Firm------------------------------------------------25
1.20 Securities and Papers Related to Finance and Business------------------------------------------26
1.21 Banks Advances and Its Securities------------------------------------------------------------------28
1.22 Financial Documents of International Trade Activities------------------------------------------29
1.23 Investment ---------------------------------------------------------------------------------------------31
1.24 Investment Alternatives ------------------------------------------------------------------------------32
1.25 Direct Investing Securities---------------------------------------------------------------------------33
1.26 Indirect Investing Securities-------------------------------------------------------------------------34
1.27 Yield of Different Financial Instruments-----------------------------------------------------------35
1.28 Global Financial Crisis-------------------------------------------------------------------------------36
1.29 Remedy of Global Financial Crisis------------------------------------------------------------------38
1.30 Ethical Practice Protects Firm’s Interest------------------------------------------------------------39
1.31 Difference between Accounting and Finance------------------------------------------------------39
1.32 History of Origin of Financial Management-------------------------------------------------------40
1.33 Organizational Structure and Career Opportunity in Finance-----------------------------------41
1.34 Summary of Chapter----------------------------------------------------------------------------------42
****Multiple Choices and True False Questions-------------------------------------------------------44
****Questions ----------------------------------------------------------------------------------------------49
Chapter 2: Financial Statements, Cash Flow and Taxes
2.01 Introduction of Financial Statements---------------------------------------------------------------50
2.02 Income Statement and its Components-------------------------------------------------------------51
2.03 Different Approaches of Income Statement--------------------------------------------------------53
2.04 Statement of Cash flow and its Components-------------------------------------------------------57
2.05 Statement of Balance Sheet and its Components--------------------------------------------------61
2.06 Different Approaches of Balance Sheet------------------------------------------------------------63
2.07 Statement of Share Holder’s Equity-----------------------------------------------------------------68
2.08 Income Tax and its relation to Financial Statement-----------------------------------------------68
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2.09 Corporate Marginal Tax Rate for 2013-------------------------------------------------------------69
2.10 Measurement of Income Taxes----------------------------------------------------------------------71
2.11 Planning of Corporate Tax --------------------------------------------------------------------------73
****Multiple Choices and True False Questions -------------------------------------------------------77
****Questions ----------------------------------------------------------------------------------------------79
Chapter 3: Financial Statements Analysis
3.01 Financial Statements Analysis with Ratios---------------------------------------------------------80
3.02 Ratio Interpretation Methodology ------------------------------------------------------------------81
3.03 Ratio Analysis and its Usefulness-------------------------------------------------------------------81
3.04 Classification of Financial Ratios and Industry Average-----------------------------------------81
3.05 Liquidity Ratio ----------------------------------------------------------------------------------------83
3.06 Assets Management Ratios or Activity Ratio------------------------------------------------------83
3.07 Debt Ratios---------------------------------------------------------------------------------------------86
3.08 Profitability Ratios------------------------------------------------------------------------------------86
3.09 Market Ratios------------------------------------------------------------------------------------------88
3.10 DuPont Analysis --------------------------------------------------------------------------------------88
3.11 Cross Sectional Analysis (Vertical) ----------------------------------------------------------------90
3.12 Cross Sectional Analysis (Horizontal) -------------------------------------------------------------91
3.13 Cash Conversion Cycle Ratios ----------------------------------------------------------------------92
3.14 Firm’s Strategy with Ratio Analysis----------------------------------------------------------------92
3.15 Different Ratio Criteria for Different Industry-----------------------------------------------------92
3.16 Ratios Analysis of Manufacturing Firm------------------------------------------------------------93
3.17 Formulas of Ratio Analysis --------------------------------------------------------------------------96
****Multiple Choices and True False Questions -------------------------------------------------------98
****Questions----------------------------------------------------------------------------------------------100
Chapter 4: Financial Planning & Applied Financial Formulas
4.01 An Overview of Cash Flow-------------------------------------------------------------------------101
4.02 Analysis of Cash Flow------------------------------------------------------------------------------102
4.03 Cash Flow VS Discounted Cash Flow or NPV---------------------------------------------------103
4.04 Analysis about the Level of Cash Flow-----------------------------------------------------------103
4.05 Analysis for the Discounting Rate of a Project of Firm-----------------------------------------106
4.06 Forecasting Technique of the Cash Flow of Existing Project----------------------------------108
4.07 Forecasting Technique or Budgeting of Financial Statements---------------------------------109
4.08: Planning of Financial Statements-----------------------------------------------------------------113
4.09 Measurement of Free Cash Flow of Firm (FCFF) -----------------------------------------------115
4.10 MVA (market value added) Model----------------------------------------------------------------116
