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Finance Concepts Yukti

Rishav

A webinar by PR Cell, IIM Rohtak for Preparation for WAT-PI process,

Admissions-2014

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

S

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

Accounting

Concepts/Principles

S Going Concern

S Accrual

S Business Entity

S Money Measurement

S Conservatism

S Duality concept

Accounting Process

Transaction Journal

Ledgers/ Sales or

Purchase Book

Posting to Trial

Balance

Final Accounts

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

Balance Sheet

Liabilities (sources of funds)

S Equity Capital

S Reserves & Surplus

S Preference Capital

S Long Term Loans/Debt

S Short Term Loans

S Current Liabilities & Provisions

Assets (application of funds)

S LT Assets

S Land & Building

S Plant & Machinery

S Investments

S Current Assets, Loans &

Advances

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

Cash Flow Statement

S Cash Flows from Operating Activities

S Cash Flows From Investing Activities

S Cash Flows From Financing Activities

Ratios

S Liquidity ratios

S Activity ratios

S Debt ratios

S Profitability ratios

S Market ratios

S

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".

Futures and Forwards

Futures

• Futures are standardized

instruments (contracts) transacted

through brokerage firms through

an exchange.

• 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.

• Exchange acts as a Clearing

House as well as counterparty to

every trade mitigating the credit

risk on the transaction.

Forwards

• Forwards are entirely customized

and all the terms of the contract

are privately negotiated between

parties.

• 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.

Options

Put Option S 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.

S A put becomes more valuable as

the price of the underlying stock

depreciates relative to the strike

price.

Call Option S 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 You profit on a call when the

underlying asset increases in

price.

The option may be an European Option or American Option

Swaps

S Interest Rate Swaps

S Currency Swaps

S Commodity Swaps

S Credit Default Swaps

S

Cost of Capital

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

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)

Thank You