This document provides an overview of key concepts from several finance chapters. It includes definitions of finance, the three major financial decisions of investment, financing, and asset management. It also discusses why wealth maximization rather than profit maximization should be the main goal of a firm. Key concepts like agency problem, how it is solved, corporate social responsibility, risk and return, types of risk, and attitudes toward risk are summarized. The document is a study guide providing questions and answers on these topics from various textbook chapters.

1. Principle of Finance
MBA- 607
Dr. Saleh Md. Mashedul Islam
Set:
1. Chapter- 1 & 5
2. Chapter- Long term (Theory)
3. Chapter- Short term & Mid-term (Theory)
4. Chapter- 3 (Time value of money)
5. Chapter- 4 (Long term securities)
6. Chapter- 13 (Capital budgeting techniques)
7. Chapter- 15 (Required returns & cost of capital)
Theory Set:
1, 2, 3
Math Set:
4,5,6,7
Chapter- 1
The Role of Financial Management
Q-1: Definition of Finance?
Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilisation
of funds. It also deals with profits that adequately compensate for the cost and risks borne by the
business. Finance is the management of money and other valuables, which can be easily
converted into cash.
Q-2: What is the function Finance?
The decision function of financial management can be broken down into three major areas: the
investment, financing, and asset management decisions.
i. Investment Decision
The investment decision is the most important of the firm’s three major decisions when it comes
to value creation. It begins with a determination of the total amount of assets needed to be held
by the firm. Picture the firm’s balance sheet in your mind for a moment. Imagine liabilities and

2. owners’ equity being listed on the right side of the balance sheet and its assets on the left. The
financial manager needs to determine the dollar amount that appears above the double lines on
the left-hand side of the balance sheet – that is, the size of the firm. Even when this number is
known, the composition of the assets must still be decided. For example, how much of the firm’s
total assets should be devoted to cash or to inventory? Also, the flip side of investment –
disinvestment – must not be ignored. Assets that can no longer be economically justified may
need to be reduced, eliminated, or replaced.
ii. Financing Decision
The second major decision of the firm is the financing decision. Here the financial manager is
concerned with the makeup of the right-hand side of the balance sheet. If you look at the mix of
financing for firms across industries, you will see marked differences. Some firms have
relatively large amounts of debt, whereas others are almost debt free. Does the type of financing
employed make a difference? If so, why? And, in some sense, can a certain mix of financing be
thought of as best? In addition, dividend policy must be viewed as an integral part of the firm’s
financing decision. The dividend-payout ratio determines the amount of earnings that can be
retainedgin the firm. Retaining a greater amount of current earnings in the firm means that fewer
dollars will be available for current dividend payments. The value of the dividends paid to
stockholders must therefore be balanced against the opportunity cost of retained earnings lost as
a means of equity financing. Once the mix of financing has been decided, the financial manager
must still determine how best to physically acquire the needed funds. The mechanics of getting a
short-term loan, entering into a long-term lease arrangement, or negotiating a sale of bonds or
stock must be understood.
iii. Asset Management Decision
The third important decision of the firm is the asset management decision. Once assets have been
acquired and appropriate financing provided, these assets must still be managed efficiently. The
financial manager is charged with varying degrees of operating responsibility over existing
assets. These responsibilities require that the financial manager be more concerned with the
management of current assets than with that of fixed assets. A large share of the responsibility
for the management of fixed assets would reside with the operating managers who employ these
assets.
Q-3: Why EPS is not the first goal of firm? / Why profit maximization should not be the
main goal of a firm? / Why wealth maximization should be the main goal of a firm?
Profit maximization refers to how much dollar profit the company makes. It is a short term
approach and a myopic person or business is mostly concerned about short term benefits.

