Business Digest: Writers and Compilers
Business Digest: Writers and Compilers
Business Digest: Writers and Compilers
Business Digest
One Stop Solution For Business and Economics Graduates
(সকল ভাইভা এবং লললিত পরীক্ষার লবষয়লভলিক পূর্ ণাঙ্গ প্রস্তুলতর জন্য)
Maruf Ahmed
Ashraful Alam MBA (Marketing) IBA,DU
MSS, BSS (Economics), University of Dhaka BBA, (University of Dhaka)
Assistant Director (Finance), BREB, Ministry of Power Ex-Instructor@ Mentors, UniAid,
Energy and Mineral Resources
Fahad Zeya Mohammad Shahidul Islam
MBA, BBA (Banking), University of Dhaka MBA, BBA (Management), University of Dhaka
Lecturer, Finance & Banking, Comilla University Assistant Manager (Admin and HR), NWPGCL
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Business Digest 2 Introduction
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Business Digest 3 Introduction
*********************BEST of LUCK***********************
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Business Digest 4 Introduction
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Business Digest 5 Introduction
উপলরলল্ললিত লবষয়গুয়লা সািারর্ত দ য়কান ভাইভার জন্যই প্রস্তুলতয়ত সহায়ক ভূলমকা পালন করয়ব। তয়ব লনয়জর
র্লিমিায়ক আত্মলবশ্বায়সর সায়র্থ উপলস্থত বুলি িাটিয়য় ভাইভা দবায়ড ণ উপস্থাপন করয়ত লনজস্ব পলরকল্পনা করয়ত হয়ব।
সৃলষ্টকতণার ওপর লবশ্বাস রািয়ত হয়ব।
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Business Digest 6 Introduction
Public investment and private investment were important contributors to the high GDP
growth rate in 2018.Real investments have increased compared to FY 2017.Public investment
to GDP ratio increased while private investment to GDP ratio decreased.However, Foreign
Direct Investment(FDI) declined to USD 1.58 billion in FY 2018 from 1.65 billion in FY
2017.Bangladesh leaped up 7 places in the Global Competitiveness Index from 2017, but it
ranked the lowest amongst its East and South Asian neighbours in Ease of Doing Business
Ranking 2018.“Encouraging foreign investment” in Bangladesh has had significant success –
particularly in the power generation, gas production, pharmaceutical, textile and cellular
telephony sectors.The country has made excellent progress in expanding electricity supply, but
further steps need to be taken to satisfy the demand for electricity which is rapidly increasing
with the growing economy.
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Business Digest 7 Introduction
What is fuelling Bangladesh’s economy? The garment industry is massive –mostly exported to
the United States and Europe.Other exports in the country include leather, ceramics,
pharmaceuticals and shrimp.This growth, despite of insufficient private sector investment, has
been attributed to manufacturing, construction and a bumper crop harvest, coupled with private
consumption, remittance and rural income growth although private sector investment remains
weak in Bangladesh.
Manufacturing and construction sectors were the main propellers of economic growth in FY
2018. Ready-made garment (RMG) exports, is accounted for 83.4% of total exports.
Bangladesh is on track to graduate from Least Development Country (LDC)status in 2024.After 2027,
the duty free,quota free market access and the relaxed rules of origin (RoO)benefits for LDCs are likely
to end, adding to the global trade challenges Bangladesh might face soon.Therefore, Bangladesh must
devote resources to the development and production of non-RMG products, such as leather, which may
have a promising future in the global market.Bangladesh’s current account deficit records an all-time high
of $7.08 billion in the first nine months of the current fiscal year (2018-29) as the country's capacity to
export is failing to keep up with the appetite for imports.The government has also made efforts to create an
'investor-friendly' environment so as to attract foreign trade.
The volume of non-performing loans (NPLs) rose to BDT 893.4 billion in the middle of FY 2018
and the value of local currency in terms of dollar (exchange rate) decreased due to continuous
inflation.
The arrival of Rohingya refugees will test the resilience of the country’s economy and its ability
to maintain the social development momentum while providing humanitarian
support.Employment opportunities for the young population should be taken into
consideration while making investment decisions.These measures will ensure fairer distribution
of the benefits of robust growth.Sadly, natural disasters have had a negative impact on
Bangladesh’s economy.Despite this Bangladesh’s economic situation looks set to continue
improving.
Total investment (as % of GDP) sluggishly improved mostly due to public investment
Private investment (as % of GDP) remains the “Achilles Heel”
The revenue-GDP ratio has stagnated(around 10%)over the last 10 years without any major
improvement.Development expenditure(22.0%)is programmed to grow faster than operating
expenditure (16.3%).Already more than 12 mega projects are on the way to be
completed.These include Padma Bridge, Metro-rail, Rooppur Nuclear Power Plant, Rampal
Coal Power Plant etc.
The shackles for the business community are coming from land unavailability, poor logistics,
plodding bureaucracy, and skills shortage and quality energy scarcity. To alleviate the land
problem, the government has, in the past, announced creation of 100 economic zones, and
started providing one stop service(electricity, telephone, communication etc utility services).
Bangladesh needs to reduce its gap of balance of payment with India and China.Bangladesh
government is trying to use its demographic dividend (labor force aged 15-)60 properly.
Government is arranging different types of training and focusing technical knowledge for the
young generation to turn this huge population into asset.
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Business Digest 8 Introduction
Like in most other nations, the outbreak of COVID-19 pandemic is an unprecedented shock to the
Bangladesh economy.
Global and local demand for manufactured goods, particularly in the garments sector, has affected
private sector growth and government’s focus in managing the COVID-19 pandemic has expectedly
halt public sector projects. Hence, based on the economic disruptions following the pandemic, GDP
growth forecast of Bangladesh by IMF, WB and ADB has been revised downward from 7.8%-8.2% to
a range of 2.0% to 3.8% for FY’20. Expert project export to fall by 15.4%, import to slow down by
11.8% and remittance to grow at 6.0% in FY 20.
The banking sector was already struggling prior to the COVID-19 situation from skyrocketing Non-
Performing loans, declining margins in a capped interest rate regime, etc. Now, the pandemic has put
the sector into further stress. The funds from the stimulus package will be distributed through the
banking channel; while both credit and collection risk will lie with the banks. The sector being
overburdened with nonperforming assets need to mitigate credit risk before disbursing any fresh aids. It
is high time for the country’s banking sector to develop and implement a truly digitized financial
system, which would include a secured, contactless, and converged financial platform for transactions.
The post pandemic banking scenario would be unquestionably different than the present and
technology would play the dominant factor in creating competitiveness.
High cost to income ratio (78%) in the banking sector with a sudden pandemic shock made the banks
ripe for cost efficiency developments. Cost rationalizations and layoffs in banking sector may come up
with an endeavour to increase efficiency but if done in biased/ weak governance framework, it may
leave the sector demoralized.
The revenue stream of insurance industry is suffering badly due to COVID-19 pandemic. Due to
COVID-19 fire and marine insurance are expected to take the biggest hit. The Covid-19 pandemic has
completely derailed the textile industry from its growth trajectory. From Mar 2020 to May 2020, RMG
exports fell by 54.8% to USD 3.7bn from USD 8.2bn over the same period of 2019. During this time,
1,150 factories reported order cancellation/suspension of USD 3.18bn which impacted around 2.28mn
workers in the industry. The previous structural weaknesses coupled with pandemic shock has driven
the textile industry into a corner and has created a “do or die” situation.
Bangladesh has excess power generation capacity that results in growing capacity payments every
year. Overall power capacity utilization in Bangladesh for 2018-19 was just 43%. Now, the pandemic
driven slowdown in economic activities is likely to further lower energy demand and worsen the excess
capacity situation. Many of the power generation and distribution companies are likely to witness
significant fall in their topline even with capacity payments, some will face business continuity risk
from non-renewal of rental power agreements. Cement and Steel producers in Bangladesh made
aggressive expansion over the past few years with the aim of supplying to the government for its
megaprojects, meeting the rising consumer demand and exporting to neighboring countries. Now, with
the advent of the Covid-19 pandemic all activities in the construction industry has come to a grinding
halt. With the prospect a prolonged demand slump, broken cash cycle from high credit sales and high
debt burden industry players are likely to find it impossible to survive without government assistance.
The pharmaceutical industry is among the least effected by the pandemic disruption but the industry’s
supply chain has been stretched dangerously thin. The industry imports over 97% of its raw materials;
however, trade with importing countries has been severely restricted since the start of the pandemic. If
this persists, drug producers may have to shift to expensive import destinations which will eat into their
profit margins.
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Business Digest 9 Introduction
The government stimulus gives the industry access to cheap financing which is not enough to
address the demand and supply chain disruptions over the long run. Fiscal stimulus worth BDT
1,029.6bn and various non fiscal stimulus has been announced to tackle the economic fallout of
the coronavirus pandemic. However, efficient implementation of the fiscal stimulus will be a key
challenge.
Fortunately, The GDP growth rate of Bangladesh has reached 5.24 per cent in the last fiscal year
(FY20) despite the impact of coronavirus pandemic while the per capita income increased to
$2,064, according to the provisional estimation of Bangladesh Bureau of Statistics (BBS), reports
BSS. The per capita income stood at $2,064 in the last fiscal from US$1,909 in FY19. The per
capita income was US$1,751 in FY18. According to the BBS, the GDP growth rate at constant
prices in the Industry sector increased by 6.48 per cent in the last fiscal year which was 12.67 per
cent in FY19.
Till August,2020, Many of Bangladesh’s South Asian peers and other countries around the world
are in negative growth or lower growth than projections. Bangladesh has recorded an impressive
5.24% GDP growth (provisional) in FY2019-20, despite the devastating impact of the Covid-19
pandemic. Bangladesh’s inspiring performance in GDP growth and other economic indicators has
led economists and global projections to forecast that the country's economy will recover from the
pandemic faster than many other economies in the region.
Experts believe that there will be huge opportunities for Bangladesh in the post-Covid-19 scenario
that the country needs to utilize. The pandemic will bring new life and new culture. He said here
is shortage in demand and supply and this will encourage other countries to supply to Bangladesh
and also take goods from the country. “Bangladesh will be in a much stronger position to
negotiate with the importers of garments which is a basic goods. Padma Bridge and three ports are
coming up which will connect the country with the rest of the world. Many African countries do
not have port facilities for which they have to suffer a lot, but Bangladesh has got that
opportunity. Metro rail, underground tunnel projects are being implemented which will create
new opportunities for the country. Bangladesh's large import is the energy and its cost will be half
in post-COVID-19 era. Education sector is now more dependent on internet connectivity.
Already 95 percent people have access to telephony that another huge thing that happens in
infrastructure “With these telephony available, we can extend it to 4G and 5G and we can find it
for ensuring access to medical service for the people. If we can properly provide education
through internet we can move up. China is coming up fast as because their people are educated. if
we can give it through the internet and computers and telephone, it will be much more useful.
Now the government is looking for converting all the upazila health complexes into hospitals that
will be huge upside to provided social infrastructures. COVID-19 is certainly bad for all but these
opportunities are the stars in the darkness. There could be sunshine and there could be sunshine in
the cloud for which Bangladesh must pursue.
