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William Sharpe, a financial economist developed Capital asset pricing, model in 1970. According to his book, “portfolio theory and capital markets”, he defined risk as systematic risk and unsystematic risk.Systematic risk is related to interest rates, recessions etc., where perils of investing can’t be diversified. Whereas, unsystematic risk is related to stocks.Capital Asset pricing model states relationship between systematic risks and expected returns. It based on mean variation concept. Formula is as follows −$$R_{a}=R_{rf}+\beta_{a}\ast(R_{m}-R_{rf})$$$R_{a}= expected\:return\:on\:a\:security, R_{rf}= risk\:free\:rate, R_{m}=expected\:return\:of\:the\:market$$$\beta_{a}=the\:beta\:of\:the\:security, (R_{m}-R_{rf})=equity\:market\:premium$$Assumptions are mentioned below −Preference of investors for risk return.Investors’ expectations of risk and return.Depending on their assessments of risk and return, ... Read More
Financial strategy tells about how to gather funds and how to utilise the funds. The main purpose is adequate supply of funds to meet present and future needs of business activities. The main aim is to maximise financial value of a firm.Evaluating financial performances − Firm financial performances can be measured by analysing financial ratios of the firm.Financial forecasting − By analysing financial needs, funds will be allocated accordingly. By using scientific techniques accurate forecasts are made, which provides basis to strategic decisions.Capital structure planning − Capital structure decisions will be made on reasonable debt and equity capital. Capital structure ... Read More
There are 3 types of accountsReal account − It relates assets and liabilities; it does not include people accounts. They carry forword every year.Personal account − Connects individuals, firms and associations accounts.Nominal account − Relates all income, expenses, losses and gains accounts.Golden rules of accountingDebit the receiver, credit the giverIf a person gives something to a firm, it must be recorded as credit in the books of accounts. It is used as in personal accounts.If anything coming then Debit, if anything goes out then credit.Real accounts consist of machinery, land and building etc. debit what comes in means it will ... Read More
ADR means American Depository Receipt. ADR is a certificate issued by an American Bank which states that number of shares of another country firm can be traded in U.S. markets. JPMorgan a British departmental store created first ADR in 1927. According to Securities and Exchange Commission (SEC), instead of foreign stock, ADR is more convenient because they have more protection and transparency.ADR Process includes −Domestic company already in local stock exchange sell the shares in bulk to U.S. bank and listed on U.S. exchange.After bank accepts the shares it will issue ADR to interested investor.Selling of ADR shares will be ... Read More
GDR stands for Global Depository Receipts. It is an instrument in which a company in one country issues its shares or convertible bonds in another country. It is a depository receipt, where the security certificate is issued by financial intermediaries (like depository bank), purchases the security and then creates bank certificate and finally selling them in the stock exchange.Some of Indian companies who have GDRs are −Bombay DyeingAxis BankHDFCIndia bulls housing etc.Mechanism of GDR is explained below −If a firm make an agreement with overseas depository bank for purpose of issue of GDR. Then depository bank makes a custodian agreement ... Read More
Source of finance can be simply explained as follows −Based on timeLONG TERMMEDIUM TERMSHORT TERMBASED ON TIMEEquity sharesPreference sharesTrade creditPreference sharesDebenture/BondsWC loansInternal accrualsfinancial institutesgovernmentcommercial banksFixed deposits (period of 1 year)Debentures/bondsAdvances from customersTerm loansCreditorsVenture fundinglease financePayablesAsset securitizationHire purchase financeFactoring servicesInternational financeBill discountingBased on ownership and controlOwnedBorrowedBased on ownership and controlEquity capitalLoans fromFinancial institutionsCommercial loansPreference capitalRetained earningsConvertible debenturesDebenturesVenture fund/ private equityBased on source generationInternalExternalBased on source generationEquity capitalRetained profitsPreference capitalReduction in working capitalRetained earningsSale of assetsConvertible debenturesVenture fund/private equity
The term breakeven point in terms of accounting is nothing but, in a particular accounting period the firm revenues is exactly as same as expenses. This is denoted as BEP (Break Even Point). It tells about number of units to be sold to meet the expenses. It also helps in calculating zero operating margin.Formula − (total fixed cost/price per unit) - variable costFinancial breakeven point is a point where earnings before income tax (EBIT) is equal to financial cost of a firm (or) earnings per share (EPS) is equal to zero. It is useful in calculating zero net income. It ... Read More
Characteristics of corporate finance includes −Financial activity − This kind of duties are done by financial manager and consists activities like planning, raising, investing and monitoring the finance of the company.Raising the finance − It is raised through shares, debentures, bank loans etc. New companies will face difficulties to raise finance, whereas established companies can do it easily because of their reputation.Investing the finance − It will help in purchasing the fixed asset to fulfil the company objectives.Objective oriented − The main objectives are to earn maximum profits, to pay regular dividends to shareholders and to create a future growth ... Read More
Companies in finance are classified as follows −Based on liabilities − Company limited by shares, company limited by guarantee, unlimited companies.Based on members − One-person company, private companies, and public companies.Based on control − Holding and subsidiary companies, associate companies.Based on liabilitiesCompanies limited by shares − Shareholders of company will not be paid completely to their shares, therefore, company’s liability is limited. While winding up company will be liable until they pay total amount to their shareholders.Companies limited by guarantee − this, company will be liable only to amount which is guaranteed.Unlimited companies − As name suggests, it will have ... Read More
Amortisation means distribution of cost of intangible asset over a periods of time. Only intangible assets (assets which don’t have physical existence) are amortised, tangible assets (assets which have physical existence) can’t be amortised.Steps to record amortisation in a journal are as follows −Identify initial value of the asset.Life span of the asset.Residual value.DebitCreditAmortisation expenseXXXXAccumulated amortisationXXXXXFormula to calculate is − amortisation expenses = (initial value-residual value)/lifespanAdvantages of amortisation are −Reduces tax burdens.Firms can show higher value of an asset.Firms can show more income in financial statements.Amortising intangible assets includes −Note the starting date.Calculate initial cost.Estimate life span.Calculate amortisation value per ... Read More