The document covers essential financial concepts in preparation for the WAT-PI process for admissions in 2014, focusing on topics such as accounting, derivatives, and cost of capital. Key areas include financial statements like profit and loss accounts, balance sheets, and cash flow statements, along with various financial ratios. Additionally, it explains derivatives including futures, forwards, options, and swaps, as well as the methods for calculating cost of capital.

1. Finance Concepts
Yukti
Rishav
A webinar by PR Cell, IIM Rohtak for Preparation for WAT-PI process,
Admissions-2014
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2. Important Financial Concepts
S Accounting (P & L A/C, Cash Flow, Balance Sheet, Ratios)
S Derivatives (Forwards, Futures, Options & Swaps)
S Cost of capital: Cost of Equity & Cost of Debt

3. Financial Accounting
“Accounting is the art of recording, classifying and
summarizing, in significant manner and in terms of
money, transactions which are, in part, at least of
financial character and interpreting results thereof.”
- AICPA
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4. Accounting
Concepts/Principles
S Going Concern
S Accrual
S Business Entity
S Money Measurement
S Conservatism
S Duality concept

5. Accounting Process
Transaction
Journal
Ledgers/
Sales or
Purchase
Book
Posting to
Trial
Balance
Final
Accounts

6. Profit & Loss Account
S A financial statement that summarizes the revenues, costs and
expenses incurred during a specific period of time - usually a fiscal
quarter or year.
S These records provide information that shows the ability of a
company to generate profit by increasing revenue and reducing
costs.
S The P&L statement is also known as a "statement of profit and
loss", an "income statement" or an "income and expense
statement".
S Top Line & Bottom Line

8. Balance Sheet
Liabilities
(sources of funds)
S
Equity Capital
S
Reserves & Surplus
S
Assets
(application of funds)
Preference Capital
S
Long Term Loans/Debt
S
Short Term Loans
S
Current Liabilities & Provisions
S
LT Assets
S Land & Building
S Plant & Machinery
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Investments
S
Current Assets, Loans &
Advances

10. Types of Capital
S Equity Share Capital
S Preference Share Capital
S Reserves & Surplus
S Long term loan funds:
S Term Loans
S Debentures
S Short term loan funds:
S Bank Overdraft
S Credit Limit

14. Cash Flow Statement
S Cash Flows from Operating Activities
S Cash Flows From Investing Activities
S Cash Flows From Financing Activities

17. Ratios
S Liquidity ratios
S Activity ratios
S Debt ratios
S Profitability ratios
S Market ratios

18. Derivatives
A derivative is a financial contract which derives its
value from the performance of another entity such
as an asset, index, or interest rate, called the
"underlying".
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19. Futures and Forwards
Futures
Forwards
•
Futures are standardized
instruments (contracts) transacted
through brokerage firms through
an exchange.
•
Forwards are entirely customized
and all the terms of the contract
are privately negotiated between
parties.
•
Terms of a futures contract including delivery places and dates,
volume, technical specifications,
and trading and credit procedures are standardized for each type of
contract.
•
They can be keyed to almost any
conceivable underlying asset or
measure.
•
The settlement date, notional
amount of the contract and
settlement form (cash or physical)
are entirely up to the parties to the
contract.
•
Forwards entail both market risk
and credit risk.
•
Exchange acts as a Clearing
House as well as counterparty to
every trade mitigating the credit
risk on the transaction.

20. Options
Put Option
Call Option
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An option contract giving the
owner the right, but not the
obligation, to sell a specified
amount of an underlying security
at a specified price within a
specified time.
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An option contract that gives an
investor the right, but not the
obligation, to buy a stock, bond,
commodity, or other instrument
at a specified price within a
specific time period.
S
A put becomes more valuable as
the price of the underlying stock
depreciates relative to the strike
price.
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You profit on a call when the
underlying asset increases in
price.
The option may be an European Option or American Option

21. Swaps
S Interest Rate Swaps
S Currency Swaps
S Commodity Swaps
S Credit Default Swaps

22. Cost of Capital
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23. Cost of Capital
S Cost of Capital is the cost of using funds of the owners or the
creditors
S Cost of Equity:
S Dividend Discount Method
S
Ke=(D1/P0)+g
S Capital Asset Pricing Method
S
Ke= Rf+ bi *(Equity Risk Premium)
S Factor Model

24. Cost of Capital
S Cost of Debt
S Kd=r(1-t)
S Yield to maturity approach and Debt
S Cost of Preference Shares
S KPS=(Dividend+(M.V.-N.P.))/(0.5*(M.V.+N.P.))
(M.V.=Maturity Value, N.P.=Net Proceeds)
S Weighted Average Cost of Capital
= (We*Ke + Wd*Kd + WPS*KPS)

25. Thank You