Bangladesh’s exports rose by 0.6% to $3.91 billion in July, after suffering an 83% decline to $520
million in April. Imports are also showing signs of improvement, with a 36% rise from May to
June. In addition, remittance hit record highs of $18.20 billion in FY20 and Foreign Exchange
reserves hit an all-time high of $37.1 billion in July. Agricultural production, a crucial engine of
growth, performed better in the pandemic, even though crops suffered due to supply chain
disruptions. However, the Covid-19 pandemic continues to pose great risk as it could weaken the
outlook in the US and European Union, major exports destinations for Bangladeshi goods, said
the global research team of Standard Chartered Bank.
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Business Digest 10 Introduction
Furthermore, falling oil prices and Covid-19 in the Middle East, a major source of inbound
remittances, is another concern for the Bangladesh economy. Fiscal and monetary support is likely
to be simultaneously used to cushion the growth slowdown. Bangladesh's debt to GDP ratio is
likely to increase to 40% of GDP in FY 2021, but it is still in a comfortable zone compared to
peers, according to the multinational bank. The Bangladeshi Taka is likely to remain stable on the
back of Balance of Payment surpluses, it added. The country’s external debt to GDP ratio remains
low and this is a unique advantage, allowing for a V shaped economic recovery if properly
utilized. While fiscal and monetary policy measures for stimulus packages are expected to
increase local currency liquidity, there will also be opportunities to tap into the foreign currency
liquidity pool for medium to long term funding for various investment and infrastructure projects,
they added. Expert suggested looking at capital market instruments such as commercial paper,
zero coupon bonds, sukuks NS green bonds for long-term financing, and moving away from
traditional bank-led financing models. This will not only help to attract local investors but also
bring in foreign investment to the capital market, making Bangladesh’s financial sector more
vibrant.
The post-COVID-19 world will not be the same again. The new normal may come up with
changed lifestyle, purchasing behavior and way of doing business through new interfaces. The
post-pandemic solutions of unique problems that we are facing through this pandemic may lay the
foundation for many business ideas and can shape the future of our e-commerce industry in the
coming years.
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Business Digest 11 Introduction
The government has already approved the Tk 2.03 trillion Annual Development Programme.
The government is placing the maximum emphasis on developing rural infrastructure to ensure
that people living in these areas have access to all urban amenities in keeping with the party’s
electoral promises. “Therefore, the upcoming budget is focusing on the motto ‘my village, my
city. The Government plans to expand the national budget to Tk 7 trillion and scale double -digit
GDP growth by 2021, the golden jubilee of the country’s independence. Tk. 43,919 crore is
allocated for 14 projects which is 21.7% of total ADP of FY 19-20.
To promote FDI, the government has provided relief to the foreign companies from multiple layer
of taxation on dividend income. Moreover, the proposal to continue with reduced tax rates between
10 percent and 15 percent for readymade garment and textile sectors, would also augment foreign
investment, boost exports and generate employment opportunities. The budget FY20 has proposed
new fiscal incentives for the export sector. Cash incentive of 1% for the RMG exports which are not
receiving the prevailing 4%incentive –An additional Tk. 2,825 crore will be provided in FY20.
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Business Digest 12 Introduction
Education budget decreased as a share of total budget from 12% in FY09 to 11.7% in FY2019 but
VAT on English Medium Schools is to be reduced to 5% from 7.5%- reducing the cost of
education. Allocation for social safety net (SSN) has been increased by 15.5%. TDS on interest from
savings certificate has been increased from 5% (final settlement) to 10% (final settlement) –the final
settlement part of the new clause will put tax burden in case of low-income people depending on the
interests from savings (measures should be taken to protect their welfare).
VAT exemption on, inputs required for government's priority and fast track projects, such as the
Bangladesh Economic Zone (BEZA) and the Public-Private Partnership (PPP) projects, might attract
investment but will probably create discrimination. Total allocation for the power division has been
increased from BDT 22, 936 crore in budget FY19 to BDT 26, 064 crore in budget FY20 -a 13.64%
increase.
Certain products and services are exempt from VAT (foodstuffs, agricultural supply, public transport,
pharmaceutical products, educational services), and some have a reduced rate:6% for restaurants
without air conditioning, 5% on electricity supply, information technology services, online business
services (as of 2019), 4.5% on photography and garages, 2% on goldsmiths, 1.5% on construction,
etc. Bangladesh is expected to introduce a new VAT regime by 2021, with two standard reduced VAT
rates of 7.5% and 5%.
Excise duties have been abolished on all products except on bank deposits and airline tickets
(exemptions are provided for disabled soldiers). An additional duty of 20%, 35%, 65%, 100%
or more is levied on certain products, the highest being on beer (250%), alcohol and cigarettes
(350%).
During the last three fiscal years, it has never been possible to fully spend the agriculture subsidy
(Tk. 2,570 crore, Tk. 5,390 crore and Tk. 3,800 crore remained unutilized in FY16, FY17 and
FY18). The proposed budget has announced to introduce ‘crop insurance’ in order to save
farmers from the financial loss caused by natural calamities -very much needed.
Most appreciated part of the budget includes proposed changes in tax holiday facilities,Tax
exemption or rebate on institutions for educating, training or employing the physically
challenged, Providing new fiscal incentives to exporters and remitters, instead of gradually
depreciating BDT.
Govt. has also proposed institutional measures to expand tax net includes setting up tax offices in
every upazilla, Increasing the number of tax zones to 63 from current 31, Setting up specialized
units, submitting return of income for the non-resident taxpayers who are doing business in
Bangladesh through permanent establishments, making TIN compulsory for receiving different
utility services as well as asset transfer, increasing the number of income taxpayers to more than
1 crore by the next few years -any time bound action plan is missing in this regard.
Tax on retained earning had been very much controversial issue in this budget. However,
according to finance act-2019, any listed company can transfer maximum 70 percent of its net
profit after tax to retained earnings and reserves in any financial year. That means at least 30
percent dividend will have to be offered. If any company fails to do so, 10 percent tax will be
levied on retained earnings and reserves. In addition, if the company's stock dividend is more
than the cash dividend, 10 percent tax will be slapped on stock dividend.
Successful implementation of these initiatives, revenue on average will grow by 25 percent in the
coming years, and the Tax-GDP ratio will increase to 15 percent by 2021, ” FM said in his
speech. Several economists predicted that it would be difficult to implement this budget. Now we
will have to see whether the government will be able to face the forthcoming challenges.
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Business Digest 13 Introduction
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Business Digest 14 Introduction
It is very commendable that the government has given a Tk 20,000 crore stimulus to the micro, small and
medium enterprises (MSMEs). The MSMEs should get easy access to loan under the stimulus package.
The government could have imposed 1 percent source tax instead of 2 percent on local Letters of Credits (L/
C) used for importing essential commodities.
There is no imposition of new taxes on taxpayers in the new budget, but the government will expand the tax
net to bring more eligible people under it.
Successful implementation of the huge gigantic budget depends on the efficiency in using the available
resources. Since at first, the govt. need to topple the covid-19 situation, it is to expand and monitor the
health sectors very carefully right now. Now we need to depend on time to have answer whether this piece
of budget is an effective one or not!
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Business Digest 15 Introduction
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Business Digest 16 Introduction
Secondly, inefficient liquidity management:During the last few years, the banking industry
faced more than two
management of some banks. We can
attribute the current liquidity crisis of banking sector to four major factors - 1) the rise in
default loans, 2) the erosion of public confidence in the banking sector, c) increased demand
of dollar in foreign currency market, and d) high demand of government savings certificate
as they offering high-interest rate.
Fourth-generation banks such as The Farmers Bank, NRB Global Bank, and NRB
Commercial Bank faced liquidity crisis during 2016-2017. The problem was particularly
acute in the case of The Farmers Bank, which had to be bailed
agreements with The Farmers Bank to inject BDT 765 crore into the bank (The Daily Star,
2018).
The government will inject another Tk1, 500 crore in FY 2019-20 into state-run banks to
meet their capital shortfall, despite their persistent financial irregularities and irresponsible
lending practices. In the last 10 years, the government has supplied a total of Tk17,521 crore
in capitalization to ailing state banks with budgetary allocation since fiscal year 2009-10.
Economists have raised concerns about the practice of recapitalizing state-owned banks with
budgetary allocations, saying that the trend will not help improve these banks ’ health.
Rather, it will encourage loan defaults.
Finally, Poor corporate governance: A single corporation gained control over 7 private
commercial banks in Bangladesh (The Daily Star, 2017). In 2013, the government-approved
licenses of 9 new private commercial banks. All of these banks were backed by politically
powerful owners. The fourth-generation banks (9 newly approved commercial banks) are
beset with large amounts of NPLs and are making losses.
It has been estimated that the Government of Bangladesh has spent BDT 15,705 crore in
recapitalizing the banks during the period FY 2009 - FY 2017 (Monthly Fiscal Frameworks,
Budget Briefs, Finance Division).
From the perspective of current scenario, single digit interest rate has become talk of the
town in banking industry. Earlier in 2018, the private banks' lending rates hovered
between 10 percent and 16 percent while the deposit rates were below 6 percent. But the
rates on fixed deposit schemes for three months to three years ranged between 5 percent
and 10 percent; the rates were above 10 percent in a few banks. after August 9, 2018, the
BB recommended single digit interest rate policy which is, to bring down interest rates
on lending to 9% and the rate on deposits to 6% from existing levels. However, many of
the banks failed to keep their promise. Currently, private banks are lending at between
14% and 15%, while the average interest rate for deposits is between 9% and 10%.
The average advance-deposit ratio (ADR), came down to 84.38 percent in September from 86.23
percent in April, according to Bangladesh Bank data. Currently, banks are required to maintain an
ADR of 85 percent, meaning they can lend Tk 85 against a deposit of Tk 100. In January last year,
the BB slashed the ADR by 1. 5 percentage points to 83.5 percent in a bid to tighten banks'
capacity to lend. The ratio for Shariah-based banks was cut to 89 percent from 90 percent. The
number of the non-compliant banks dropped after the central bank cut down the cash reserve
requirement (CRR) by 1 percentage point to 5.5 percent - a move that has freed up about Tk 20,000
crore for banks to lend.
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Business Digest 17 Introduction
At the end of June, the ratio of bad loans in the country’s banking sector increased to 9.16% against
outstanding loans worth Tk.10,49,725 crore. Banks’ non-performing loans (NPLs) increased by
Tk.3,606 crore in the second quarter of this year, despite the Bangladesh Bank’s directive not to
classify loans till September due to consequences arising from the new virus. At the end of June this
year, the amount of NPLs in the banking sector stood at Tk.96,116 crore, which was 9.16% of the total
disbursed loans, according to the latest Bangladesh Bank (BB) data. The defaulted loans in the banking
sector were Tk.92,510 crore as of March this year. On June 15 this year, the BB asked banks not to
downgrade any loan over a failure to pay installments in the January-September period in order to help
business people combat the economic fallout of Covid-19. In March, the NPL ratio in the country’s
banking sector was 9.03% against Tk.10,24,498 crore in outstanding loans.
