1. RATIO ANALYSISRatio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. The ratios are categorized as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios, Profitability Ratios, and Market Value Ratios.

Ratio Analysis as a tool possesses several important features. The data, which are provided by financial statements, are readily available. The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time.

Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm's performance and to identify areas which need to be investigated further.

2. THE DU-PONT IDENTITY

A method of performance measurement was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE).It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things: 

- Operating efficiency which is measured by the profit margin, - Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier

ROE = Sales X Net income X AssetsSales Total assets Total equity

Return on equity = Net income = Net income X AssetsTotal equity Total equity Assets

= Net income X AssetsTotal assets Total equity

3. EXTERNAL FINANCING AND GROWTH

External financing needed and growths are obviously related. All other things staying the same, the higher the rate of growth in sales or assets, the greater will be the need for external financing. In the previous section, we took a growth rate as given, and then we determined the amount of external financing needed to support that growth. In this section, we turn things around a bit. We will take the firm’s financial policy as given and then examine the relationship between that financial policy and the firm’s ability to finance new investments and thereby grow. Once again, we emphasize that we are focusing on growth not because growth is an appropriate goal; instead, for our purposes, growth is simply a convenient means of examining the interactions between investments and financing decisions. In effect, we assume that the use of growth as a basis for planning is just a reflection of the very high level of aggregation used in the planning process.

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4. FINANCIAL PLANNING MODELS

Financial planning models do not always ask the right questions. A primary reason is that they tend to rely on accounting relationships and not financial relationships. In particular, the three basic elements of firm value tend to get left out, namely, cash flow size, risk, and timing.

Because of this, financial planning models sometimes do not produce output that gives the user many meaningful clues about what strategies will lead to increases in value. Instead, they divert the user’s attention to questions concerning the association of, say, the debt-equity ratio and firm growth.The financial model we used for the Hoffman Company was simple—in fact, too simple.Our model, like many in use today, is really an accounting statement generator at heart. Such models are useful for pointing out inconsistencies and reminding us of financial needs, but they offer very little guidance concerning what to do about these problems.

In closing our discussion, we should add that financial planning is an iterative process. Plans are created, examined, and modified over and over. The final plan will be a result negotiated between all the different parties to the process. In fact, long-term financial planning in most corporations relies on what might be called the Procreates approach. Upper-level management has a goal in mind, and it is up to the planning staff to rework and to ultimately deliver a feasible plan that meets that goal.

The final plan will therefore implicitly contain different goals in different areas and also satisfy many constraints. For this reason, such a plan need not be a dispassionate assessment of what we think the future will bring; it may instead be a means of reconciling the planned activities of different groups and a way of setting common goals for the future.

5. FUTURE VALUE AND COMPOUNDING

There are two ways to calculate Future Value (FV):1) For an asset with simple annual interest =Original Investment x (1+ (interest rate*number of years))2) For an asset with interest compounded annually: = Original Investment x ((1+interest rate)^number

of years) Consider the following examples: i. $1000 invested for five years with simple annual interest of 10% would have a future value

of $1,500.00.ii.  $1000 invested for five years at 10%, compounded annually has a future value of

$1,610.51.When planning investment strategy, it's useful to be able to predict what an investment is likely to be worth in the future, taking the impact of compound interest into account. This formula allows you (or your calculator) to do just that:

Pn = P0(1+r)n

Where,Pn is future value of P0

P0 is original amount investedr is the rate of interestn is the number of compounding periods (years, months, etc.)

Note in the example below that when you increase the frequency of compounding, you also increase the future value of your investment.

P0 = $10,000Pn is the future value of P0

n = 10 yearsr = 9% 

Example 1- If interest is compounded annually, the future value (Pn) is $23,674.2

Pn = $10,000(1 + .09)10 = $23,674Example 2 - If interest is compounded monthly, the future value (Pn) is $24,514.

Pn = $10,000(1 + .09/12)120 = $24,514

6. Present value and DiscountingPresent value, also called "discounted value," is the current worth of a future sum of money or stream of cash flow given a specified rate of return. Future cash flows are discounted at the discount rate; the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations. If you received $10,000 today, the present value would be $10,000 because present value is what your investment gives you if you were to spend it today. If you received $10,000 in a year, the present value of the amount would not be $10,000 because you do not have it in your hand now, in the present. To find the present value of the $10,000 you will receive in the future, you need to pretend that the $10,000 is the total future value of an amount that you invested today. In other words, to find the present value of the future $10,000, we need to find out how much we would have to invest today in order to receive that $10,000 in the future.

 Present value of future payment of $10,000 at end of year two:

7. Profitability IndexAn index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

A ratio of 1.0 is logically the lowest acceptable measure on the index. Any value which is 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.

8. Bond Valuation

Bond valuation includes calculating the present value of the bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for an investment in a particular bond to be worthwhile.

Bond valuation is only one of the factors investors consider in determining whether to invest in a particular bond. Other important considerations are: the issuing company's creditworthiness, which determines whether a bond is investment-grade or junk; the bond's price appreciation potential, as determined by the issuing company's growth prospects; and prevailing market interest rates and whether they are projected to go up or down in the future.

9. Stock Valuation

The process of calculating the fair market value of a stock by using a predetermined formulas that factors in various economic indicators. Stock valuation can be calculated using a number of different methods. The most common methods used are

The discounted cash flow method, The P/E method, and The Gordon model.

Whichever method is chosen must be done accurately so that the price of stock can be valued properly.

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10. Financial Regulation

FISCAL LAWSIncome Tax Ordinance 1984 Value Added Tax Act 1991Stamp Act 1899Foreign Exchange Regulation Act 1947 and Guidelines

REGULATORY LAWSCompanies Act 1994Securities and Exchange Commission Act 1993SEC, the InstitutionSecurities and Exchange Ordinance 1969Bank Company Act 1991Financial Institutions Act 1993Insurance Act 1938Insurance Corporations Act 1973Money Loan Court Act 2003Customs Act 1969 Imports and Exports (Control) Act 1950

Dhaka Municipal Corporation Ordinance 1983 Bangladesh Standards and Testing Institution Ordinance 1985Bangladesh Telecommunications Act 2001Bangladesh Energy Regulatory Commission Act 2002

PROPERTY LAWSTransfer of Property Act 1882State Acquisition and Tenancy Act 1950Registration Act 1908Patent and Design Act 1911Trade Marks Act 1940Copyright Act 2000

ENVIRONMENTAL LAWS Environmental Policy 1992Environmental Conservation Act 1995Environmental Conservation Rules 1997Factories Act 1965

PROCEDURAL LAWSCode of Civil Procedure 1908Specific Relief Act 1877Penal Code 1860Arbitration Act 2001Bankruptcy Act 1997

COMMERCIAL LAWS Negotiable Instruments Act 1881Contract Act 1872Foreign Private Investment (Promotion and Protection) Act 1980Board of Investment Act 1989Bangladesh Export Processing Zones Authority Act 1980

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