3. But a short term horizon can fulfill objective of earning profit but may not help in creating
wealth. It is because wealth creation needs a longer term; therefore financial management
emphasizes on wealth maximization rather than profit maximization.
For a business, it is not necessary that profit should be the only objective; it may concentrate on
various other aspects like increasing sales, capturing more market share, return on capital etc,
which will take care of profitability. So, we can say that profit maximization is a subset of wealth
and being a subset, it will facilitate wealth creation.
Constrains of Profit Max-
It is a short term approach
It ignores the timing of returns, cash flows, and risk
Profit max method could not discuss on market share, high sales, and greater stability and so on.
It could not consider the social responsibility that is one of the most important objectives of
many firms.
Wealth Maximization/ Maximize Shareholder Wealth
Why wealth max is better option than profit max?
Wealth maximization is long term process. It refers the value of the company generally
expressed in the value of the stock.
Value maximization says that managers should make all decisions so as to increase the total long
run market value of the firm. Total value is the sum of the value of all financial claims on the
firm- including equity, debt, preferred stock and warrants.
Here, the executives undertake investing in new projects, maximizing profits from existing
products and services, controlling cost, and adding value to the company through process, which
reflects in the price of the stock, but always in the increase in Net Asset Value and Equity Per
Share.
The wealth of corporate owners is measured by the share price of the stock, which in turn is
based on the timing of returns (cash flows), their magnitude and their risk. Maximizing share
price will maximize owner wealth.
Cash flow and risk are the key decision variables in maximizing owner wealth.
When investors look at a company they not only look at dollar profit but also profit margins,
return on capital, and other indicators of efficiency. Profit maximization does not achieve the
objectives of the firm’s owners; therefore wealth maximization is better option than profit
maximization.

4. Profit Max vs. Wealth Max
Profit maximization is short term approach and it refers to how much money the company
makes. But Wealth maximization is a long term approach and it refers the value of the company.
Profit maximization is a subset of wealth.
Profit max ignores timing, cash flows, and risk, but in wealth maximizing those are the key
decisions variables.
Maximization of wealth approach believes that money has time value.
Stakeholders Wealth
“Stakeholder theory”, the asserted main contender to value maximization for this objective
function, has its root in sociology, organizational behavior, the politics of specials interests, and
managerial self interest. Here “asserted contender” because stakeholder theory is incomplete as a
specification for the corporate purpose or objective function. It is incompleteness in not
accidental; it serves the private interests of those who promote it, including many managers and
directors of corporations.
Briefly put, value maximization says that managers should make all decisions so as to increase
the total long run market value for the firm. Total value is the sum of the value of all financial
claims on the firm- including equity, debt, preferred stock, and warrants.
Stakeholder theory, on the other hand, says that managers should make decisions so as to take
account of the interest of all the stakeholders in a firm. And stakeholders include all individuals
or group who can substantially affect the welfare of the firm, including not only the financial
claimants, but also employees, customers, communities, governmental officials, and under some
interpretation the environment, terrorists, blackmailers, and thieves.
Q-4: What is Agency Problem?
The agency problem usually refers to a conflict of interest between a company's management and
the company's stockholders. The manager, acting as the agent for the shareholders, or principals,
is supposed to make decisions that will maximize shareholder wealth. However, it is in the
manager's own best interest to maximize his own wealth. While it is not possible to eliminate the
agency problem completely, the manager can be motivated to act in the shareholders' best
interests through incentives such as performance-based compensation, direct influence by
shareholders, the threat of firing and the threat of takeovers.

5. Q-5: How the Agency Problem solve?
An agency relationship occurs when a principal hires an agent to perform some duty. A conflict,
known as an "agency problem," arises when there is a conflict of interest between the needs of
the principal and the needs of the agent.
In finance, there are two primary agency relationships:
A. Managers and stockholders
B. Managers and creditors
1. Stockholders versus Managers: If the manager owns less than 100% of the firm's common
stock, a potential agency problem between mangers and stockholders exists. Managers may
make decisions that conflict with the best interests of the shareholders. For example, managers
may grow their firms to escape a takeover attempt to increase their own job security. However, a
takeover may be in the shareholders' best interest.
2. Stockholders versus Creditors: Creditors decide to loan money to a corporation based on the
riskiness of the company, its capital structure and its potential capital structure. All of these
factors will affect the company's potential cash flow, which is a creditors' main concern.
Stockholders, however, have control of such decisions through the managers.
Since stockholders will make decisions based on their best interests, a potential agency problem
exists between the stockholders and creditors. For example, managers could borrow money to
repurchase shares to lower the corporation's share base and increase shareholder return.
Stockholders will benefit; however, creditors will be concerned given the increase in debt that
would affect future cash flows.
Motivating Managers to Act in Shareholders' Best Interests
There are four primary mechanisms for motivating managers to act in stockholders' best
interests:
1. Managerial compensation
2. Direct intervention by stockholders
3. Threat of firing
4. Threat of takeovers
1. Managerial Compensation: Managerial compensation should be constructed not only to
retain competent managers, but to align managers' interests with those of stockholders as
much as possible.