Compared to the pre-pandemic days, the customer's transaction pattern and behavior has been a lot
different in the last few months. Small depositors, who generally were used to withdrawing their
money on a piecemeal basis, tended to take out a chunk of their money keeping the pandemic in mind.
On the other hand, due to the countrywide shutdown, many business houses had to shut down and
consequently the recovery from the loans and advances were close to zero.
Some banks have taken some steps to face covid-19 crisis such as:
On July 09, One Bank management issued letters to their officials, announcing that basic salary would be
reduced by 5 to 10% .
In June, for the first time, City Bank slashed its staffers’ salaries by 10% to offset the losses caused by the novel
coronavirus outbreak.
Earlier, On June 14, Bangladesh Association of Banks (BAB) issued a 13- point recommendation to private
banks that include as high as 15% salary cut.
Private commercial AB bank is not just cutting the salaries of their staff; it terminated at least 80 bank staff.
Earlier, Al Arafah Islami Bank, Exim Bank, Citi Bank and AB Bank have cut salaries of their staff.
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Business Digest 18 Introduction
The banking sector will face liquidity pressure as deposit growth and loan recovery also declines..
Cutting the cash reserve requirement (CRR) by 1 per cent would add approximately inject Tk. 130
billion into banking sector liquidity. Other than this BB has taken some healthy initiatives such as:
reduction in repo interest rate, buy-back of government securities, promotion of payment services,
refinance scheme BDT 50bn for agriculture sector at a concessional rate, quarterly repayment for
imports under supplier's/buyer's credit, refinance scheme of BDT 30bn for low income professionals,
farmers, micro businessmen, postponement of charging interest on loans, restriction on dividend
payment by banks, prohibition of workers lay-off, maximum margin limit for import of child food,
relaxations for holding meetings and regulatory reporting. In addition, Bangladesh Bank also relaxed
the bar of Advance-Deposit Ratio (ADR) from 83.50 to 87 per cent. Although the financial market
especially the banking sector is battered heavily due to regulated cap of rate of interest of deposit and
advance very before of this pandemic. Many willful borrowers may resort to take undue advantage of
this regulation and the industry may face this in bigger scale amid the pandemic. A threshold may be
initiated to identify the genuine sufferers and pass a resolution for safeguarding them only.
Digitisation is the major tool that can help banks cope with the challenging situation by improving
operational efficiency and minimising expenditures. Covid-19 has brought blessings for digitalisation
as the pandemic has pushed banks to go for expanding their digital banking services. Digital banking
also has penetrated the customers' mind as people have become used to with online shopping and
transactions during the pandemic situation. According to Bangladesh Bank, the average daily mobile
financial services (MFS) transactions increased by 7% in the third quarter of FY 2019-20 from its
previous quarter. Moving towards a cashless society, digital transactions are gradually being woven
into the fabric of life. According to Bangladesh Bank data, the volume of transactions EFT
substantially increased from March 2020 to June 2020. Banks have witnessed significant growth in
online transactions during the pandemic indicating the up and coming demands for digital banking
services.
The customers who made regular payments before the pandemic and affected by COVID-19, Banks are
allowing a grace period. This will help them to revive the business and make the payments. Besides,
some encouragement programs are being introduced for the good customers like a discount/waiver on
interest is offered to them on regular payment or upon successful closure of the loan.
Some special financial packages have been declared by the banks as well as government. Another
strategy to manage the liquidity is restructuring of the bank debt with grace period. As collection is the
main lifeline of this sector, Banks are more focused to improve their collection strategies and
disbursing new loans based on the collection in order to maintain liquidity.
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Business Digest 19 Introduction
Name of the Capital Market Dhaka Stock Exchange Chittagong Stock Exchange
(DSE) (CSE)
Establishment 1954 1995
OTC introduction 2009 2004
Market Capitalization (BDT million) 3, 847, 423 3, 144, 671
Number of listed companies 585 288
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Business Digest 20 Introduction
Investors are taught in fundamental finance course that the recipe to avoiding financial disaster is
to diversify their money. “Don't put all your eggs in one basket”— the golden rule of investing.
In our country, however, investors do the exact opposite. They put all (or most) of their money in
the hands of an ailing banking sector in mundane deposit schemes generating returns that cannot
even outrun inflation. In fact, rise and fall of stock prices in Bangladesh market, in most cases,
have been without any plausible reason.
In Bangladesh, companies raise money from the primary market through IPO (initial
public offering) and rights offer. In the last nine years, on an average 15 new companies
got listed through IPO each year. Till date, bank financing has been the major source for
companies despite the long-term benefits of fund raising from the capital market.
Lack of listing of large corporations in the market is the primary reason behind our
falling Mcap/GDP ratio. The government may focus on reducing the time it takes for a
corporate to raise money through IPO to increase the attractiveness of IPO as a financing
option.
There have been several challenges in the primary market and in the process of IPO. One of
the challenges is an absence of regulatory measures or incentives to bring new companies in
the market with strong fundamentals. Discovery of price also becomes very difficult due to a
lack of analysts.
Discovery of price also becomes very difficult due to a lack of analysts. Public
confidence in mutual funds is very low due to asset managers' involvement in the gross
violations of securities rules and misappropriation of funds money. Quality of
disclosure is not up to the peer standards. Investors find it difficult to assess the
portfolio holdings or quality of stated net asset value. Most of the mutual funds are
generic rather than style based. Fund managers have selection errors and prefer passive
management. While in peer markets open-end funds dominate, there are only nine open-
end funds in Bangladesh.
Although there were eight debentures and 221 treasury bonds listed in the market, these
issues do not trade in the market. There is only one corporate bond listed in the
market, which is hardly traded. We are not aware of any regulatory vision or seldom
see any guideline in introducing derivative products/new products. We have noticed fear
in the derivative products but no initiative to gain knowledge on these products.
Despite having favourable economic factors and a positive market outlook, foreign
participation in equity market is very low. Foreign Direct Investment (FDI) is highly
focused on large-cap stock. Weak corporate governance, less transparent market
structure, low level of financial disclosure and a lack of research remain as
bottlenecks.
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Business Digest 21 Introduction
Bangladeshi corporate houses are yet to grow a culture of investor meetings. Even, they
do not have any formal investor relationship department. While allowing foreigners,
local institutions should also build capacity for better investment management. The
domestic banks had too much of their money invested in the stock market (18% of
market cap, till date), for quick and easy profit taking and as a result caused the stock
market to rise even higher.
In last three decades, capital market of Bangladesh faced two calamitous market
crashes:one in 1996 and the other in 2010. Both crashes had one thing in common. Stock
prices were manipulated to exorbitant levels luring in naive investors who were hoping to
make easy money. Speculation became the mantra of stock investing. The supposedly high -
quality companies dragged down the market.
It is a shame that the daily turnover of the prime bourse of the world's 42nd largest economy,
in nominal terms, is less than Tk 3.0 billion. The figure should be many times more.
In 2018, financial sector was adversely affected by rising interest rate and growing NPL
problems. Financial composite including Bank, NBFI, and Insurance declined by 18.6%
against overall market decline of 13.8%. In recent days, macro factors were positive for
Textile Sector, which rallied almost 16% (till date). Textile business returned to a growth
momentum after a long time, benefitting from US-China trade war and cheaper BDT.
Fuel & Power sector also surged, backed by earnings growth coming from the government ’s
power plant binge. High import growth arising primarily from one– time surge in food grain
import due to flood and sharp increase in petroleum products import exerted significant
pressure on current account (Dec, 2018).
As a result of the recent entrance of a Chinese consortium, comprising the Shanghai
Stock Exchange and Shenzhen Stock Exchange, as strategic partner of DSE , DSE
should become a more profitable organisation and receive foreign knowledge and expertise
which can only change things for the better.
In Bangladesh, we cannot compel multinational companies to come to the stock market due
to lack of rules. But in India, it is mandatory for every multinational to be listed with stock
market if it wants to do business in that country. The existing rule of giving 10 percent tax
benefit to every listed company has failed to attract the global firms.
It must be acknowledged that regulators have taken some steps in recent years which have
promised to bring some semblance of market stability. Largest of these steps was
demutualization of the Dhaka and Chittagong stock exchanges. It is fair to say that
separating ownership, management, and trading rights of members and transforming the two
stock exchanges into more professionally run organizations free of vested interests from
brokers and dealers will go a long way towards ensuring long-term development. The overall
volume of our capital market needs to be increased with a greater number of good IPOs each
year. The overall accounting practice of private companies is a major issue, which needs to
be addressed as soon as possible. Importance should be given to the authenticity of financial
statements, and all stakeholders must promote financial literacy among retail investors.
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Business Digest 22 Introduction
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Business Digest 23 Introduction
The price-setting scheme goes against the basic economic principles of supply-demand
equilibrium. Fortunately, BSEC has lifted the floor price restrictions for transactions in the block
market on June 15. This is a good sign although the move will not impact small investors as they
do not participate in the block market where the minimum allowed transaction is BDT 5 lakhs.
BSEC should also remove the restriction on the main market so that small investors can benefit as
well.
The Dhaka Stock Exchange (DSE) uses Flextrade- a real-time trading platform that allows remote
trading from any suitable device. But only 5% of trades of the bourse are executed online. BSEC
should, therefore, provide incentives for traders and brokers to adopt electronic trading. Electronic
trading will also support the need for physical distancing as market participants do not need to be
physically present in the market. This measure will support small retail investors who might need
emergency liquidity if the economy faces a further downturn.
A vibrant bond market can provide investors with a less risky asset. This can increase participation
in the country’s capital market. Moreover, the fixed coupon payment of bonds can increase
investors’ confidence in the market. On the other hand, corporations will have a low-cost
alternative to banks for funding.
The capital market of Bangladesh has gone through a lot of downturns in the past two years. As a
result, investor confidence went down as well. The situation went further south with the COVID-
19 pandemic. Now as the country’s two stock exchanges have reopened, it is time for
policymakers to diversify the market so that investors, businesses, and even the government can
benefit and help in the path to economic recovery.
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Business Digest
Finance, financial Management, objectives of the finance, Corporate (Business) Finance, Public 1-3
Basics of Finance, Functions of finance, Major Financial Decisions, Principles of Finance, Financial
Finance instruments, Debt Instruments , Equity Securities, Bonds, Derivative instruments, Collateralized
mortgage obligation, Term structure of interest rate, Market Segmentation Theory, Expectations
Theory , Liquidity Preference Theory
Financial Financial instruments, Debt Instruments and types, Equity Securities and types, Bonds and its 4-9
Instrument properties/Bonds related issues, Major Types of bond, Differences between common stock and
preferred stock, Difference between preferred stocks, common stocks, and bonds, Why preferred
stock is called hybrid security, What are the structural finance instruments, Stripped security,
Derivative instruments, Theories that describe the shape of yield curve, Term structure of interest
rate, Treasury bond, Treasury bill vs Treasury bond
Financing Types of Financing, short-term financing , mid and long-term financing, lines of credit and 10-11
overdrafts , long-term financing (internal)
Capital market/financial market, Characteristic of good market, Major functions of Capital/share 12-18
Market, Problems of Share Market in Bangladesh, Types of Financial Market, Money Market:
(Regulated by Central Bank,Capital Market (Regulated by BSEC),Core differences between
Money market and capital market, Primary vs Secondary market, Bearish vs Bullish market,Cash/
Spot Market, Financial Intermediaries, participants of Financial market,Difference between Dealer
Market and Broker, Strong, Semi-strong and weak form, Internal and external efficiency of market, Types of
order in market, Possible abuses by stockbroker, market breadth and Depth, Buy side vs sell side,
market capitalization, Net asset Value(NAV)of mutual fund, market premium, bubble in capital
market, Short Sale, Stock split, Growth vs value stock, Blue Chip Stocks, Defensive Stock VS
Cyclical Stocks, Marketed claims of the firm, Margin/Margin requirement:Margin Call, Open
interest, Proxy, Different valuation terms used in market, Capital Market regulators.