4.11 Calculation of MVA---------------------------------------------------------------------------------117
4.12 Firm Valuation on Yearly MVA-------------------------------------------------------------------118
4.13 Firm Valuation on Half Yearly or Quarterly MVA --------------------------------------------120
4.14 Economic Value Added Model (EVA) ----------------------------------------------------------123
4.15 Valuation of a Project on EVA (limited period) ------------------------------------------------124
4.16 Firm Valuation on EVA (Yearly Basis) ----------------------------------------------------------127
4.17 Firm Valuation on EVA (Half Yearly or Quarterly Basis) ------------------------------------129
4.18 Firm Valuation on EBIT (yearly basis) ----------------------------------------------------------132
4.19 Firm Valuation on Half Yearly or Quarterly Basis EBIT--------------------------------------136
4.20 Firm Valuation on the Yearly Basis CF-----------------------------------------------------------142
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4.21 Firm Valuation on Half-yearly or quarterly Basis CF------------------------------------------144
4.22 Firm Valuation on FCFF (Intrinsic Value) ------------------------------------------------------147
4.23 Firm Valuation on FCFF (Half-yearly or Quarterly Basis) -----------------------------------149
4.24 Break-Even-Point (BEP) ---------------------------------------------------------------------------153
4.25 Marginal Costing------------------------------------------------------------------------------------154
4.26 Marginal Cost and Marginal Revenue------------------------------------------------------------155
4.27 Summary of Chapter--------------------------------------------------------------------------------156
****Multiple Choices and True False Questions-----------------------------------------------------158
****Questions----------------------------------------------------------------------------------------------161
Part 2: Time Value of Money
Chapter 5: An Overview of the Time Value of Money
5.01 Introduction ------------------------------------------------------------------------------------------162
5.02 Definition of the time value of money------------------------------------------------------------163
5.03 Concept of the Cash Flow of Project- ------------------------------------------------------------163
5.04 Time Line --------------------------------------------------------------------------------------------164
5.05 Concept of Present value and Future value ------------------------------------------------------165
5.06 Concept of Interest-----------------------------------------------------------------------------------165
5.07 Compounding and discounting Factor-------------------------------------------------------------166
5.08 Determination of the future value and present value of one time investment ---------------169
5.09 Annuity -----------------------------------------------------------------------------------------------169
5.10 Derivation of annuity -------------------------------------------------------------------------------171
5.11 Determination of the annuity due and ordinary annuity for the PV & FV--------------------174
5.12 Importance and necessity of time value of money-----------------------------------------------176
5.13 Objectives of the time value of money------------------------------------------------------------177
5.14 Determinants of the time value of money---------------------------------------------------------177
5.15 Some examples of the time value of money------------------------------------------------------178
5.16 Cash Flow per Period and Final Cash Flow------------------------------------------------------180
5.17 Equivalent Annuity----------------------------------------------------------------------------------181
5.18 Use of Financial Calculator------------------------------------------------------------------------182
5.19 Use of Scientific Calculator-------------------------------------------------------------------------184
5.20 Use of the Excel for Solving PV and NPV -------------------------------------------------------------185
5.21 Some Examples of Project Evaluation -----------------------------------------------------------186
5.22 Growing annuity-------------------------------------------------------------------------------------192
5.23 Perpetuity Annuity ----------------------------------------------------------------------------------199
5.24 Deferred Annuity------------------------------------------------------------------------------------199
5.25 Deferred Growing Annuity ------------------------------------------------------------------------200
5.26 Case Study of the Time Value of Money---------------------------------------------------------202
5.27 Case Study of the Multiple Growth Project -----------------------------------------------------203
5.28 Formulas of the Time Value of Money-----------------------------------------------------------205
5.29 Summary of Chapter -------------------------------------------------------------------------------206
****Multiple Choices and True False Questions ----------------------------------------------------207
****Questions and Exercises ---------------------------------------------------------------------------210
Chapter 6: One Time Investment – Certificate Deposit or Fixed Deposit
6.01 Introduction------------------------------------------------------------------------------------------216
6.02 Borrowing and Lending rate of Financial Institution-------------------------------------------217
6.03 Types of Onetime Investment (Fixed Deposit) --------------------------------------------------217
6.03 Merit and Drawback of one time investment to investor---------------------------------------218
6.05 Merit and Drawback of one time investment to financial institution-------------------------219
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6.06 Examination of the benefit of investors-----------------------------------------------------------219
6.07 Use of Financial Calculator------------------------------------------------------------------------222
6.08 Use of Excel for Solving the Problem of Onetime Investment--------------------------------224
6.09 Some Examples of Onetime Investment----------------------------------------------------------225