6.  This is typically done with an annual salary plus performance bonuses and company
shares.
 Company shares are typically distributed to managers either as:
Performance shares, where managers will receive a certain number shares based on the
company's performance
Executive stock options, which allow the manager to purchase shares at a future date
and price. With the use of stock options, managers are aligned closer to the interest of the
stockholders as they themselves will be stockholders.
2. Direct Intervention by Stockholders
Today, the majority of a company's stock is owned by large institutional investors, such as
mutual funds and pensions. As such, these large institutional stockholders can exert influence on
mangers and, as a result, the firm's operations.
3. Threat of Firing
If stockholders are unhappy with current management, they can encourage the existing board of
directors to change the existing management, or stockholders may re-elect a new board of
directors that will accomplish the task.
4. Threat of Takeovers
If a stock price deteriorates because of management's inability to run the company effectively,
competitors or stockholders may take a controlling interest in the company and bring in their
own managers.
Q-6: What is CSR (Corporate Social Responsibility)?
Corporate social responsibility (CSR) A business outlook that acknowledges a firm’s
responsibilities to its stakeholders and the natural environment.
Q-7: Will the CSR be included under wealth maximization?

7. Chapter- 5
Risk & Return
Q-1: What is the difference between Risk & Return?
Risk is the possibility of loss by unforseen happenings. It may be categorised as monetary and
non- monetary. In financial parlance risk is the possiblity of loss in your investments made
(either the capital u had invested, returns or both). Return is the expected value from an
investment which has a risk associated with it. For ex: investing in stock market has a equity risk
involved with it. Generally returns are based on risk levels. Higher the risk higher the return and
the vice versa.
Q-2: What is Expected Return?
Expected return is the weighted average of possible outcomes where the weights represent the
outcome probabilities. Standard deviation describes the risk that expected return will or will not
happen.
Q-3: What is Coefficient of Variance (CV)?
The coefficient of variation represents the ratio of the standard deviation of a distribution to the
mean of that ditribution. It is a measure of ralative risk.
Q-4: What different attitude toward Risk?
Let’s Make a Deal. The host, Monty Hall, explains that you get to keep whatever you find behind
either door #1 or door #2. He tells you that behind one door is $10,000 in cash, but behind the
other door is a “zonk,” a used tire with a current market value of zero. You choose to open door
#1 and claim your prize. But before you can make a move, Monty says that he will offer you a
sum of money to call off the whole deal.
Let’s assume that you decide that if Monty offers you $2,999 or less, you will keep the door. At
$3,000 you can’t quite make up your mind. But at $3,001, or more, you would take the cash
offered and give up the door. Monty offers you $3,500, so you take the cash and give up the
door. (By the way, the $10,000 was behind door #1, so you blew it.) What does any of this have
to do with this chapter on risk and return? Everything. We have just illustrated the fact that the
average investor is averse to risk. Let’s see why. You had a 50/50 chance of getting $10,000 or
nothing by keeping a door. The expected value of keeping a door is $5,000 (0.50 × $10,000 plus
0.50 × $0). In our example, you found yourself indifferent between a risky (uncertain) $5,000
expected return and a certain return of $3,000. In other words, this certain or riskless amount,
your certainty equivalent (CE) to the risky gamble, provided you with the same utility or
satisfaction as the risky expected value of $5,000.