Time Value of Why value of money changes, Determining factors of time value of money, Future value, Present 19
Money Value, Annuity and its classification, amortization schedule, Effective Interest Rate (EIR)
Gross working capital and net working capital, Methods/approaches of working capital 20-23
Working management, Cash conversion cycle and cash turnover, Economic Order Quantity (EOQ), cash
Capital management, Operating cash flow (OCF),Free cash flow, Most liquid assets, Motives for Holding
Management Cash and marketable securities, Float, lockbox, Zero balance account, Relevant model in cash
management, cash budget, cash concentration, Liquidity vs Marketability
Risk and Return Return,Risk,Variance, standard deviation, Coefficient of variation (CV), Types of Investor based 24-26
on risk preference, beta, Adjusted bet, Types of Risks, Systematic Risk/Market Risk/Non-
Diversifiable Risk/Uncontrollable Risk, Unsystematic Risk/non-market/Stand-alone Risk/
Diversifiable Risk/controllable Risk.
Cost of Capital Importance of cost of capital, Computation of cost of capital, Steps in computation of Weighted 27-28
average cost of capital (WACC),Capital Asset Pricing model (CAPM),Arbitrage pricing theory
(APT),Fama-French Three-factor Model
Capital Capital structure, Factors Affecting Capital Structure, Miller and Modigliani’s two propositions , 29-30
Structure and Static trade-off theory.Pecking order theory, consideration in selecting of debt-equity ratio/Capital
Leverage structureLeverage/operating leverage/financial leverage, Degree of operating leverage
(DOL),Degree of financial leverage (DFL),Degree of total leverage (DTL)
Capital Types of Projects, Conventional vs nonconventional cash flows, Three major types of investment 31-35
Budgeting decision, Problems Associated with Capital Budgeting, Hurdle rate, Methods (Techniques/Tools)
of capital budgeting, Discounted Payback Period, Time value of Money adjusted or Discounted
Cash Flows Methods,NPV profile, Multiple IRR (MIRR),Modified internal rate of return
(MIRR)
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Business Digest
Investment Banking New issue, Market trades, Major Four activities of Investment Banker, financial engineering, 44-47
Securitization, fiduciary obligation, due diligence, Underwriting and different types, prospectus,
shelf registration, red herring, origination, IPO vs Private placement vs seasoned offering,
flotation cost, The steps in going public/new issue of shares/how to be public limited company,
Method of determining new issue price in Bangladesh, Determination of offering price (under
fixed price method), Book Building Method, Types of trading strategies:(Arbitrage,
speculation and hedging)
Portfolio Market portfolio, portfolio Management, Portfolio management process, Modern Portfolio 48-51
Management Theory (MPT), Assumptions in MPT, opportunity, Set, efficient frontier, optimal portfolio,
Capital preservation vs capital appreciation, How to measure portfolio return and risk, beta,
Concave vs convex curve, global Minimum variance portfolio, Separation theorem, CAL Vs,
CMLVS SML, How to find optimal portfolio (when risk free borrowing/lending allowed),
characteristic line, Sharp ratio vs Treynor ratio, Jensen’s Alpha Ratio, Alpha/Alpha hunter,
Active vs passive portfolio management, Returns to the investor:Main three forms/How
investors get return.
Corporate Finance Agency problem/agency cost/principle-agent/types of agency cost, merger, acquisition, 52-55
strategic alliance, joint venture, venture capital, conglomerate, Types of acquisition, Purchase
method of acquisition, tender offer, synergy, Sources of synergies, Steps in determining NPV of
merger, Strategy to discourage takeover followed by target firm, Greenmail, Golden parachute,
Poison pill, knight, financial distress, Options in financial distress, Absolute priority rule,
coinsurance effect, Dilution, leveraged buy-out (LBO),Altman Z Score model.
Derivatives Call and put option, writer, exercise price (strike price), expiration date, elapsed option, 56-61
American vs European option, Options Premium (call premium or put premium),In the money,
out of the money and at the money, naked option, Factors affecting the price of an option,
warrants, employee stock option (ESOP),put-call parity, Futures contract, Forward contract,
Forward vs Futures, Options vs Futures, Long short position, Options and futures are zero sum
game, LIBOR vs LIBID (London interbank offered rate, London interbank bid rate), Forward
rate, basis and basis point, backwardation and contango, SWAP, Plain vanilla interest rate swap,
Forward Rate Agreement (FRA),Trading strategies using options, Delta, theta, Gamma, Rho,
hedge ratio, Swaptions.
Financial Statement Limitations of Financial Statement, Techniques or Tools of Financial Analysis, Limitations of 62-63
Analysis Ratio Analysis, Decision tree, Sensitivity vs scenario analysis, Monte Carlo simulation, Du Pont
Analysis
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Business Digest 1 Finance (Basics of Finance )
Profit Maximization
★ A business being an economic institution must earn profit to cover its costs and provide funds
for growth.Profit maximization is the traditional and narrow approach, which aims at,
maximizes the profit of the concern. Profit of a business entity is measured by the EPS.
Drawbacks of Profit Maximization
√ The term ‘Profit’ is vague and it cannot be precisely defined. Maximizing means different things for
different people. For example, short term profit or long-term profit? Gross profit or net profit?
√ Profit maximization does not consider the time value of money or the net present value of the cash
inflow.
√ Profit maximization does not consider the risk of the prospective earnings stream.
√ The effect of the dividend policy on the market value of the shares is also not considered in the profit
maximization objective.
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Business Digest 2 Finance (Basics of Finance )
Wealth Maximization
★ Financial theory asserts that the wealth maximization is the single substitute for a stake holder’s
utility.Wealth maximization is also known as value maximization or net present worth
maximization.The wealth of the shareholders is measured by the current market price per
share.Thus, a firm should aim at maximizing its current stock price, which helps in increasing
the value of shares in the market.
Favourable arguments for Wealth Maximization
The concept of wealth maximization is universally accepted, it takes care of interest of financial
institution, owners, employees and society at large.
Wealth maximization considers the time value of money or the net present value of the cash inflow.
Wealth maximization considers risk of the business concern.
Wealth maximization guides the management in framing the consistent strong dividend policy to
reach maximum returns to the equity holders.
Types of finance:
★ Corporate finance can be broadly defined as the activity of planning, raising, controlling and
administrating the funds used in a corporation. It is concerned with the procurement and
utilization of capital funds in meeting financial needs of a corporation.
What is Public Finance? /Sources of income and expenditure of Government:
★ Public finance is that branch of economics which deals with, the income and expenditure of a
government. Major ingredients of public finance are:
(1) Public Expenditure (2) Public Revenue, (3) Public Debt and (4) Budgeting etc.
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Business Digest 3 Finance (Business Finance)
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Business Digest 4 Finance (Financial Instruments)
★ Simply when exporter discounts his letter of credit (L/C) in his domestic bank for
short term financing, this L/C is called Banker’s Acceptance (BA).
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Business Digest 5 Finance (Financial Instruments)
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Business Digest 6 Finance (Financial Instruments)
√ Sinking Fund Provision:Sinking fund provision of the corporate bond indenture requires a
certain portion of the issue to be retired periodically. A sinking fund reduces credit risk but
presents reinvestment risk to bondholders.
√ Call Provision, Call price:The right of the issuer to buy back the bond at a predetermined
price at a certain time in future. This is likely to happen when interest rates go down. The
price at which bonds are called is named as call price.
√ Put Provision:The right for the holder of the bond to force the issuer to repay the bond before
the maturity date on the put dates. This is likely to happen when interest rates go up.
√ Trustee:A trustee is a third party to a bond indenture. The trustee is paid to act as “watchdog”
on behalf of the bondholders and can take specified action if the terms of the indenture are
violated. The trustee can be an individual, a corporation or (most often) commercial bank trust
department.
** In Bangladesh corporate bond market is almost non-existing. But the regulators are
working on it.
Major Types of bond:
► Corporate Bonds:Bonds issued by different types of companies. They are riskier than
government bonds so they offer a higher rate of return.
► Government Bonds:Bond issued by a national government, generally with a promise to pay
periodic interest payments and to repay the face value on the maturity date.
► Convertible Bonds:A convertible bond may be redeemed for a predetermined amount of the
company's equity at certain times during its life, usually at the discretion of the bondholder.
► Perpetual Bond:A perpetual bond is a fixed income security with no fixed maturity date. A
perpetual bond is also known as a "console" or a "perp. "
► Zero-coupon Bond:Doesn’t pay interest (a coupon) like other bonds. Instead investor will
receive a discount when he purchase the bond and hopes to make profit when the bond is
redeemed at maturity.
► Callable Bond:A callable bond (also called “redeemable bond”) is a type of bond that allows
the issuer of the bond the right, but not the obligation, to buy back the bonds from the bond
holders at a defined call price. Usually a premium is paid to the bond owner when the bond is
called.
► Put-able/put Bond:Puttable bond (put bond, put-able, or retractable bond) is a type of bond
that allows the holder of the bond the right, but not the obligation, to demand early repayment
of the principal.
► Eurobond:An international bond issued in Euros, or in a currency not native to the country
where it is issued. An example is a bond issued by a group of banks in Singapore, denominated
in US dollars, sold to international investors.
► Junk Bonds:Junk bonds are similar to regular bonds, except that the issuer has a low credit
rating. Because of this, they have the potential to pay higher yields than regular bonds to
investors, but they also come with higher risks.
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Business Digest 7 Finance (Financial Instruments)
► Angel Bonds:Angel bonds are investment-grade bonds that pay a lower interest rate because of
the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which
are bonds that have been given a "junk" rating and are therefore much riskier
► Senior Bond:Ranked higher in an issuer’s repayment list if they face financial difficulty.
► Subordinated Bond:Ranked low in an issuer’s repayment list if they face financial difficulty.
► Debenture:A debenture is similar to a bond except the securitization conditions are different. A
debenture is generally unsecured in the sense that there are no liens or pledges on specific assets.
Debentures vs. Bonds:
★ Debentures and bonds are similar except for bonds are secured and backed by company’s
physical assets whereas debentures are unsecured and backed by issuer’s creditworthiness .
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Business Digest 8 Finance (Financial Instruments)
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Business Digest 9 Finance (Financial Instruments)
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Business Digest 10 Finance (Financing)
Types of financing:
► Short term financing:Short term finance refers to financing needs for a small period normally less
than a year.