6.10 Target based investment situation-----------------------------------------------------------------227
6.11 Calculating Interest Rate in Targeted Amount and Period-------------------------------------229
6.12 Calculating Year in Targeted Amount and Interest Rate----------------------------------------231
6.13 Continuous Compounding Interest Charged ----------------------------------------------------232
6.14 Case Study of Onetime Investment ---------------------------------------------------------------233
6.15 Case study of one time investment ----------------------------------------------------------------234
6.16 Case Study of Onetime Investment----------------------------------------------------------------235
6.17 Formulas of one time investment -----------------------------------------------------------------236
6.18 Some ready reckoned factor of one time investment--------------------------------------------237
6.19 Source Tax on Onetime Investment---------------------------------------------------------------238
6.20 Summary of Chapter --------------------------------------------------------------------------------239
****Multiple Choices and True False Questions------------------------------------------------------239
****Questions and Exercises----------------------------------------------------------------------------241
Chapter 7: Several Times Equal Investments
7.01 Introduction-------------------------------------------------------------------------------------------243
7.02 Borrowing and Lending Rate of Financial Institution-------------------------------------------244
7.03 Kinds of depositors of several times equal investments----------------------------------------244
7.04 Types of several times equal investments---------------------------------------------------------244
7.05 Merits and drawbacks of several time equal investments to investors-------------------------245
7.06 Merits and drawbacks of several time equal investments to financial institutions-----------245
7.07 Determination of the Future Value of Several Times Equal Investment----------------------246
7.08 Determination of the PMT of Several Times Equal Investments-------------------------------247
7.09 Comparative analysis between the opening of the term and closing of the term deposit--247
7.10 Earlier Depositing Fund is better while Depositing Beginning Term-------------------------249
7.11 Effect of Earlier Funds & Compounding Interest Charge for Closing Deposit--------------249
7.12 Use of Equivalent Annuity for Several Times Equal Investment------------------------------250
7.13 Use of Financial Calculator-------------------------------------------------------------------------251
7.14 Use of Excel for Solving the Several Times Equal Investment--------------------------------253
7.15 Estimating Future Value Annuity Due and Future Value Ordinary Annuity-----------------255
7.16 Some Examples of Several Times Equal Investments-------------------------------------------256
7.17 Target Based Investment Decision----------------------------------------------------------------259
7.18 Calculation of Interest Rate in Targeted Amount------------------------------------------------261
7.19 Case Study of Several Time Equal Investments--------------------------------------------------261
7.20 Case Study of Several Times Equal Investment--------------------------------------------------266
7.21 Some Selected Ready Reckoning Factors of Future Value-------------------------------------270
7.22 Review of the several time deposit----------------------------------------------------------------273
7.23 Formulas of several time equal investments------------------------------------------------------274
Chapter 8: Financial Credit and Its Recovery
8.01 Introduction------------------------------------------------------------------------------------------279
8.02 Spread of Financial Institution---------------------------------------------------------------------279
8.03 Effect of Changed Inflation on Spread------------------------------------------------------------280
8.04 Proper Utilization of Short Term and Long Term Credit---------------------------------------281
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8.05 Different Types of Financial Credit Products----------------------------------------------------281
8.06 Classification of Credit or Loan--------------------------------------------------------------------282
8.07 Categories of Financial Credits--------------------------------------------------------------------282
8.08 Recovery of Financial Credit-----------------------------------------------------------------------284
8.09 Merit and Drawbacks of Financial Credit to Borrowers----------------------------------------284
8.10 Merits and Drawbacks of Financial Credit to Financial Institutions---------------------------285
8.11 Comparative Analysis of the Opening and Closing Term Installment------------------------285
8.12 Comparative Analysis of the Opening and Middle Term Installment-------------------------286
8.13 Use of Financial Calculator-------------------------------------------------------------------------288
8.14 Use of Excel for solving Installment (PMT) ------------------------------------------------------289
8.15 Application of Various Financial Products and Fixation of Installment----------------------290
8.16 Amortization schedule of Balloon and credit recovery-----------------------------------------294
8.17 Case Study of Credit Recovery---------------------------------------------------------------------295
8.18 Formulas of Financial Credit or Loan Recovery-------------------------------------------------299
8.19 Some Selected Ready Reckoning Factors--------------------------------------------------------300
Part 3: Projects and Their Valuation
Chapter 9: The Sources of Capital
9.01 Definitions of Short Term Finance----------------------------------------------------------------307
9.02 Characteristics of Short Term Financing---------------------------------------------------------307
9.03 Sources of Short Term Financing-----------------------------------------------------------------308
9.04 Spontaneous Financing ----------------------------------------------------------------------------308
9.05 Money market----------------------------------------------------------------------------------------309
