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Definition of Corporate Finance

Corporate finance is the division of a company that deals with financial and investment
decisions. Corporate finance is primarily concerned with maximizing shareholder value through
long-term and short-term financial planning and the implementation of various strategies.

2. Who is the head of finance in corporation?

The chief financial officer (CFO) is the officer of a company that has primary responsibility for
managing the company's finances, including financial planning, management of financial risks,
record keeping, and financial reporting.

3. What is the difference of sole proprietorship, partnership and corporation?

A sole proprietorship is an unincorporated entity that does not exist apart from its sole owner. A
partnership is two or more people agreeing to operate a business for profit. A corporation is a
legal entity -- a "person" in the eyes of the law -- existing separate and apart from its owners.

4. Role of financial manager

Financial managers are responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and develop strategies and plans for the
long-term financial goals of their organization. Financial managers typically: ... Help
management make financial decisions.

5. Goal of financial manager

All businesses aim to maximize their profits, minimize their expenses and maximize their market
share. Here is a look at each of these goals. Maximize Profits A company's most
important goal is to make money and keep it.

6. Agency Problem

The agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. In corporate finance, 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 even though it is in the manager’s best interest to
maximize his own wealth.
7. Primary market & Secondary Market

A primary market is a market that issues new securities on an exchange, facilitated by

underwriting groups and consisting of investment banks.

The secondary market is where investors buy and sell securities they already own. It is what
most people typically think of as the "stock market," though stocks are also sold on the
primary market when they are first issued.

8. Capital market and Money market.

A money market is a component of financial market where short-term borrowing can be issued.
This market includes assets that deal with short-term borrowing, lending, buying and selling.
A capital market is a component of a financial market that allows long-term trading of debt
and equity-backed securities.

9. Initial Public Offering

An initial public offering is when a private company or corporation raises investment capital by
offering its stock to the public for the first time.

10. Importance of Different ratio (Liquidity ratio, Inventory turnover ratio)

Liquidity Ratio: The ratio between the liquid assets and the liabilities of a bank or other

Inventory turnover ratio: The inventory turnover ratio is an efficiency ratio that shows how
effectively inventory is managed by comparing cost of goods sold with average inventory for a
period. In other words, it measures how many times a company sold its total average inventory
dollar amount during the year.

11. Components of income statement

Income Statement Format, Components, and Purpose. The Income Statement format is revenues,
expenses, and profits (or losses) of an entity over a specified period of time. In other words, it is
a description of the entities profitability over a period of time (usually quarterly or annually).

12. Components of balance sheet

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The
main categories of assets are usually listed first, typically in order of liquidity.
13. Ratio analysis formula

Current Ratio Current Assets/Current Liabilities

Quick Ratio Current Assets-Inventories/Current Liabilities

Gross Profit Ratio Gross Profit/Net Sales X 100

Operating Cost Ratio Operating Cost/Net Sales X 100

Operating Profit ratio Operating Profit/Net Sales X 100

Net Profit Ratio Operating Profit/Net Sales X 100

Net Profit After Interest And Taxes/ Shareholders Funds or

Return on Investment Ratio
Investments X 100

Return on Capital Employed Ratio Net Profit after Taxes/ Gross Capital Employed X 100

Earnings Per Share Ratio Net Profit After Tax & Preference Dividend /No of Equity Shares

Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100

Earning Per Equity Share Net Profit after Tax & Preference Dividend / No. of Equity Share

Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100

Price Earnings Ratio Market Price Per Share Equity Share/ Earning Per Share X 100

Net Profit to Net Worth Ratio Net Profit after Taxes / Shareholders Net Worth X 100
14. Who are the internal and external users of financial Statement?

Examples of internal users are owners, managers, and employees. External users are people
outside the business entity (organization) who use accounting information. Examples of external
users are suppliers, banks, customers, investors, potential investors, and tax authorities.

15. What is the difference between book value and market value?

The book value of an asset is its original purchase cost, adjusted for any subsequent changes,
such as for impairment or depreciation. Market value is the price that could be obtained by
selling an asset on a competitive, open market.