► Mid-term financing:Medium term finance are sources of finance available for the mid-term of
between 2 – 5 years typically used to finance an expansion of a business or to purchase large fixed
assets.
► Long-term financing: Long-term finance can be defined as financing with any financial instrument
with maturity exceeding 4-5 year (such as equity financing, bonds, leasing and other forms of
debt finance).
Which financing mood is best?
• The finance manager should choose the alternative that best suit the risk-return preferences of the firm
following the balance between liquidity and profitability.
Different types of mid and long-term financing and their sources:
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Business Digest 11 Finance (Financing)
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Business Digest 12 Finance (Market/Capital Market)
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Business Digest 14 Finance (Market/Capital Market)
Broker Dealer
Broker executes the trade on behalf of others Trader trades securities on their own behalf.
Brokers do not take long or short position Dealers take long or short position
Brokers have comparatively lower level of Dealers have sound knowledge on markets,
depth regarding market and trends economy and trends.
★ In strong form/perfect market, all relevant information of the–private, public, historical and
current – about the company are reflected in the current stock prices. Price will change only if new
information is emerged. Active management is fruitless in this market.
★ In semi-strong form the stock's current price reflect only relevant public and historical
information about the stock. Active management can be somewhat meaningful in this form.
★ The weak form suggests that stock prices reflect only historical price information of the share. It
implies that security prices follow a random walk. Active management is highly effective in this
market.
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Business Digest 15 Finance (Market/Capital Market)
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Business Digest 16 Finance (Market/Capital Market)
commodities, technology, etc.)where too many investors become overly eager to buy.If bubble is
created artificially, it will eventually crash ,leading to collapse in stock market and thereby the whole
economy.
What do you mean by market breadth and Depth?
Market breadth: Market breadth is a technique used in technical analysis that attempts to gauge
the direction of the overall market by analyzing the number of companies advancing relative to the
number declining. The capital market of Bangladesh suffers from lack of breadth. In another way,
market breadth is a ratio that compares the total number of rising stocks to the total number of
falling stocks.
Market depth: Market depth is the market's ability to sustain relatively large market orders without
impacting the price of the security. Market depth is closely related to liquidity and volume within a
security.
For example, if the market for a stock is "deep", there will be a sufficient volume of pending orders on
both the bid and ask side, preventing a large order from significantly moving the price.
What is the market capitalization?
★ Market capitalization is the current market value of a company which is equal to the share price
multiplied by the number of shares outstanding. Total market cap is the sum of market cap of all
listed companies in the exchange.
Share premium and share discount:
★ Share premium is the amount received by a company over and above the face value of
its shares.A discount on stock occurs when the stock’s par value is higher than the
issuing price.Premium is reported under equity in financial statements and share
discounts are reported as fictitious asset in the statement.
Short sale:
★ A short sale is the sale of an asset or stock the seller does not own. It is generally a transaction in
which an investor sells borrowed securities in anticipation of a price decline.
What is stock split? Why it is done?
★ A stock split is a corporate action in which a company divides its existing shares into multiple
shares to boost the liquidity of the shares.The primary motive is to make shares seem more
affordable to small investors even though the underlying value of the company has not
changed.This has the practical effect of increasing liquidity in the stock.
Growth vs value stock:
★ Growth stocks are associated with high-quality, successful companies whose earnings are expected
to continue growing at an above-average rate relative to the market.Growth stocks generally have
high price-to-earnings (P/E) ratios and high price-to-book ratios along with low dividend yield
★ Value stocks are those that tend to trade at a lower price relative to their fundamentals (including
dividends, earnings, and sales).Value stocks generally have good fundamentals, but they may have
fallen out of favour.Investors buy these stocks in the hope that they will increase in value when the
broader market recognizes their full potential, which should result in rising share prices. Value
stocks generally have low current price-to-earnings ratios and low price-to-book ratios along with
high dividend yield.
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Business Digest 17 Finance (Market/Capital Market)
★ Growth and value are styles of investing in stocks.Neither approach is guaranteed to provide
appreciation in stock market value; both carry investment risk.
Blue Chip Stocks:
► Blue chip stocks are shares of very large and well-recognized companies with a long history of
sound financial performance and stable dividend policy.
► These stocks are known to have capabilities to endure tough market conditions and give high
returns in good market conditions.
► Blue chip stocks generally cost high, as they have good reputation and are often market leaders in
their respective industries. Such as Square Pharma share.
Defensive stocks VS Cyclical stocks:
★ A Defensive (or non-cyclical) stock is a stock whose profit growth and therefore its price has a
very low correlation to the economic activity. Health care, household and Personal Care (HPC)
stocks are known as Defensive
★ A Cyclical stock is a stock highly correlated to the economic activity. These types of stocks grow
rapidly during the boom cycle but the growth is slowed down in the slow economy. Automobile
stocks fall in this category.
Marketed claims of the firm:
★ Firms liability to shareholders and bondholders to pay periodical cash or dividends is called
marketed claims
Margin/Margin requirement:
★ Margin(some sort of collateral)is a good-faith deposit, or down payment, on the assumed liability
of a newly opened position to ensure that contract will be honoured in due time and to avoid
potential credit risk.
Margin Call:
★ Margin Call is a notification from the broker to top up cash into client’s margin account so that it
is once again at initial margin level. Failure to meet a margin call immediately may result in some
or all of the trader’s positions being liquidated by the firm without prior notification.
Open interest:
★ Open interest indicates the number of options or futures contracts that are held by market
participants. It tells you how many futures(or Options)contracts are currently outstanding
(open) in the market.
Proxy:
★ A proxy is an agent legally authorized to act on behalf of another party or a format that allows an
investor to vote without being physically present at the meeting.
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Business Digest 18 Finance (Market/Capital Market)
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Business Digest 19 Finance (Time value of Money)
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Business Digest 20 Finance (Working capital Management )
★ Businesses follow mainly three working capital financing strategies or approaches to maximise the
wealth of the firm.These strategies are different because of their different trade-off between
liquidity risk and profitability.Long term finance provides higher liquidity but also requires higher
interest payment.Short-term finance sources require low interest payment but firms might face
liquidity risk.
In conservative strategy, apart from the fixed assets and permanent working capital, a part of
temporary working capital is financed by long-term financing sources. Thus, long-term
sources are mostly used. It has the lowest liquidity risk at the cost of higher interest outlay.
In aggressive strategy, Long term funds are utilized only to finance fixed assets and a part of
the permanent working capital.Complete temporary working capital and a part of permanent
working capital also are financed by the short-term funds.Thus, short-term sources are mostly
used. The complete focus of the strategy is in profitability.It is a high-risk high profitability
strategy with the cost high liquidity risk.
Matching strategy works on the cardinal principle of financing.It suggests utilizing long-term
sources for financing long-term assets and a part of permanent working capital and temporary
working capital are financed by short-term sources of finance.It matches the maturity of
financing source and maturity of assets.This is a meticulous strategy with moderate risk and
profitability.It matches liquidity and profitability.
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Business Digest 21 Finance (Working capital Management )
★ Cash conversion cycle is the time it takes a company to convert its investment in inventory and
other resource inputs into cash. It is measured through: Cash Conversion Cycle =
Days Inventory Outstanding +Days Sales Outstanding -Days Payable Outstanding
★ Days Inventory Outstanding (DIO) is average number of days that a company holds its
inventory before selling it.Days Sales Outstanding (DSO) is the average number of days for a
company to collect payment after a sale.Days Payable Outstanding (DPO) is the number of
days, on average, it takes a company to pay back its payables.(See Formula: F-136,137,140)
★ Cash Turnover is a ratio measuring the amount of times that the company’s cash has been
spent through over certain period of time.It measures the number of times cash conversion
cycle took place in a year.
★ A higher cash turnover ratio and lower cash conversion cycle is always expected.
What is Economic Order Quantity (EOQ)?
★The Economic Order Quantity(EOQ)is the number of units that a company should order to
minimize the total costs of inventory—such as holding costs, order costs, and shortage costs.It
is the efficient order management approach to minimise inventory management cost.(See
Formula: F-87*)
What is cash management?
► Cash management refers to management of cash from the time it starts its transit to the firm
until it leaves the firm in payments. It also includes planning, designating monitoring and
executing firm’s cash collection and disbursement system while temporary investment of idle
cash to generate value.
► Decisions regarding the level of cash balance to maintain, when and how to make cash
transactions and where to put any excess cash are critical value-adding activities.
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Business Digest 22 Finance (Working capital Management )
★ Operating cash flow (OCF), also known as cash flow from operations, is the total amount of cash
generated by a firm during a given period from its core business activities. OCF begins with net
income, adds back any non-cash items, and adjusts for changes (investment)in net working capital
to arrive at the total cash generated or consumed in the period.
What is Free Cash Flow (FCF)?
★ Free cash flow is the cash available to the firm to be distributed between stockholders and
bondholder after meeting investment and working capital needs.
Most liquid assets:
Cash in vaults and cash with other banks
√
Cash with central banks
√
Commercial paper (a short-term debt instrument)
√
Money market funds,
√
Savings and checking account money
√
Treasury bills
√
Investment in capital markets (easily marketable)
√
Motives for holding Cash and marketable securities:
Transaction Motive: to meet the day to day needs of its business operations
Precautionary Motive: to meet the contingencies or unforeseen circumstances if arises
Speculative Motive: to exploit the possible opportunities out of regular business.
What is float?
► Float is the time it takes in issuance, distribution and clearance of checks.
► In other words, Float can be defined as the delay between a payment being made and the funds
being received by the payee. Three main categories of float are mail float, processing float and
availability float
► Cash float is the total value of checks that have been written or received, but have not yet come out
or been credited to your bank account.
★ The goal of efficient cash management is minimising this float.(See Formula: F-83)
What is lockbox?
► It’s a cash management system to reduce float.Lockbox is a bank-operated mailing address to
which a company directs its customers to send their payments.
► Customers are required to mail all their checks to the bank, which receives the checks and starts
their clearance right away.
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Business Digest 23 Finance (Working capital Management )
► By using lockbox, float can be reduced because company staff is no longer required to receive
checks and then send them to bank for deposit.
What is Zero Balance Account?
★ It is a controlled cash disbursement mechanism.An account is opened with a bank where firm
doesn’t hold permanent cash.Cash is wired transferred into the account just before the checks are
presented to the bank for cash.
Relevant model in cash management :
Baumol’s model Cash flows are certain
Cash inflows are periodic(terminal)
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Business Digest 24 Finance (Risk And Return)
► In finance, standard deviation is the statistical measure used as proxy of risk. It is the variabilities
of return distribution around expected return. Standard deviation is the measure of dispersion.
The greater the standard deviation, the greater the risk.
► In other words, standard deviation is squared root of weighted average sum of the squared
deviations of returns from expected returns.
► Variance is also another measure of risk, which is calculated by squaring the standard deviation.
But variance is rarely used as measure because of its being large in quantity.
► Variance is the weighted average sum of squared deviations of returns from expected return.
► But standard deviation is an absolute measure, thus cannot be compared with another stock’s risk.
Coefficient of Variation(CV)is the relative measure which solves this problem.
► Coefficient of variation is the ratio of the standard deviation and expected return of a particular
stock.