9.06 Trade Credit and Its Cost----------------------------------------------------------------------------309
9.07 Commercial paper and Its Characteristics--------------------------------------------------------310
9.08 Cost of commercial Papers-------------------------------------------------------------------------311
9.09 Factoring----------------------------------------------------------------------------------------------311
9.10 Advantages of factoring----------------------------------------------------------------------------312
9.11 Calculation of Factoring Cost---------------------------------------------------------------------312
9.12 Short Term Financing from Bank Loan----------------------------------------------------------314
9.13 Cost of Bank Loan----------------------------------------------------------------------------------315
9.14 Medium Term and Long term Financing---------------------------------------------------------316
9.15 Sources of Medium and Long term Financing---------------------------------------------------317
9.16 Recovery of the Medium Term Financing--------------------------------------------------------318
9.17 Reasons for Use of Term Finance by Small and Medium Entrepreneurs---------------------320
9.18 Cost of Medium Term Financing------------------------------------------------------------------320
9.19 Long Term Financing and its Characteristics------------------------------------------------------------321
9.20 Long Term Finance and Its Cost-------------------------------------------------------------------322
9.21 Equity Capital and Its Cost ------------------------------------------------------------------------322
9.22 Preferred Stock and Its Advantages --------------------------------------------------------------323
9.23 Debt Capital and Its Cost---------------------------------------------------------------------------324
9.24 Advantages of Long Term Debt-------------------------------------------------------------------324
9.25 Requirements of Issuance of Bonds and Its Prerequisites--------------------------------------325
****Multiple Choices and True False Questions-----------------------------------------------------327
****Questions---------------------------------------------------------------------------------------------329
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Contents
Chapter 10: The Cost of Capital and Its Analysis Page no:
10.01 Introduction ---------------------------------------------------------------------------------------- 331
10.02 Basic concept of cost of capital -------------------------------------------------------------------332
10.03 Relevant cost of the cost of capital---------------------------------------------------------------332
10.04 Breaking point -------------------------------------------------------------------------------------333
10.05 Kinds of cost of capital----------------------------------------------------------------------------333
10.06 Cost of Equity or common stock capital---------------------------------------------------------334
10.07 Risk premium approach----------------------------------------------------------------------------334
10.08 Capital Assets Pricing Model---------------------------------------------------------------------------335
10.09 Assumptions of CAPM Model and Its Criticisms------------------------------------------------336
10.10 Some examples of cost of capital-----------------------------------------------------------------336
10.11 Dividend Discount Model-------------------------------------------------------------------------341
10.12 Zero Growth Model--------------------------------------------------------------------------------341
10.13 Gordon Model or constant growth model-------------------------------------------------------341
10.14 Different between CAPM and constant growth model-----------------------------------------342
10.15 Multiple growth model----------------------------------------------------------------------------345
10.16 Cost of debenture or bond capital-----------------------------------------------------------------346
10.17 Floatation cost reduce per value of debt instrument--------------------------------------------347
10.18 Tax factors increase per value of debt instrument----------------------------------------------347
10.19 Some examples of cost of Debenture of existing and new company-------------------------348
10.20 Perpetual or irredeemable debenture-------------------------------------------------------------350
10.21 Preferred stock--------------------------------------------------------------------------------------351
10.22 Cost of preferred stock-----------------------------------------------------------------------------351
10.23 Some examples of the cost of Preferred Stock and Its Review-------------------------------352
10.24 Perpetual or irredeemable preferred stock------------------------------------------------------354
10.25 Opportunity cost------------------------------------------------------------------------------------355
10.26 Retained Earnings and Its Cost--------------------------------------------------------------------356
10.27 Weighted average cost of capital-----------------------------------------------------------------357
10.28 Types of weights-----------------------------------------------------------------------------------359
10.29 Calculation of weighted average cost of capital-------------------------------------------------359
10.30 Weighted marginal cost of capital----------------------------------------------------------------359
10.31 Calculation of WMCC--------------------------------------------------------------------------------------360
10.32 Criticism of marginal weights--------------------------------------------------------------------360
10.33 Some examples of weighted average cost of capital-------------------------------------------361
10.34 Case study of cost of capital-----------------------------------------------------------------------365
10.35 Formulas of Cost of capital-----------------------------------------------------------------------367
10.36 Summary of Chapter-------------------------------------------------------------------------------368
*****Multiple Choices and True False Questions----------------------------------------------------369
*****Questions and Exercises---------------------------------------------------------------------------374
Chapter 11: The Techniques of Capital Budgeting – Evaluating Cash Flow