8. It would be amazing if your actual certainty equivalent in this situation was exactly $3,000, the
number that we used in the example. But take a look at the number that we asked you to write
down. It is probably less than $5,000. Studies have shown that the vast majority of individuals, if
placed in a similar situation, would have a certainty equivalent less than the expected value (i.e.,
less than $5,000). We can, in fact, use the relationship of an individual’s certainty equivalent to
the expected monetary value of a risky investment (or opportunity) to define their attitude toward
risk. In general, if the
l Certainty equivalent < expected value, risk aversion is present.
l Certainty equivalent = expected value, risk indifference is present.
l Certainty equivalent > expected value, risk preference is present.
Thus, in our Let’s Make a Deal example, any certainty equivalent less than $5,000 indicates risk
aversion. For risk-averse individuals, the difference between the certainty equivalent and the
expected value of an investment constitutes a risk premium; this is additional expected return
that the risky investment must offer to the investor for this individual to accept the risky
investment. Notice that in our example the risky investment’s expected value had to exceed the
sure-thing offer of $3,000 by $2,000 or more for you to be willing to accept it. In this book we
will take the generally accepted view that investors are, by and large, risk averse. This implies
that risky investments must offer higher expected returns than less risky investments in order for
people to buy and hold them. (Keep in mind, however, that we are talking about expected
returns; the actual return on a risky investment could be much less than the actual return on a less
risky alternative.) And, to have low risk, you must be willing to accept investments having lower
expected returns. In short, there is no free lunch when it comes to investments. Any claims for
high returns produced by low-risk investments should be viewed skeptically.
Q-5: What is the difference between Systematic & Unsystematic Risk?
We have stated that combining securities that are not perfectly, positively correlated helps to
lessen the risk of a portfolio. How much risk reduction is reasonable to expect, and how many
different security holdings in a portfolio would be required?
Research studies have looked at what happens to portfolio risk as randomly selected stocks are
combined to form equally weighted portfolios. When we begin with a single stock, the risk of the
portfolio is the standard deviation of that one stock. As the number of randomly selected stocks
held in the portfolio is increased, the total risk of the portfolio is reduced. Such a reduction is at a
decreasing rate, however. Thus a substantial proportion of the portfolio risk can be eliminated
with a relatively moderate amount of diversification – say, 20 to 25 randomly selected stocks in
equal-dollar amounts. Conceptually, this is illustrated in Figure 5.3. As the figure shows, total
portfolio risk comprises two components:

9. Systematic risk Unsystematic risk
Total risk = (nondiversifiable + (diversifiable or unavoidable) or avoidable)
Systematic risk, also known as market risk and undiversifiable risk, is risk inherent in the entire
market. It affected the global market and was something that couldn't have been foreseen on such
a large scale. There also wasn't much businesses could do to avoid it. Hence, the name
'undiversifiable' risk.
Unsystematic risk is risk which arises from the industry a company operates in or the risk within
the company itself. Unsystematic risk is also called diversifiable risk. It can be of two types:
business risk and financial risk. Industry leaders are usually companies which are more adept at
understanding the unsystematic risks and taking steps to minimize them. As a business,
systematic risks are inevitable and will affect businesses on a wide scale. However, unsystematic
risk is something businesses should prepare for. Business risk arises from changing trends,
slowing industry sales and innovation, and successful companies stay on top of developments so
they can adapt and avoid business risks. Financial risks relate to financial challenges a company
faces and these can be avoided by being more stringent and managing company's cash flows and
profitability
Q-6: What is beta?
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to
the market as a whole. In other words, beta gives a sense of a stock's market risk compared to the
greater market. Beta is also used to compare a stock's market risk to that of other stocks.
Investment analysts use the Greek letter 'ß' to represent beta.

10. Q-7: What is the assumption of CAPM model?
The CAPM depends on certain assumptions. Originally there were nine assumptions, although
more recent work in financial theory has relaxed these rules somewhat. The original assumptions
were:
a. Investors are wealth maximizers who select investments based on expected return and
standard deviation.
b. Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
c. There are no restrictions on short sales (selling securities that you don't yet own) of any
financial asset.
d. All investors have the same expectations related to the market.
e. All financial assets are fully divisible (you can buy and sell as much or as little as you
like) and can be sold at any time at the market price.
f. There are no transaction costs.
g. There are no taxes.
h. No investor's activities can influence market prices.
i. Market portfolio contains only systematic risk.
Math: Self Correction Problem- 1, 2
Problem: 1, 5
Long Term Finance
Q-1: What is the difference between debenture & bond?
Debentures and bonds are types of debt instruments that can be issued by a company. The
functional differences center around the use of collateral, and they are generally purchased under
different circumstances.
Bonds are the most frequently referenced type of debt instrument between the issuer and the
purchaser. An investor loans money to an institution, such as a government or business; the bond
acts as a written promise to repay the loan on a specific maturity date. Normally, bonds also
include periodic interest payments over the bond's duration, which means that the repayment of
principle and interest occur separately. Bond purchases are generally considered safe, and highly
rated corporate or government bonds come with little perceived default risk.
The unsecured long term debt instruments are known as debentures. Debentures have a more
specific purpose than bonds. Both can be used to raise capital, but debentures are typically issued
to raise short-term capital for upcoming expenses or to pay for expansions. Sometimes called
revenue bonds because they may be expected to be paid for out of the proceeds of a new business