► When making risk decision among the projects/stocks, CV should be appropriate risk measure.
(See Formula: F-5-17)
Types of Investor based on risk preference:
► An investor is said to be risk averse if he requires additional return for increase in the risk.
► An investor is said to be risk neutral if he doesn’t require any return premium for increase in risk
and
► Finally, an investor is risk seeker if he requires reduced return for increase in the degree of risk.
► In most of the finance and portfolio theory, investors are assumed as risk averse.
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Business Digest 25 Finance (Risk And Return)
★ Systematic risk is the influence of external factors on an organization.Such factors are normally
uncontrollable from an organization's point of view.It is macro in nature as it affects a large
number of organizations operating under a similar stream or same domain.However, an
organization can reduce its impact, to a certain extent, by properly planning the risk attached to the
project.The types of systematic risk are explained below:
Interest rate risk: Interest-rate risk arises due to the variability in the interest rates from time
to time. It particularly affects debt securities as they carry the fixed rate of interest.
Price risk: Price risk arises due to the possibility that the price of the shares, commodity,
investment, etc. may decline or fall in the future.
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Business Digest 26 Finance (Risk And Return)
Reinvestment rate risk: Reinvestment rate risk results from the fact that the interest or dividend
earned from an investment can't be reinvested with the same rate of return as it was acquiring
earlier.
Purchasing power or inflation risk: Purchasing power risk is also known as inflation risk. It
affects the purchasing power adversely; the same amount of money will buy fewer goods and
services.
Currency Risk:It applies when investors owns foreign investments. It is the risk of losing
money because of a movement in the exchange rate.
Political Risk: Political risk occurs due to changes in the political events. Such changes
may have an unfavourable impact on an investor.
★ Unsystematic risk is due to the influence of internal factors prevailing within an organization.
Such factors are normally controllable from an organization's point of view. Such risk is
micro in nature. It can be planned, so that necessary actions can be taken by the organization
to mitigate(reduce the effect of)the risk. The types of unsystematic risk are depicted below.
Business risk: Business risk is the
possibility that a company will have
lower than anticipated operating
profits, or experience loss rather than
making profit. It is the risk that the
business may not be able to cover its
operating costs. It is influenced by
numerous factors, including sales
volume, per-unit price, input costs,
competition etc.
Financial risk:The risk that the cash flow of an issuer will not be adequate to meet its
financial obligations is called financial risk. It is the inability of the firm of not being able to
pay off the debt it has taken from the bank or the financial institution. Financial risk arises
when a company uses debt financing.
Credit risk:A credit risk is the risk of default which may arise from a borrower failing to
make required payments.Credit risk is the risk of probable loss resulting from a borrower's
failure to repay a loan or interest timely.
Operational risk:This type of risk arises from operational failures such as mismanagement or
technical failures.Operational risk can be classified into Fraud Risk and Model Risk. Fraud
risk arises due to lack of controls and Model risk arises due to incorrect model application.
Liquidity risk: Liquidity risk is the risk that a company may be unable to meet short term
financial demands. This usually occurs due to the inability to convert a security or hard asset
to cash without a loss of capital and/or income.
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Business Digest 27 Finance (Cost of Capital)
★ The cost of capital of a firm is the minimum rate of return expected by its investors. It is the rate
of return that a firm must earn on its project investments to maintain its market value and attract
funds. It is the weighted average cost of various sources of finance used by the firm.
Importance of cost of capital:
Acts as criterion in capital budgeting.
Helps in determining the present value of cash flows
Required in the valuation of firm/stock
Acts as basis for evaluating the financial performance.
Computation of cost of capital:
★ Cost of Debt:Cost of debt is the after-tax cost of long-term funds through borrowing. Debt may
be issued at par, at premium or at discount and also it may be perpetual or redeemable.
★ Cost of Preference Share Capital:Cost of preference share capital is the annual preference share
divided by the net proceeds from the sale of preference share.
★ Cost of Retained Earnings:Cost of retained earnings is the same as the cost of an equivalent fully
subscripted issue of additional shares, which is measured by the cost of equity capital.
★ Cost of Equity:Cost of equity capital is the minimum rate of return that a firm must earn on the
equity financed portion of an investment project in order to leave unchanged the market price of
the shares. Cost of equity can be calculated from the following approach:
★ Weighted average cost of capital is the weighted average cost of various sources of financing. It
is the expected average future cost of funds over the long run which is found by weighting the cost
of each specific type of capital by its proportion in the firm’s capital structure.
★ It is the appropriate rate used in valuation of a levered firm.
Steps in computation of Weighted Average Cost of Capital (WACC):
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Business Digest 28 Finance (Cost of Capital)
★ CAPM is a market determined model to determine the price of an asset or required return the firm
must earn on its equity capital.The model assumes the cost of the equity is a function of risk-free
return and risk premium for the responsiveness of the risky asset in response to systematic risk
measured by beta. It also assumes there is linear relationship between the required return and risk
-premium for systematic risk. In CAPM, only market risk is considered relevant and premium is
required only for market risk.
★ The Arbitrage Pricing Theory (APT)is a theory of asset pricing that holds that an asset’s returns
can be forecasted using the linear relationship between the asset’s expected return and a number of
macroeconomic factors that affect the asset’s risk such as inflation rate, GDP growth, change in
interest rate, major political upheavals etc. The theory also suggests that the returns on assets
follow a linear pattern. An investor can leverage deviations in returns from the linear pattern
using the arbitrage strategy.
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Business Digest 29 Finance (Capital Structure and Leverage )
Capital structure:
★ Capital structure refers to the proportions or combinations of common equity capital, preferred
capital, bonds, debentures, long-term loans, retained earnings and other long-term sources of funds
in the total amount of capital.
★ In other words, capital Structure refers to the amount of debt and/or equity employed by a firm to
fund its operations and finance its assets.
Optimum capital structure:
★ Optimum capital structure is the capital structure at which the weighted average cost of capital is
minimum and thereby the value of the firm is maximum.The structure is typically expressed as a
debt-to-equity or debt-to-capital ratio.
Factors which affect capital structure:
㊣ Financial leverage ㊣ Cost of capital &costs of floatation
㊣ Cash flow ability to service debt ㊣ Control &flexibility
㊣ Nature and size of a firm
㊣ Growth and stability of sales ㊣ Risk
㊣ Capital market conditions ㊣ Corporate tax Rate &legal requirements
㊣ Purpose of financing
★ Proposition I states that market value of any firm is independent of amount of debt or equity in its
capital structure. The firm cannot change its value by changing its capital structure. The value of
the levered firm is the same the value of the unlevered firm.
★ Proposition II states that the company’s cost of equity is directly proportional to the company’s
leverage level. The increase in leverage level induces higher default probability to a company.
Therefore, investors tend to demand a higher cost of equity (return) to be compensated for the
additional risk.
Static Trade-Off theory:
★ Tax shield from debt increases the value of the firm whereas financial distress costs associated with
debt decreases the value of the levered firm. The two offsetting factors produce an optimal
amount of debt.
★ The static trade off theory attempts to explain the optimal capital structure in terms of the
balancing act between the benefits and loss of debt. According to this theory, optimal debt level is
the point at which marginal financial distress cost equals marginal tax benefit from the debt.
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Business Digest 30 Finance (Capital Structure and Leverage )
► Tax rate(High tax rate leads to high debt-equity ratio and vice versa)
► Types of assets(if assets are mostly physical, firm can go for high debt-equity ratio)
► Certainty of operating income(if high level certainty)exists, go for high debt-equity ratio and
vice-versa)
Leverage/operating leverage/financial leverage:
► Leverage is defined as the ability of a firm to use fixed cost liability or fund to magnify the
returns of the shareholder.
► Leverage is created when a firm has fixed cost associated with sales/operation or with its
financing characteristic.
► Operating leverage is the firm’s ability to use fixed operating costs to magnify the effects of
changes in sale on its operating profit.
► Financial leverage is the firm’s ability to use fixed financing costs to magnify the effect of
changes in operating profit on firms earning per share (EPS).
★ The degree of operating leverage(DOL)is a financial ratio that measures the sensitivity of a
company’s operating income to its sales.It is the multiple by which operating income of a
business changes in response to a given percentage change in sales.The DOL ratio shows the
percentage change in operating income in response to a 1% change in Sales. (See Formula:F
-77).
★ The degree of financial leverage(DFL)measures the sensitivity of earnings per share (EPS)to
the fluctuation in the operating income. The DFL ratio shows the percentage change in EPS in
response to a 1%change in EBIT. (See Formula:F-78)
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Business Digest 31 Finance (Capital Structure and Leverage )
★ Capital Budgeting is the process of identifying, evaluating, and selecting investment projects whose
returns are expected to extend beyond one year to maximise shareholders’ wealth. It is the process
of deciding whether or not to commit resources to particular long-term projects whose benefits are
to be realized over a period of time.
Problems associated with capital budgeting:
1.Forecasting cash flows in long term is very difficult due to uncertainty
2.Figuring out proper discount rate is also challenging
Steps of Capital Budgeting Process:
Types of Projects:
► Mutually Exclusive Projects:Mutually exclusive projects are a set of projects from which
at most one will be accepted.
► Independent Projects:An independent project is a project whose cash flows are not
affected by the accept/reject decision for other projects. Thus, all Independent Projects
which meet the Capital Budgeting criterion should be accepted.
► Dependent Project:Dependent projects are those project whose acceptance/rejection
depends on the acceptance/rejection of another project.
Hurdle rate:
★ Hurdle rate is the minimum required rate of return on an investment/project in a discounted cash
flow analysis. The minimum rate at which project is acceptable.
Three major types of investment decision:
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Business Digest 32 Finance (Capital Structure and Leverage )
CAPITAL BUDGETING
TECHNIQUES
★ The future cash-flows are always uncertain. Estimation of demand, production, selling price, cost
etc. cannot be exact. The firm can incorporate such uncertainty in cash flows by:
Risk-adjusted discount rate:Discount rate to derive NPV is added with some uncertainty
premium leading to increased cost of funds and reduced NPV.
Certainty equivalent method:It reduces expected cash inflows by certain amounts.
Expected cash flows are multiplied by certainty equivalent factor (less than 1)to derive
most certain cash flows.
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Business Digest 33 Finance (Capital Structure and Leverage )
Merits Demerits
√ It recognizes the time value of mon- √ It involves some guesswork regarding cost of
ey. capital.
√ It considers the total benefits arising √ It assumes the same level of risk for the whole
out of the proposal. period.
√ It is the best method for the selec- √ It is not suitable for the projects having different
tion of mutually exclusive projects. effective lives.
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Business Digest 34 Finance (Capital Structure and Leverage )
Merits Demerits
It considers the time value of money. It produces multiple rates which may be
It takes into account the total cash confusing for taking decisions.
inflow and outflow. It assumes that all intermediate cash flows
It does not use the concept of the are reinvested at the internal rate of return.
required rate of return. It uses same rate for the whole period.
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Business Digest 35 Finance (Capital Structure and Leverage )
★ Multiple IRRs occur when a project has more than one internal rate of return.It is a limitation of
IRR, where IRR provides more than one rate that makes the NPV equal to zero.The problem arises
where a project has non-conventional interim cash flow pattern.
