PRESTON UNIVERSITY sajid ali

PESHAWAR
Program: BBA
Subject: Corporate FinanceSemester:
Spring 2020
Mid-TERM ASSIGNMENT
Instructions:

1. This is an assignment in-lieu of Mid-term Assessment and is not an examination.

2. All questions are compulsory.

3. You must submit the assignment by email directly to the email address of the teacher.

4. You are required to depict your understanding and knowledge of the subject by individually
attempting all of the given questions.

5. The workload for this assignment is about 2-3 hours. However, considering the connectivity difficulties
and limited/interrupted access to Internet, the maximum time

allowed is 24 hours, starting on May 2nd, 2020 at 4.00 pm).

6. You are advised to submit your assignment as soon as possible without waiting till the last hour.

7. No assignment will be accepted for any reason whatsoever if submitted after the deadline.

Attempt all of the following questions:

1. Define risk & return, characteristics line & its beta also define why beta a measure of systematic risk
and what is its meaning?

Answer
Definitions and Basics Risk-Return
Definition:
Higher risk is associated with greater probability of higher return and lower risk with a greater
probability of smaller return. This trade off which an investor faces between risk and return while
considering investment decisions is called the risk return trade off.... Description: For example, Rohan
faces a risk return trade off while making his decision to invest. If he deposits all his money in a saving
bank account, he will earn a low return i.e. the interest rate paid by the bank, but all his money will be
insured up to an amount of.... However, if he invests in equities, he faces the risk of losing a major part
of his capital along with a chance to get a much higher return than compared to a saving deposit in a
bank.

A straight line formed on a graph which represents the relation over time between returns on a stock
and a return on the market. The line is used to showa stock's vertical intercept (alpha) and the line's
slope (beta) and to highlight the difference between unsystematic and systematic risks.

Definition:
Systematic risk, also known as market risk or volatility risk, signifies the inherent danger in the
unexpected nature of the market. This form of risk has an impact on the entire market and not on
individual securities or sectors

. What Does Systematic Risk Mean?

What is the definition of systematic risk? Systemic risk contains the impact of a
recession, inflation and interest rate changes on the entire market, and therefore, it is extremely
volatile, and it cannot be leveraged through diversification.

2. How many types of financial statements and explain each types in detail with examples?

Answer
Financial statements
Definition
Financial Statements represent a formal record of the financial activities of an entity. These are written
reports that quantify the financial strength, performance and liquidity of a company. Financial
Statements reflect the financial effects of business transactions and events on the entity.
 Four Types of Financial Statements
The four main types of financial statements are:
1. Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an
entity at a given date. It is comprised of the following three elements: · Assets: Something a business
owns or controls (e.g. cash, inventory, plant and machinery, etc) - Liabilities: Something a business owes
to someone (e.g. creditors, bank loans, etc) Equity: What the business owes to its owners. This
represents the amount of capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.

View detailed explanation and Example of Statement of

Financial Position

2. Income Statement Income Statement,

Also known as the Profit and Loss Statement, reports the company's financial performance in
terms of net profit or loss over a specified period. Income Statement is composed of the
following two elements:

Income: What the business has earned over a period (e.g. sales revenue, dividend
income, etc)

Expense: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc) Net profit or loss is arrived by deducting expenses from
income.

Cash Flow Statement

Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement
in cash flows is classified into the following segments:

Operating Activities: Represents the cash flow from primary activities of a business.
Investing Activities: Represents cash flow from the purchase and sale of assets other
than inventories (e.g. purchase of a factory plant)

Financial Activities: Represents cash flow generated or spent on raising and repaying
share capital and debt together with the payments of interest and dividends.

View detailed explanation and Example of Cash Flow

Statement
4. Statement of Changes in Equity
Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the
movement in owners' equity over a period. The movement in owners' equity is derived from
the following components:

• Net Profit or loss during the period as reported in the income statement

• Share capital issued or repaid during the period

• Dividend payments

• Gains or losses recognized directly in equity (e.g. revaluation surpluses)

• Effects of a change in accounting policy or correction of accounting error

View detailed explanation and Example of Statement of

Changes in Equity
Link between Financial Statements
The following diagram summarizes the link between
financial statements.
Balance Sheet at the start of the period Income Statement Add Profit (Less Loss) from
operations Statement of changes in Equity Cash Flow Add Capital Raised Less Dividends paid to
owners Statement Cashflow used in Gains & Losses recognized directly in Equity Investing
Activities Cashflow from Financing Debt Balance Sheet at the end of the period
3. What is the purpose of the statement of cash flows? Explain in detail with examples. Also discuss the
benefits that can be derived by the firm from cash budgeting?

Answer
the purpose of the statement of cash flows
A cash budget can help to prepare you financially for seasonal fluctuations in sales and expenditures. If
you are required to renew expensive licenses at a particular time of year, for example, a cash budget can
help you to set aside money over time for these outlays.

The advantages of budgeting

The advantages of budgeting include the following:

Planning orientation. The process of creating a budget takes management away from
its short-term, day-to-day management of the business and forces it to think longer- term. This is the
chief goal of budgeting, even if management does not succeed in meeting its goals as outlined in the
budget - at least it is thinking about the company's competitive and financial position and how to
improve it.

Profitability review. It is easy to lose sight of where a company is making most of its
money, during the scramble of day-to-day management. A properly structured budget points out what
aspects of the business produce money and which ones use it, which forces management to consider
whether it should drop some parts of the business or expand in others.

Assumptions review. The budgeting process forces management to think about why the
company is in business, as well as its key assumptions about its business environment. A periodic re-
evaluation of these issues may result in altered assumptions, which may in turn alter the way in which
management decides to operate the business.

Performance evaluations. You can work with employees to set up their goals for a
budgeting period, and possibly also tie bonuses or other incentives to how they perform. You can then
create budget versus actual reports to give employees feedback regarding how they are progressing
toward their goals. This approach is most common with financial goals, though operational goals (such
as reducing the product rework rate) can also be added to the budget for performance appraisal
purposes. This system of evaluation is called responsibility accounting.
Funding planning. A properly structured budget should derive the amount of cash that
will be spun off or which will be needed to support operations. This information is used by the treasurer
to plan for the company's funding needs. This information can also be used for investment planning, so
that the treasurer can decide whether to park excess cash in short-term or longer-term investment
instruments.

Cash allocation. There is only a limited amount of cash available to invest in fixed assets and
capital, and the budgeting process forces management to decide which assets are most worth investing
in.

Bottleneck analysis. Nearly every company has a bottleneck somewhere, and the
budgeting process can be used to concentrate on what can be done to either expand the capacity of
that bottleneck or shift work around it.