16. What is Good will? What is Tangible Asset? What is Intangible asset?

Good Will: Goodwill is an intangible asset that arises when one company purchases another for a
premium value. The value of a company’s brand name, solid customer base, good customer
relations, good employee relations, and any patents or proprietary technology represents goodwill.

Tangible Asset: A tangible asset is an asset that has a physical form. Tangible assets include
both fixed assets, such as machinery, buildings and land, and current assets, such as inventory.

Intangible Asset: An intangible asset is a non-physical asset that has a useful life of greater than
one year. Examples of intangible assets are trademarks, customer lists, motion pictures, franchise
agreements, and computer software.

17. What are Capital Structure, Capital Budgeting and Working Capital Management?

Capital Structure refers to a company’s outstanding debt and equity. It allows a firm to
understand what kind of funding the company uses to finance its overall activities and growth.

Capital Budgeting is the process in which a business determines and evaluates potential
large expenses or investments. These expenditures and investments include projects such as
building a new plant or investing in a long-term venture.

Working Capital Management is defined as the management of short-term liabilities and short-
term assets. The process is used continuously to operate and generate cash flow to meet the need
for short-term obligations and daily operational expenses.
18. What are common stock and preferred stock?

Common stock is a security that represents ownership in a corporation. Holders of common

stock exercise control by electing a board of directors and voting on corporate policy.

Preferred stock is a class of ownership in a corporation that has a higher claim on its assets and
earnings than common stock. Preferred shares generally have a dividend that must be paid out
before dividends to common shareholders, and the shares usually do not carry voting rights.

19. What is Debt? Which is cheaper equity or debt? What Is Debt Financing?

When a firm raises money for capital by selling debt instruments to investors, it is known as debt
financing. In return for lending the money, the individuals or institutions become creditors and
receive a promise that the principal and interest on the debt will be repaid on a regular schedule.

20. What Is Equity Financing?

Equity financing is the process of raising capital through the sale of shares in a company. With
equity financing comes an ownership interest for shareholders. Equity financing may range from
a few thousand dollars raised by an entrepreneur from a private investor to an initial public
offering (IPO) on a stock exchange running into the billions.

21. What are the different sources of funds in finance?

Loan stock, Retained earnings, Bank borrowing, Government sources, Business expansion
scheme funds, Venture capital, Franchising.

22. What are Cost of Capital, WACCC and CPM Model?

Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of
return that could have been earned by putting the same money into a different investment with
equal risk. Thus, the cost of capital is the rate of return required to persuade the investor to make
a given investment.

Weighted average cost of capital (WACC) is the average rate of return a company expects to
compensate all its different investors. The weights are the fraction of each financing source in the
company's target capital structure.

The CPM model refers to advertising bought on the basis of impression. This is in contrast to the
various types of pay-for-performance advertising, whereby payment is only triggered by a
mutually agreed upon activity
23. What is Systematic risk, Unsystematic risk with example?

Systematic risk also called market risk or non-diversifiable risk, systematic risk is the fluctuation
of returns caused by the macroeconomic factors that affect all risky assets.

Unsystematic risk also called the diversifiable risk or residual risk. The risk that is unique to
a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that
can be eliminated through diversification.

24. What is beta co-efficient and Risk Premium?

Beta coefficient is a measure of the systematic risk of a security or a portfolio compared with the
market as a whole. It is widely used in portfolio theory and namely in capital asset pricing
model (CAPM) and security market line (SML). Beta shows whether the volatility of return of a
given security is higher or lower than market return volatility.

Risk premium represents the extra return above the risk-free rate that an investor needs in order
to be compensated for the risk of a certain investment. In other words, the riskier the investment,
the higher the return the investor needs.

25. Who are called Marginal investors?

A representative investor whose actions reflect the beliefs of those people who are currently
trading a stock. It is the marginal investor who determines a stock's price

26. What is efficient market hypothesis?

The efficient market hypothesis states that share prices reflect all relevant information, and that it
is impossible to beat the market or achieve above-average returns on a sustainable basis. There
are many critics of this theory, such as behavioral economists, who believe in inherent market

27. What are weak form, semi- strong form and strong form efficiency?

Weak form suggests that all information is not incorporated in the current stock price. It’s used
as an argument against technical analysis, and suggests that past price performance does not give
predictive power on an underlying’s future price.