What is Modified Internal Rate of Return (MIRR)?
★ MIRR assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial
outlays are financed at the firm's financing cost.In contrast, the traditional internal rate of return
(IRR)assumes the cash flows from a project are reinvested at the IRR.The MIRR more accurately
reflects the cost and profitability of a project.
NPV or IRR which one is better?
★ IRR and NPV both are superior capital budgeting techniques.But for almost any project simple IRR
isn't superior to NPV.In many cases, projects’ NPV is much better compared to IRR.Some reasons
for the superiority of NPV include:
IRR assumes the single discount rate which will not be case in reality
Multiple IRR will not only make confusion but also make analysis difficult.
IRR can be negative too which is difficult to interpret, whereas in case of negative NPV, it surely
means deficit and positive value implies profitability in the project.
Positive NPV indicates value addition to shareholder’s wealth, and negative NPV implies vice-
versa. However, this thumb rule will not applicable in case of IRR.
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Business Digest 36 Finance (Security Valuation )
Where,
V = Value of security at time zero (t = 0)
At= cash flow expected at the end of year t
K = appropriate discount rate
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Business Digest 37 Finance (Security Valuation )
★ Under the discounted cash flow valuation techniques, the value of the stock is estimated based
upon the present value of some measure of cash flow. Cash flows include dividends, operating
cash flow, and free cash flow.
Steps in stock valuation based on forecasted future cash flow:
1) Determine the methods of valuation
2) Define forecast time horizon.
3) Calculate appropriate WACC or Cost of equity funds as discount rate
4) Define the types of cash flow such as Dividend/FCF/RE
5) Calculate the growth rate of cash-flow beyond time horizon
6) Determine the continuing value
7) Calculate the present value of forecasted cash flow within horizon and beyond horizon
(continuing value)
8) The sum of present value of cash in hands, forecasted cash flow and continuing value is the
stock’s intrinsic value.
Asset based valuation:
★ Asset- based valuation values equities by adding up the estimated fair market values of the assets
of a firm minus the values of liabilities. The model is criticized due to inadequate and inefficient
access to the fair market value of intangible assets and sometimes market values are not readily
available.
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Business Digest 38 Finance (Security Valuation )
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Business Digest 39 Finance (Security Valuation )
In relative valuation:
1. Find the comparable firms in terms of sale size, capital size, same industry/product, equivalent
environment
2. Identify measures for the comparable such as P/E, P/S, P/B, P/CF ratio from the financial
statements of comparable firms.
3. Determine the average of every -ratio for all comparable firms.
4. Multiply the average of any particular ratio with target firm’s value. For example, if average P/
E ratios of comparable firms equals 10 and earnings of target firm is 10, then value of that
target firm is 10*10*10= 100 Tk.
5. Similarly, if average P/S ratios of comparable firms equals 9 and Sales of target firm is 8, then
value of that target firm is 9*8=72 Tk.
6. After calculating the values based on different ratios of comparable firms, the average of all
values is considered as the final determined value of the firm.
Problems with relative valuation:
★ There is circular effect.The values of firms are circulated within themselves. One
firm’s value is based on comparable but those comparable are also based on another
comparable and this goes on making no sense.
★ Market is inefficient in reality.Comparable’ prices may not be well justified.
★ No firm is alike and comparable in reality
★ This method would be meaningless of denominator of any ratio becomes negative.
Valuation of Bonds:
★ A Bond is a long-term fixed income instrument. The value of bond is the present value of the
contractual payments its issuer obliged to make from the beginning till maturity. The appropriate
discount rate would be the required return matching with risk and the prevailing interest rate. This
is the amount that an investor should be willing to pay for this bond, if the market price is above
this value, the investor should not buy it.
What is tax shield and interest tax shield?
★ Tax Shield is the saving in taxable income for corporations by deducting allowable expenses such
as interests, depreciation. A levered firm pays interest, and thus pays less tax than an unlevered
firm does. This benefit made out of using debt is called interest tax shield.
(Tax Shield =Interest expense x Tax Rate).
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Business Digest 40 Finance (Security Valuation )
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Business Digest 41 Finance (Dividend)
In case of cash dividend, the total equity value will fall by the amount dividend paid.
When there
is news of dividend in the market, price might increase due to signalling effect but after the
payment of dividend price will fall.
Stock dividend or stock split increases the number of outstanding shares. Since no cash-flow is
involved with stock dividend, there will be no change in total equity but stock price will change as
number of shares changes. It will have dilution effect on EPS, NOCF, NAV per share.
Why stock price falls on or after ex-dividend date?
★ It is to be noted that this fall is the sign of market efficiency, not inefficiency because market
rationally attaches or adjusts the value to be distributed among shareholders. Since some value
will be distributed, price falls.
Cumulative dividend:
★ Cumulative dividend is a sum that companies must remit, usually on preferred shares, before any
other dividends on any of the issuer's of other securities. Maximum 6 years of accumulation is
possible.
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Business Digest 42 Finance (Dividend)
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Business Digest 43 Finance (Dividend)
What is Homemade-dividend?
What is pay-out ratio and retention (plowback) ratio? See Formula: (F-48, 132)
MM Approach suggests that dividend policy has no effect on the price of the shares of the firm
and believes that it is the investment policy that increases the firm’s share value.
Major assumptions are: perfect capital market, dividend and capital gain tax rate are same
and investment policy are set ahead of time.
Bird-In-Hand theory:
★ Investors think dividends are less risky than potential future capital gains, hence they like
dividends.
★ The theory states that having a cash pay-out appears to be better than the company retaining
the earnings for growing the business.The latter is full of uncertainty as the company may
eventually collapse with the investors ending up with nothing. Hence, it seems to be better to
get the money out first!
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Business Digest 44 Finance (Investment Banking and new issue)
Investment banking:
★ Investment banking is a special segment of banking operation although it is different from banking
activities that help individuals or organisations raise capital and provide financial consultancy
services. It is one sort of intermediation in resource allocation.
Major Four activities of Investment Banker :
1. Issue management
2. Corporate advisory
3. Underwriting
4. Portfolio management
What is financial engineering?
★ It can be defined as the development and creative application of financial technology to solve
financial problems, exploit, financial opportunities and to otherwise add value.For example, the
creation of swaption. For example:
► Quantitative research and analysis
► Model validation
► Building valuation models
► Derivative trading
► Portfolio analysis
► Development of quantitative software
What is securitization?
★ Securitization is the practice of packaging and pooling together various types of debt instruments
(assets)such as mortgages and other consumer loans, and finally, selling the interest in the pool as
financial instrument in the liquid market.
What is fiduciary obligation?
★ Fiduciary obligation is the obligation or trust imposed by law on officials of an organization
making them liable for the proper use of the client’s money, funds and property to ensure client’s
best interest served.
What is due diligence?
★ Due diligence is the process of systematically independent researching and verifying the accuracy
of a statement and future prospects to identify or re-evaluate risk in the anticipation of a major
investment.
Lock provision:
★ Lock provision specifies the predetermined amount of time after an initial public offering where
large stakeholders are restricted from selling their shares. The length of time for a lock-up
provision can vary, but is typically for the duration of the investment.
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Business Digest 45 Finance (Investment Banking and new issue)
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Business Digest 46 Finance (Investment Banking and new issue)
★ Book building is a process of price discovery for security that is intended to be issued through
public offering It is one of the two mechanisms to determine the offer price of a new public
issue.The stages in book building are as follows sequentially:
1. Receipt of permission from BSEC and DSE
2. Issuer will prepare prospectus and quote an indicative price (at least three different
categories of EII) in the prospectus & SEC
3. Prospectus will have to be posted on the Websites of the Commission, stock exchanges,
issue manager and issuer at least two weeks prior to the start of the bidding
4. A road-show will be arranged where issuer invites for bid price offer from the EII
(Eligible Institutional Investor)
5. Eligible institutional investors shall bid for the share at a price within (+/-)20% of the
indicative price.
6. No institutional investor shall be allowed to quote for more than 10%of shares.
7. If institutional quota is not cleared at 20%(twenty percent)below indicative price, the
issue will be considered cancelled unless the floor price is further lowered
8. The bidding will be handled through a uniform and integrated automated system of the
stock exchanges.
9. The institutional bidders will be allotted security on pro-rata basis at the weighted average
price of the bids that would clear the total number of securities being issued to them;
10. The lowest bid price at which all the institutional investor’s share will be exhausted is
called cut-off price.
11. General investors, which include mutual funds and NRBs, shall buy at the cut-off price;
12. There shall be a time gap of 25(twenty-five)working days between bid and public issue.
13. General investors shall place their application through banker to the issue.
Who is scalper?
★ Scalper is a trader who buy and sell an underlying asset multiple times in the same day for a small
profit. It is a form of day trading that involves taking position in stock only for a few minutes.
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Business Digest 48 Finance (Portfolio Management)
What is portfolio?
★ A portfolio is the collection of assets of different kinds. Financial portfolio includes investments
asset such as share, bond, derivatives, Government securities and so on. Typically, an investor
would want to hold a number of different financial securities to spread his risk, and would seek a
mixture of them. Harry Markowitz is the father of portfolio theory.
What is market portfolio?
★ The market portfolio is a portfolio consisting of all securities available in the market where the
proportion invested in each security corresponds to its relative market proprtion.
★ It is a portfolio consisting of all assets/securities available to investors.
What is portfolio management?
★ Portfolio Management is the art of tactfully managing an investment portfolio by selecting the best
investment mix in the right proportion in the right time and continuously shifting proportion and
class of assets in the portfolio, to increase the return on investment and maximize the wealth of the
investor.
Portfolio management process:
Investment policy statement (goals, expectations, risk/return preference)-IPS
Examine market environment (Capital market, economy, political condition, social status)
Implement the plan and construct the portfolio considering objectives and constraints.
Monitor and update regularly.
Modern Portfolio Theory (MPT):
★ According to Markowitz portfolio theory, an investor can mathematically trade off risk tolerance
and reward expectations, resulting in the ideal portfolio. This theory was based on two main
concepts:
► Every investor’s goal is to maximize return for any level of risk
► Risk can be reduced by diversifying a portfolio through individual, unrelated securities.
Assumptions in MPT:
√ Investment alternatives provide expected returns which follows normal distribution
√ Risks are estimated based on the variability of expected return
√ For a given risk they want to maximise return and for a given return they want to minimise risk.
√ Investors are generally rational and risk adverse
√ To buy and sell securities there is no transaction costs.
√ Analysis is based on a single period model of investment.
√ Investors base decision solely on expected return and risk and thereby their utility curve is a
function of expected return and risk (variance/standard deviation of expected return)
√ Investors want to maximise their utility for a given period, and their utility curve shows
diminishing marginal utility of wealth.
What is opportunity set?
★ Opportunity set is the set of all combinations of assets/investment that can be created/constructed
from a given asset pool with different risk and return expectations.
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Business Digest 49 Finance (Portfolio Management)
★ These are two statistical measures that describe how two variables are related.
►Covariance indicates the direction of how two variables are related. A positive
covariance means the returns of the stocks are positively related, while a negative
covariance means the returns are inversely related.