11.01 Introduction-----------------------------------------------------------------------------------------377
11.02 Steps of Capital Budgeting -----------------------------------------------------------------------378
11.03 Kind of investment proposal --------------------------------------------------------------------- 379
11.04 Phases of investment proposal ------------------------------------------------------------------- 379
11.05 Evaluating Process of Project---------------------------------------------------------------------380
11.06 Types of Capital Budgeting Decision -----------------------------------------------------------381
11.07 Project Performance Evaluation------------------------------------------------------------------381
11.08 Payback period method ---------------------------------------------------------------------------382
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11.09 Payback Reciprocal--------------------------------------------------------------------------------384
11.10 Return on Investment (ROI) ------------------------------------------------------------------------------384
11.11 Average Rate of Return (ARR) Method----------------------------------------------------------385
11.12 Discounting Cash Flow Methods-----------------------------------------------------------------385
11.13 Net Present Value-------------------------------------------------------------------------------------------386
11.14 Characteristics of Net Present Value------------------------------------------------------------ 387
11.15 Estimating Appropriate Cash Flow Level with NPV Analysis-------------------------------388
11.16 Evaluating Cash Flow with NPV at Different Discounting Rate-----------------------------389
11.17 Approaches of project selection ------------------------------------------------------------------391
11.18 Modified Net Present Value ----------------------------------------------------------------------395
11.19 Internal Rate of Return and Its Definition-------------------------------------------------------396
11.20 Calculation of Internal Rate of Return----------------------------------------------------------- 396
11.21 Characteristics of IRR--------------------------------------------------------------------------------------398
11.22 Comparison of NPV with IRR--------------------------------------------------------------------398
11.23 IRR Using to Estimate Financial Break-Even Point-------------------------------------------399
11.24 Weakness of Internal Rate of Return------------------------------------------------------------400
11.25 Modified Internal Rate of Return-----------------------------------------------------------------401
11.26 Evaluating Cash Flow with MIRR at Different Discounting Rate---------------------------402
11.27 Profitability Index and Modified Profitability Index-------------------------------------------404
11.28 Depreciation method-------------------------------------------------------------------------------406
11.29 Mutually Exclusive Project -----------------------------------------------------------------------407
11.30 Investment Opportunity Schedule (IOS) --------------------------------------------------------------410
11.31 Optimum Capital Budgeting by Using WMCC and IOS--------------------------------------------411
11.32 Use of Scientific Calculator and Financial Calculator-----------------------------------------412
11.33 Use of EXCEL Software for Solving NPV or IRR or MIRR---------------------------------412
11.34 Lease Financing or Borrowing-------------------------------------------------------------------414
11.35 Some Selected Ready Reckoning IRR for Analysis--------------------------------------------415
11.36 Formulas of Capital Budgeting Technique------------------------------------------------------416
*****Multiple Choice and True False Questions ----------------------------------------------------419
Chapter 12: Cash Flow Estimation and Risk Analysis
12.01 Introduction-----------------------------------------------------------------------------------------424
12.02 Risk adjusted discount rates-----------------------------------------------------------------------425
12.03 Forecasting Techniques of the Cash Flow of Projects-----------------------------------------425
12.04 Sensitivity Analysis--------------------------------------------------------------------------------429
12.05 Scenario Analysis----------------------------------------------------------------------------------431
12.06 Decision Tree---------------------------------------------------------------------------------------432
12.07 Standard Deviation---------------------------------------------------------------------------------437
12.08 Monte Carlo Simulation---------------------------------------------------------------------------438
12.09 Investment Allowance-----------------------------------------------------------------------------441
12.10 Flexible Budget for Project -----------------------------------------------------------------------441
12.11 Basel 2 and Bailout Programme------------------------------------------------------------------442
12.12 Different Starting Time of Project----------------------------------------------------------------442
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Contents
Part 4: Securities and their Valuation
Chapter 13: Risk, Return and Capital Assets Pricing Model Page no:
13.01: Introduction ----------------------------------------------------------------------------------------448
13.02 Primary Risk Assessment -------------------------------------------------------------------------449
13.03 Probability Distribution ---------------------------------------------------------------------------450
13.05 Diversifiable Risk----------------------------------------------------------------------------------453
13.06 Non Diversifiable Risk----------------------------------------------------------------------------454
13.07 Diversifiable Risk Measurement with Standard Deviation-----------------------------------454
13.08 Measurement of Non-Diversifiable Risk--------------------------------------------------------457
13.09 Reasons of the Different Beta Value of a Stock------------------------------------------------459
13.10 Capital Asset Pricing Model (CAPM) ---------------------------------------------------------- 460