11. project, debentures are never asset-backed (they are not secured by any collateral) and are only
backed by the credit of the issuer.
These debt instruments provide companies and governments with a way to finance beyond their
normal cash flows. Some debentures and bonds are convertible, which means that they can be
converted into company stock. In a sense, all debentures are bonds, but not all bonds are
debentures. Whenever a bond is unsecured, it can be referred to as a debenture.
Q-2: What is the equipment trust certificate?
Q-3: What is indenture?
Q-4: What is the difference between debenture & indenture?
Q-5: Describe the Repayment procedure, Retirement of debt & Retirement at Maturity?
Q-6: Describe the rights of common stock holders?
Q-7: Describe the some issues on which preferred stock is similar to bond?
Q-8: Describe a number of issues on which preferred stock is similar to common stock?
Q-9: What is Lease Financing?
Q-10: What is the difference between operational lease & capital lease?
Q-11: What is the difference between Sale and lease back system & Leveraged lease?
Short Term & Mid Term financing
Q-1: What is the difference between Trade acceptance and commercial paper?
Q-2: What is Factoring?
Q-3: How the inventory can be regarded in against of short term bank loan?
Q-4: What is the difference between Line of credit and Revolving credit?

12. Chapter-3
Time Value of Money
Q-1: Short Note: Compound Interest, Discount rate, Capitalization Rate and Annuity.
Compound Interest: Compound interest is interest calculated on the initial principal and also on
the accumulated interest of previous periods of a deposit or loan.
Discount rate/ Capitalization Rate: Interest rate used to convert future values to present values
is called discount rate.
Annuity: Annuity is a series of equal payments or receipts occurring over a specified number of
periods. In an ordinary annuity, payments or receipts occur at the end of each period; in an
annuity due, payments or receipts occur at the beginning of each period.
Math: Self Correction Problem- 1, 2, 3, 4, 5, 6, 7
Problem: 1, 4, 5, 6, 9, 19
Chapter-4
Long term securities
Q-1: What is the difference between Book value and Market value?
Book value is the price paid for a particular asset. This price never changes so long as you own
the asset. On the other hand, market value is the current price at which you can sell an asset.
For example, if you bought a house 10 years ago for $300,000, its book value for your entire
period of ownership will remain $300,000. If you can sell the house today for $500,000, this
would be the market value.
Book values are useful to help track profits and losses. If you have owned an investment for a
long period of time, the difference between book and market values indicates the profit (or loss)
incurred.
The need for book value also arises when it comes to generally accepted accounting principles.
According to these rules, hard assets (like buildings and equipment) listed on a company's
balance sheet can only be stated according to book value. This sometimes creates problems for
companies with assets that have greatly appreciated - these assets cannot be re-priced and added
to the overall value of the company.

13. Q-2: What is intrinsic value?
The intrinsic value is the actual value of a company or an asset based on an underlying
perception of its true value including all aspects of the business, in terms of both tangible and
intangible factors. This value may or may not be the same as the current market value. Value
investors use a variety of analytical techniques in order to estimate the intrinsic value of
securities in hopes of finding investments where the true value of the investment exceeds its
current market value.
Q-3: What is coupon rate?
A coupon rate is the yield paid by a fixed income security. A fixed income security's coupon rate
is simply just the annual coupon payments paid by the issuer relative to the bond's face or par
value. The coupon rate is the yield the bond paid on its issue date. This yield, however, will
change as the value of the bond changes, thus giving the bond's yield to maturity.
Math: Self-Correction Problem- 1, 2, 3, 4, 5, 6
Problem: 1, 2, 3, 5, 6, 7, 10
Chapter-13
Capital Budgeting Techniques
Q-1: What are the acceptance criteria of 4 methods?
we evaluate four alternative methods of project evaluation and selection used in capital
budgeting:
1. Payback period
2. Internal rate of return
3. Net present value
4. Profitability index
1. Payback Period
The payback period (PBP) of an investment project tells us the number of years required to
recover our initial cash investment based on the project’s expected cash flows.