The Semi-Strong Form of the EMH argues that, in addition to the historical price data available
in the weak form of EMH, public information about a company is available to investors and is
incorporated into the current price of the stock.
The Strong Form of the EMH argues that, even if the information is not available to investors,
and is only known to corporate directors, the current stock price still reflects it. This means that
even knowing insider information cannot improve price prediction leading to “abnormal profit
over time.
28. Different types of insurance?

• Life Insurance or Personal Insurance.

• Property Insurance.
• Marine Insurance.
• Fire Insurance.
• Liability Insurance.
• Guarantee Insurance.
• Social Insurance.
29. What is moral Hazard and Adverse selection?

Moral hazard is a situation in which one party gets involved in a risky event knowing that it is
protected against the risk and the other party will incur the cost. It arises when both the parties
have incomplete information about each other.

Adverse selection refers generally to a situation where sellers have information that buyers do
not have, or vice versa, about some aspect of product quality. In the case of insurance, adverse
selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance.

30. What is dealer? Who is a broker? Who are underwriters?

A dealer is an individual or entity, such as a securities firm, when it acts as a principal and
stands ready to buy and sell for its own account. More generally, an individual or entity
which buys and sells products and holds an inventory.

The most important person in the lending process is the one individual most buyers never think
about: the underwriter. These professionals are responsible for reviewing documents and assessing
a final mortgage application for risk before approving a loan

31. How to insurance compliance earn profit?

32. What is premium in Insurance? Who pays the premium? What is Collateral?

Premium is paid by the insured and received by the insurer for the insurance.

Insured pays the premium

Collateral is defined as the asset submitted by the borrower to the lender as security against the
loan. It will remain with the lender until the full payment of loan amount including interest and
fees charged.

33. Who is insurer? Who is insured?

Insurer is the party who agrees to pay for the losses.

Insured is the party who claim for the damage from the insurer.

34. Name some well-reputed financial institutions of the world?

Fannie Mae, ING Group, Santander Group, BNP Paribas, China Construction Bank, AXA,
Assicurazioni Generali, Allianz, Berkshire Hathaway, Industrial and Commercial Bank of China.

35. What is Mutual fund? What is a pension fund? What is Credit Union?

A mutual fund is an investment vehicle made up of a pool of money collected from many
investors for the purpose of investing in securities such as stocks, bonds, money market
instruments and other assets.

A pension fund is an investment product into which scheme members pay contributions in order
to build up a lump sum to provide an income in retirement.

A credit union is another type of financial institution and is essentially a non-profit financial
cooperative. With account holders seen as members instead of customers, credit unions run
democratically and focused on community. Instead of a hierarchy of employees, members help
members. As a member, you can even join the voluntary board of directors. This allows
members to get more involved in the union’s decision-making processes.

36. What is difference between Commercial Bank and Saving Bank?

Savings Banks provide many of the same services to customers as commercial banks, including
deposits, loans, mortgages, checks and debit cards. S&L can be owned by its depositors and
borrowers. Commercial Banks, on the other hand, are owned and managed by a board of
directors selected by stockholders.
37. What is the name of Central Bank of America, Bangladesh, India and London?

Federal Reserve System, Bangladesh Bank, Reserve Bank of India, Central Bank of London.

38. What is Liquidity? What is it important for a firm?

Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is
to get your money whenever you need it.

39. What is Bond? Is it long-term debt or short-term debt? Who can issue Bond?

A bond is a fixed income investment in which an investor loans money to an entity, which
borrows the funds for a defined period of time at a variable or fixed interest rate.

Companies, municipalities, states and sovereign governments to raise money and finance a
variety of projects and activities use bonds.

40. What is a Zero-Coupon bond? What is yield to Maturity? What is junk bond?

A Zero Coupon Bond is a debt security that is sold at a discount and does not pay any interest
payments to the bondholder. In other words, it’s a bond that sells for less than its face value and
does not make coupon payments or periodic interest payments during its life. At maturity, it can
then be redeemed at its face value allowing the bondholder to make a profit.