13.11 Portfolio Risk Management-----------------------------------------------------------------------464
13.12 Importance of Portfolio----------------------------------------------------------------------------468
13.13 Formulas of risk and return------------------------------------------------------------------------468
13.14 Summary of chapter--------------------------------------------------------------------------------469
*****Multiple Choices and True False Questions ----------------------------------------------------471
*****Questions and Exercises --------------------------------------------------------------------------474
Chapter 14: Stock Valuation
14.01 Introduction-----------------------------------------------------------------------------------------476
14.02 Market efficiency-----------------------------------------------------------------------------------477
14.03 Efficient market hypothesis-----------------------------------------------------------------------477
14.04 Fair game model------------------------------------------------------------------------------------478
14.05 Equilibrium point-----------------------------------------------------------------------------------478
14.06 Fundamental analysis of stock --------------------------------------------------------------------480
14.07 Technical analysis of stock -----------------------------------------------------------------------483
14.08 Basic Valuation Model----------------------------------------------------------------------------487
14.09 Dividend Discount Model of Equity Valuation-------------------------------------------------488
14.10 Free Cash Flow to Equity Stock Model of Equity Valuation---------------------------------491
14.11 Cash Flow Estimation of Equity Holder---------------------------------------------------------495
14.12 Reasons for Investment in Stock-----------------------------------------------------------------495
14.13 Case Study of Stock Valuation ------------------------------------------------------------------495
14.14 Warrant----------------------------------------------------------------------------------------------498
*****Multiple Choices and True False Questions ---------------------------------------------------499
Chapter 15: Option, Future and their Valuation
15.01 An Overview of Option----------------------------------------------------------------------------505
15.02 Option Market and Its Trading Procedure-------------------------------------------------------506
15.03 Understanding Call Option and Put Option-----------------------------------------------------507
15.04 Strategy for Call Option---------------------------------------------------------------------------508
15.05 Strategy for Put Option----------------------------------------------------------------------------509
15.06 Estimating the Payoff and Benefit of Call Option----------------------------------------------509
15.07 Estimating the Payoff and Benefit of Put Option----------------------------------------------511
15.08 Factors Effect on the Payoff and Return of Call Option---------------------------------------512
15.09 Factors Effect on the Payoff and Return of Put Option----------------------------------------518
15.10 Real Option -----------------------------------------------------------------------------------------524
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15.11 Stock Index Option --------------------------------------------------------------------------------525
15.12 Black Scholes Model ------------------------------------------------------------------------------525
15.13 Binominal Option Pricing Model ----------------------------------------------------------------527
15.14 Future Contract-------------------------------------------------------------------------------------528
15.15 Hedging Future Contract -------------------------------------------------------------------------529
15.16 Speculating Future Contract----------------------------------------------------------------------529
15.17 Stock Index Future --------------------------------------------------------------------------------530
15.18 Summary of Chapter ------------------------------------------------------------------------------530
*****Multiple Choices and True False questions-----------------------------------------------------532
*****Questions -------------------------------------------------------------------------------------------533
Chapter 16: Bond, Interest Rate and Its Valuation
16.01 Introduction-----------------------------------------------------------------------------------------535
16.02 Definition of Bond---------------------------------------------------------------------------------536
16.03 Determinants of Bond Valuation-----------------------------------------------------------------536
16.04 Bond Yield------------------------------------------------------------------------------------------537
16.05 Bond Indenture-------------------------------------------------------------------------------------538
16.06 Default Risk-----------------------------------------------------------------------------------------539
16.07 Spread -----------------------------------------------------------------------------------------------540
16.08 Types of Bond--------------------------------------------------------------------------------------540
16.09 Characteristics of Bond----------------------------------------------------------------------------542
16.10 Importance of Bond Valuation -------------------------------------------------------------------542
16.11 Benefit and Risk with Bond-----------------------------------------------------------------------543
16.12 Valuation of Zero Coupon Bond-----------------------------------------------------------------545
16.13 Measurement of the Yield of Zero Coupon Bond----------------------------------------------546
16.14 Measurement of the Valuation of Zero Coupon Bond-----------------------------------------547
16.15 Valuation of Redeemable Bond------------------------------------------------------------------548
16.16 Yield to Call of Bond (YTC) ------------------------------------------------------------------------------554
16.17 Current Yield of Bond (CY) ----------------------------------------------------------------------554
16.18 Irredeemable or Perpetual Bond------------------------------------------------------------------555