14. Problems:
1. It ignores any benefits that occur after the payback period and, therefore, does not measure
profitability.
2. It ignores the time value of money.
3. Cutoff point is subjective.
2. Internal rate of return: Internal rate of return is a discount rate that makes the net present
value (NPV) of all cash flows from a particular project equal to zero
Problems:
1. IRR does not consider cost of capital, it should not be used to compare projects of different
duration.
2. It assumes all cash flows reinvested at the IRR.
3. It difficults with project rankings nad multiple IRRs.
3. Net Present Value (NPV): Net Present Value (NPV) is the difference between the present
value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to
analyze the profitability of a projected investment or project.
Problems:
It may not include managerial options embedded in the project.
4. Profitability index (PI): Profitability index (PI),, also known as profit investment ratio (PIR)
and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a
useful tool for ranking projects because it allows you to quantify the amount of value created per
unit of investment.
Problems:
1. It is same as NPV.
2. It provides not only relative profitability.
3.It is potential ranking problems.
Q-2: What are the advantages and disadvantages of 4 methods?
Acceptance Criterion of PBP: If the payback period calculated is less than some maximum
acceptable payback period, the proposal is accepted; if not, it is rejected. If the required payback
period were three years, our project would be accepted.

15. Acceptance Criterion of IRR: The acceptance criterion generally employed with the internal
rate of return method is to compare the internal rate of return to a required rate of return, known
as the cutoff or hurdle rate. We assume for now that the required rate of return is given. If the
internal rate of return exceeds the required rate, the project is accepted; if not, the project is
rejected.
Acceptance Criterion of NVP: If an investment project’s net present value is zero or more, the
project is accepted; if not, it is rejected. Another way to express the acceptance criterion is to say
that the project will be accepted if the present value of cash inflows exceeds the present value of
cash outflows.
Acceptance Criterion of Profitability index (PI): A ratio of 1.0 is logically the lowest
acceptable measure on the index. Any value lower than 1.0 would indicate that the project's PV
is less than the initial investment. As values on the profitability index increase, so does the
financial attractiveness of the proposed project.
Q-3: What is the relationship between NPV and IRR?
Q-4: What is Hurdle rate?
A hurdle rate is the minimum rate of return on a project or investment required by a manager or
investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate.
Q-5: How to project must be independent? (Assumption)
Math: Self-Correction Problem- 1, 2, 3, 4, 5, 6
Problem: 4
Note: NPV & Profitability Index are more important.
Chapter-15
Required Returns & Cost of Capital
Q-1: What is the Creation of value? / How the value the company created industry
attractiveness and competitive advantage?
If the return on a project exceeds what the financial markets require, it is said to earn an excess
return. This excess return, as we define it, represents the creation of value. Simply put, the
project earns more than its economic keep. Finding and undertaking these value-creating
(positive NPV) projects increases a company’s common stock share price.

16. Value creation has several sources, but perhaps the most important are industry attractiveness
and competitive advantage. These are the things that give rise to projects with positive net
present values – ones that provide expected returns in excess of what the financial markets
require.
Industry Attractiveness
Favorable industry characteristics include positioning in the growth phase of a product cycle,
barriers to competitive entry, and other protective devices, such as patents, temporary monopoly
power, and/or oligopoly pricing where nearly all competitors are profitable. In short, industry
attractiveness has to do with the relative position of an industry in the spectrum of value-creating
investment opportunities.
Competitive Advantage
Competitive advantage involves a company’s relative position within an industry. The company
could be multidivisional, in which case competitive advantage needs to be judged industry by
industry. The avenues to competitive advantage are several: cost advantage, marketing and price
advantage, perceived quality advantage, and superior organizational capability (corporate
culture). Competitive advantage is eroded with competition. Relative cost, quality, or marketing
superiority, for example, are conspicuous and will be attacked. A successful company is one that
continually identifies and exploits opportunities for excess returns. Only with a sequence of
short-run advantages can any overall competitive advantage be sustained. Thus industry
attractiveness and competitive advantage are principal sources of value creation.
The more favorable these are, the more likely the company is to have expected returns.

17. Q-2: What is Cost of Capital?
Cost of Capital is the required rate of return on the various types of financing. The overall cost of
capital is a weighted average of the individual required rates of return(costs).
Math: Self-Correction Problem- 3
Problem: 5