Yield to Maturity is also known as redemption yield. As the name suggests, if an investment is
held till its maturity date, the rate of return that it will generate will be Yield to Maturity.

A junk bond is a fixed-income security that is rated below investment grade by one or more of the
major bond ratings agencies.

41. What is Dividend? What is retained earnings? What is voting rights of America?

A dividend is defined as a payment made by a corporation to its shareholders. Usually these

payouts are made in cash, but sometimes companies will also distribute stock dividends,
whereby additional stock shares are distributed to shareholders.

Retained Earnings are the portions of a business’s profits that are not distributed as dividends to
shareholders but instead are reserved for reinvestment back into the business. Normally, these
funds are used for working capital and fixed asset purchases, or allotted for paying off debt
42. What is leverage? What is Operating leverage? What is financial leverage?

Leverage is any technique that amplifies investor profits or losses. It's most commonly used to
describe the use of borrowed money to magnify profit potential, but it can also describe the use
of fixed assets to achieve the same goal.

Operating leverage is the ratio of fixed costs to total costs in a company’s cost structure.
Companies that have a fixed cost to total cost ratio or degree of operating leverage are said to
have high operating leverage.

Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also
known as trading on equity.

43. Define Risk in Finance? What is Business Risk? What is Financial Risk?

Financial risk refers to a company's ability to manage its debt and financial leverage, while
business risk refers to the company's ability to generate sufficient revenue to cover its
operational expenses.

44. What is Loan Amortization?

An amortizing loan is a type of debt that requires regular monthly payments. Each month, a
portion of the payment goes toward the loan’s principal and part of it goes toward interest.

45. What is NPV? What is IRR? What is Capital Rationing?

NPV is the acronym for net present value. Net present value is a calculation that compares the
amount invested today to the present value of the future cash receipts from the investment. In
other words, the amount invested is compared to the future cash amounts after they are
discounted by a specified rate of return.

Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of
potential investments. 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. IRR calculations rely on the
same formula as NPV does.

Capital rationing is a strategy used by organizations attempting to limit the costs of their own
investments. Typically, a company engaging in capital rationing has made unsuccessful
investments of capital in the recent past and would like to raise the return on those investments
prior to engaging in new business.
46. What is Compounding? What is discounting? What is an Annuity?

Compounding is the process of the exponential increase in the value of an investment due to
earning interest on both principal and accumulated interest.

Discounting is the process of determining the present value of a payment or a stream of

payments that is to be received in the future. Given the time value of money, a dollar is worth
more today than it would be worth tomorrow. Discounting is the primary factor used in pricing a
stream of tomorrow's cash flows.

An annuity is a financial product typically used by investors to save tax-deferred for retirement
or to generate regular income payments, helping to replace a paycheck in retirement.

47. What is Merger? What is Acquisition? (For example)

Merger - Business combination that occurs when one entity directly acquires the assets and
liabilities of one or more entities and no new corporation or entity is created.

An acquisition is a situation whereby one company purchases most or all of another company's
shares in order to take control.
48. Cash management, Inventory management, and Working Capital management?

Cash management is the efficient collection, disbursement, and investment of cash in an

organization while maintaining the company’s liquidity. In other words, it is the way in which a
particular organization manages its financial operations such as investing cash in different short-
term projects, collection of revenues, payment of expenses, and liabilities while ensuring it has
sufficient cash available for future use.
Inventory management is the management of inventory and stock. As an element of supply chain
management, inventory management includes aspects such as controlling and overseeing
ordering inventory, storage of inventory, and controlling the amount of product for sale.
Working capital management refers to a company's managerial accounting strategy designed to
monitor and utilize the two components of working capital, current assets and current liabilities,
to ensure the most financially efficient operation of the company.
49. What is economics of Scale? What is economic of Scope?

An economy of scale is a term that refers to the reduction of per-unit costs through an increase in
production volume. This idea is also referred to as diminishing marginal cost.

An economy of scope is an economic concept that the unit cost to produce a product will decline
as the variety of products increases. That is, the more different-but-similar goods you produce,
the lower the total cost to produce each one.