16.19 Investing Strategy for Bond-----------------------------------------------------------------------556
16.20 Case Study of Bond Valuation--------------------------------------------------------------------561
16.21 Measurement of the Intrinsic Value of Annually Coupon Bond------------------------------563
16.22 Formulas of Bond Valuation----------------------------------------------------------------------571
Part 5: Capital Structure, Leverage and Dividend Decision
Chapter 17: Capital Structure and Debt Policy
17.01 Introduction-----------------------------------------------------------------------------------------577
17.02 Capital Structure and Its Types-------------------------------------------------------------------579
17.03 Factors Influencing Capital Structure------------------------------------------------------------579
17.04 Optimum Capital Structure-----------------------------------------------------------------------580
17.05 Definition of Optimal Capital Structure---------------------------------------------------------580
17.06 Importance of Optimal Capital Structure-------------------------------------------------------581
17.07 Different Factors of Optimum Capital Structure -----------------------------------------------581
17.08 Modigliani-Miller Model -------------------------------------------------------------------------582
17.09 Selection of Appropriate Capital-----------------------------------------------------------------583
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17.11 Effect of Financial Leverage----------------------------------------------------------------------584
17.12 Sample of Different Debt-Equity Ratio within Equal Capital--------------------------------584
17.13 Breakeven Point or Indifference Point----------------------------------------------------------587
17.14 Net Income Approach-----------------------------------------------------------------------------589
17.15 Net Operating Income Approach-----------------------------------------------------------------591
17.16 Traditional Approach------------------------------------------------------------------------------592
17.17 Hamada Model-------------------------------------------------------------------------------------593
17.18 Miller Model----------------------------------------------------------------------------------------594
17.19 Bankruptcy prediction model by Altman--------------------------------------------------------594
Chapter 18 Leverage Decision
18.01 Introduction-----------------------------------------------------------------------------------------600
18.02 Operating Leverage--------------------------------------------------------------------------------601
18.03 Degree of Operating Leverage (DOL) ----------------------------------------------------------601
18.04 Operating Break Even Point (BEP) --------------------------------------------------------------602
18.05 Characteristics of Operating Leverage ----------------------------------------------------------603
18.06 Financial Leverage---------------------------------------------------------------------------------604
18.07 Degree of Financial Leverage (DFL) -------------------------------------------------------------------604
18.08 Financial Break Even Point (BEP) ----------------------------------------------------------------------605
18.09 Determinant of the Degree of Financial Leverage---------------------------------------------607
18.10 Total or Mixed Leverage--------------------------------------------------------------------------609
18.11 Case Study of Leverage ---------------------------------------------------------------------------611
18.12 Formulas of Leverage------------------------------------------------------------------------------617
Chapter 19: Dividend Decision Policy
19.01 Introduction-----------------------------------------------------------------------------------------622
19.02 Payment of Dividend: Relevant Dated-----------------------------------------------------------623
19.03 Types of Dividend----------------------------------------------------------------------------------623
19.04 Characteristics of Dividend ----------------------------------------------------------------------624
19.05 Causes of Difference in Dividend Policy-------------------------------------------------------624
19.06 Important of Dividend Policy---------------------------------------------------------------------625
19.07 Factors Effecting on Dividend Policy-----------------------------------------------------------625
19.08 Merit and Drawback of Dividend ---------------------------------------------------------------626
18.09 Dividend Payment Model ------------------------------------------------------------------------626
19.10 Stock Split-------------------------------------------------------------------------------------------627
19.11 Reverse Stock Split--------------------------------------------------------------------------------628
19.12 Stocks Repurchase---------------------------------------------------------------------------------628
19.13 Dividend Reinvestment Plan (DRIP) ----------------------------------------------------------- 628
19.14 Formulas of Dividend------------------------------------------------------------------------------629
19.15 Walter’s Share Pricing Model--------------------------------------------------------------------631
19.16 Gordon Dividend Discount Model---------------------------------------------------------------634
19.17 Modigliani and Miller Theory -------------------------------------------------------------------637
19.18 Lintner’s Model------------------------------------------------------------------------------------639
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19.19 Bolton Model---------------------------------------------------------------------------------------640
19.20 Dividend Treatment for Good and Bad Project------------------------------------------------640
19.21 Case Study of Dividend and Dividend Policy--------------------------------------------------641
19.22 Ready Reckoning Table of Gordon Share Price-----------------------------------------------644
19.23 Ready Reckoning Table of Walter Share Price------------------------------------------------647
Part 6: Corporate Governance and Valuation
Chapter 20: Corporate Governances and Its Strategy
20.01 An Overview of Corporate Governance---------------------------------------------------------657
20.02 Social Factors of Corporate Firm-----------------------------------------------------------------658
20.03 Management of Costs------------------------------------------------------------------------------659
20.04 Management of Interest---------------------------------------------------------------------------660
20.05 Breakeven Sales Quantity and its Amount for Corporate Firm-------------------------------661
20.06 Marginal Costing-----------------------------------------------------------------------------------663
20.07 Marginal Cost and Marginal Revenue-----------------------------------------------------------666
20.08 Projected Consolidated Income Statement for Corporate Firm-------------------------------668
20.09 Projected Consolidated Balance Sheet for Corporate Firm-----------------------------------669
20.10 EVA Model for the Project of Corporate Firm for Limited Period---------------------------672
20.11 Case Study of the Projects of Firm---------------------------------------------------------------675
20.12 Case Study of the Projects of Firm - Growth Approach--------------------------------------676
20.13 Economic Value Added Model for Corporate Firm for Infinite Period---------------------678
20.14 Firm Valuation on Yearly Basis EVA-----------------------------------------------------------678
20.15 Firm Valuation on Half Yearly Basis or Quarterly Basis EVA -----------------------------682
20.16 Market Value Add (MVA) -----------------------------------------------------------------------685
20.17 Firm Valuation on Yearly Basis MVA----------------------------------------------------------685
20.18 Firm Valuation on Half Yearly or Quarterly Basis MVA------------------------------------687
20.19 Required New Funds-------------------------------------------------------------------------------692
20.20 Corporate Social Responsibility (CSR) ---------------------------------------------------------693
20.21 Formulas of Corporate Governance--------------------------------------------------------------694
Chapter 21: Firm Valuation
21.01 Introduction-----------------------------------------------------------------------------------------706
21.02 Method of Firm Valuation------------------------------------------------------------------------706
21.03 Different Measurements of Firm Valuation-----------------------------------------------------707
21.04 Zero Growth Firm Valuation on the Basis of EBIT---------------------------------------------707
21.05 Valuation of Various Types of Firms beyond the MM Model--------------------------------708
21.06 Firm Valuation on Yearly Basis EBIT-----------------------------------------------------------708
21.07 Firm Valuation on Half Yearly or Quarterly Basis EBIT--------------------------------------713
21.08 Firm Valuation on Yearly Basis CF--------------------------------------------------------------724
21.09 Firm Valuation on Half-yearly or quarterly Basis CF-----------------------------------------726
21.10 Firm Valuation on Yearly Basis FCFF----------------------------------------------------------731
21.11 Firm Valuation on Half-yearly or quarterly Basis FCFF-------------------------------------733
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21.12 Case Study of Firm Valuation--------------------------------------------------------------------737
21.13 Case Study of Firm Valuation--------------------------------------------------------------------739
21.14 Some Additional Formulas -----------------------------------------------------------------------741
Part 7: Managing Global Operation
Chapter 22: Working Capital and Global Operation Management
22.01 Introduction-----------------------------------------------------------------------------------------750
22.02 Concept of Net Working Capital-----------------------------------------------------------------751
22.04 Cash conversion: Operation cycle----------------------------------------------------------------752
22.05 Matching or Hedging Approach------------------------------------------------------------------752
22.06 Aggressive and Conservative Funding----------------------------------------------------------753
22.07 Estimation of Working Capital-------------------------------------------------------------------753
22.08 Use of Economics Scale---------------------------------------------------------------------------754
22.09 Management of Assets ----------------------------------------------------------------------------754
22.10 Management of Inventory-------------------------------------------------------------------------754
22.11 Inventory Distributing Techniques --------------------------------------------------------------755
22.12 Economic Order Quantity-------------------------------------------------------------------------755
22.13 Other Assets Management -Marketable Securities---------------------------------------------756
22.14 Management of Cash Negotiated Liabilities----------------------------------------------------757
22.15 Zero Balance Account Technique (ZBA) -------------------------------------------------------757
22.16 Cash Concentration --------------------------------------------------------------------------------757
22.17 Management of Liabilities------------------------------------------------------------------------758
22.18 Procedure of Payment and Receipt---------------------------------------------------------------758
22.19 Some Examples of Working Capital Management---------------------------------------------759
22.20 Global Operation-----------------------------------------------------------------------------------765
22.21 Reason for Global Operation---------------------------------------------------------------------765
22.22 Foreign Exchange Rate----------------------------------------------------------------------------765
22.23 Foreign Exchange Rate of Different Countries-------------------------------------------------766
*****Multiple Choices and True False Questions ----------------------------------------------------769
Bibliography-----------------------------------------------------------------------------------------------774
Index--------------------------------------------------------------------------------------------------------775
Excel Solution and Ready Reckoning Table-------------------------------------------------CD
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