►Correlation coefficient is the statistical technique to measure the degree to which returns
from stocks are related. It specifies the degree of relationship.
If correlation coefficient is +1, the returns have a perfect positive correlation,
If correlation coefficient is 0, no relationship exists between the returns (returns)
If correlation coefficient is –1, the returns are perfectly negatively correlated (or inversely
correlated)
★ Diversifiable risk of the portfolio is critically dependent on the correlation co-efficient of the
portfolio.
How to measure portfolio return and risk, beta? (See Formula:F-15-17)
★ Portfolio return is the simple weighted average return of the individual assets in the portfolio.
★ The beta of a portfolio is the weighted sum of the individual asset betas, according to the
proportions of the investments in the portfolio
★ Variance of the portfolio is the expected value of the squared deviations of the return on the
portfolio from the mean return on the portfolio.Standard deviation, a measure of risk of the
portfolio, is the squared root of variance.
Concave vs Convex curve:
★ If any two points of a curve are joint by a straight line and the line lies entirely below the curve, it
is said to be concave curve, whereas if the line lies above the curve it is said to be convex curve.
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Business Digest 50 Finance (Portfolio Management)
Separation theorem:
★ The ability to determine the optimal portfolio of risky assets without knowing anything about the
investor’s risk/return preference is known as separation theorem.
CAL VS CML VS SML:
When portfolio manager combines a risky asset portfolio with a risk-free asset, he forms a capital
allocation line (CAL).
CAL demonstrates the relationship between risk and return of the portfolio where assets are
combination of risk-free asset and the risky asset based on a particular investor’s risk preferences.
The capital market line (CML) is a special case of the CAL where the portfolio of risky assets is
replaced by the market portfolio (market index).
On the other hand, security market line(SML)is the line that demonstrates the linear relationship
between expected return and systematic risk measured by beta of a particular stock.
What is characteristic line?
★ It is straight line on a graph that shows the relationship between returns on a stock and returns on the
market portfolio over time.
How to find optimal portfolio (when risk free borrowing/lending allowed):
★ The optimal risky portfolio is found at the point where the CAL(capital allocation line) is tangent
to the efficient frontier of risky assets. This portfolio is optimal because the slope of CAL is the
highest, which means the highest returns per additional unit of risk can be achieved.
Sharpe ratio vs Treynor ratio: (See Formula:F-64-65)
★ Sharpe Ratio is the most popular tool to measure the risk-adjusted performance of portfolio or
mutual fund managers among other available measuring formulas. It is calculated by dividing
excess return(portfolio return over risk free return)by standard deviation of the return of the
portfolio.
★ Treynor ratio evaluates the additional returns generated by a fund manager over and above the risk
-free returns.In case of Treynor ratio, the excess return is divided by beta-coefficient of the
portfolio. It is another popular tool to measure the risk-adjusted performance of portfolio or mutual
fund managers.
What is Jensen’s Alpha?
► The ratio is the performance ratio which evaluates the returns of the fund over its index.
This helps
investors examine the risk adjusted performance of the portfolio and determine risk reward profile
of mutual fund.
► Jensen’s Alpha=[(Fund Return-Risk free return)-(funds beta)x(Index return-risk free
return)].
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Business Digest 51 Finance (Portfolio Management)
★ In finance, the word “Alpha” signifies above-average market return. Usually the stocks which
lies above or below the market determined return or similarly far away from the SML line are
either undervalued or overvalued. The stocks that provide above average market return are
called alpha. An aggressive and highly expert benchmark beaters who find and invest in
those stocks in expect of above average return (abnormal return)are called alpha hunter.
Active vs Passive portfolio management: (See Formula:F-61)
► Active portfolio management means making investment decision with an eye to beat the
market and earn abnormal return. It is against efficient market hypothesis. It believes
there are inefficiencies in the market which skilled portfolio managers can use to their
advantage. In doing so the managers employ various trading strategies.
► On the other hand, passive portfolio management is based on Efficient Market Hypothesis
(EMH). This theory postulates that financial markets are efficiently priced and therefore
passive portfolio managers track market index in making investment decision. Passive
investment managers seek to match the return and risk of an appropriate benchmark.
Benchmarks include broad market indices that cover an entire asset class, index for a
specific industry
► While active management believes that market returns can be exceeded, passive
management believes it is futile to try to do so. Active managers take position for short
term whereas passive managers take position for long term.
► Semi-active managers want to outperform their benchmark while carefully managing their
portfolios' risk exposures. An enhanced index portfolio is designed to perform better than
its benchmark index without incurring much additional risk.
Capital preservation vs Capital appreciation:
★ In preservation, investor wants to minimise risk and maintain the equivalent purchasing power
over time.
★ In appreciation, investor wants to increase the value of portfolio in real term to meet some
future need.
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Business Digest 52 Finance (Corporate Finance )
► Principal-Agent relationship is built when one person (the agent-the management of the firm)is
allowed to make decisions on behalf of another person (the principal—the owners of the firm/
bondholder).
► Agency problem is a situation in which agents of an organization(e.g.the management)use their
authority for their own benefit or wealth maximisation rather than pursuing the interest or wealth
maximisation of the principal.
► Agency cost is the cost of the firm associated with resolving the conflicts of interest between
managers and shareholders or the value firm lost as a result of such conflict (directly traceable).
► Major two type of agency costs are:
Monitoring costs of the shareholder
Costs of implementing monitor and control device and techniques .
What is merger?
★ A merger happens when two firms agree to go forward as a single new company rather than remain
separately owned and operated. In merger, previous two firms cease to exist and new one
emerges. A+B=C
What is acquisition?
★ In an acquisition, one company purchases another through stock or assets. In other words, when
one company takes over (at least 51%)share of the acquired)another and clearly established
itself as the new owner, the purchase is called an acquisition. A+B=A
What is strategic alliance?
★ A strategic alliance is a legal agreement between two or more companies to share access to their
technology, trademarks or other assets. A strategic alliance does not create a new company.
What is joint venture?
★ Joint Venture can be described as a business wherein two or more independent firms come together
and share resources to form a legally independent firm for a stipulated period, to fulfil a specific
purpose such as activity or project. In Joint venture new firm comes into force where the previous
two continue their own business (unlike merger).
What is venture capital?
★ It is a private or institutional capital investment made in the early-stage of new ventures having
uncertain outcome in the expectation of a sizeable gain. Invested firms are usually small; or exist
only as an initiative, but have huge potential to grow.
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Business Digest 53 Finance (Corporate Finance )
What is conglomerate?
★ A conglomerate is a large corporation run as a single business, but made up of several unrelated
firms (acquired through mergers or takeovers)operating in diverse goods and/or services
industry.
Types of acquisition:
★ Horizontal:Acquisition of a company which belongs in the same industry and same production
step
★ Vertical:Acquisition of a company which belongs in the same industry but different step of
production process(supplier/customer group).
★ Conglomerate:Acquisition a company which is active in a partly or entirely different industry.
Purchase method of acquisition:
★ Purchase method of reporting acquisition requires that asset of the acquired firm be reported at fair
market value on the book of acquiring firm. The difference in purchase price and market value of
asset is considered as goodwill.
What is tender offer?
A tender offer is the offer by a company (bidder)to the public investor to purchase a substantial
percentage of the equity share in a particular company(target company)at a price slightly higher than
market price.
What is synergy?
★ Synergy is the extra added value that derives through merger or acquisition.
It is the difference
between the value generated by a merged firm and the sum of value generated by previous two
firms.
★ Synergy=AB - (A+B)
Sources of synergies:
Revenue enhancement through economies of scale and economies of scope
Increased control over market leading monopoly in price setting
Exploitation of unused capacity
Reduced marketing and promotion cost
Reduced fixed cost (shared facility)
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Business Digest 54 Finance (Corporate Finance )
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White Knight:
★ A white knight is called a saviour. It is a third corporation invited by target firm to buy out
substantial shares of target firm in order to prevent an undesired takeover.
Options in financial distress:
★ Absolute priority rule is a rule that stipulates the order of payment in the event of liquidation
among creditors and shareholders. It states senior claims must be fully satisfied before junior
claims receive anything.
What is coinsurance effect?
★ It refers to the fact that merger of two firms reduces the probability of default on either’s debt.
What is dilution?
★ Reduction in the price of every share as a result of increase in the number of total outstanding
shareholdings.
What is leveraged buy-out (LBO)?
★ Leveraged buyout refers to the purchase of a company while using mainly debt to finance the
transaction
★ It is the process of buying another company using money from outside sources as debt.
MBO (Management Buy Out):
★ Management buyout (MBO) is a type of acquisition where a group of people in the current
management of a company buy out majority of the shares from existing shareholders and take
control of the company.
Altman Z Score model: (See Formula:F-86)
★ The Altman Z Score model, defined as a financial model to predict the likelihood of bankruptcy in
a company, The Altman Z Score is used to predict the likelihood that a business will go bankrupt
within the next two years.The formula is based on information found in the income statement and
balance sheet of an organization; as such, it can be readily derived from commonly-available
information.
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Business Digest 56 Finance (Derivatives)
★ Derivative is a kind of financial instrument whose value is derived from another underlying
traded asset such as share, bond, commodities, interest rate, currency etc.Derivative securities
are traded on exchanges or OTC market like other financial instruments, and their value varies
with the value of the underlying assets.Most common form of derivative securities are call
option, put option, futures, forward contract, swap etc.
Call and put option, writer, exercise price (strike price),expiration date, elapsed option:
► Call option is a derivative contract which gives the holder (buyer) of the option the right
(not obligation)to buy the underlying asset at a certain predetermined price on or before the
maturity date.
►A put option gives the holder (buyer) the right(not obligation) to sell the underlying asset
at a predetermined price (exercise price) on or before the maturity date.
► The price at which the option is executed (if right is applied) or the price at which
underlying asset is bought/sold is called exercise or strike price.
► The date at which the option is exercised (written in the contract) is called expiration date.
Sometimes option can be exercised before aforementioned expiration date.
► The party which sells (prepares) the option contract in exchange of premium is called the
writer of the contract.
► Since option is a right (not the obligation), the holder (buyer) will decide whether to
exercise the contract or not. If an option contract is not exercised within maturity, it is
called elapsed option. Largest option exchange in the world is Chicago Board Options
Exchange.
American vs European option:
★ Owners (holder)of American options may exercise the option contract at any time before the
option expires (before or on maturity date)while owners (holder)of European style options
may exercise only at maturity date. Early exercise is possible in American option.
Options Premium (call premium or put premium):
★ Option premium is the price (initial outflow)paid to acquire the option, also known simply
as option price.This is the price paid to the writer (seller)by the holder (buyer).In other
word it is the price of the right gained by the holder.In case of call option, it is told call
premium.In case of put, it is called put premium.
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Business Digest 57 Finance (Derivatives)
★ An option is in the money when exercise of the option is profitable; out of the money when exercise
is not profitable, at the money when holder is neither in profitable nor in unprofitable situation.
★ In case of call option, In the money means spot price(market price)is higher than strike price, out
of the money means spot price is lower than strike price and at the money means spot price equals
strike price.
★ A naked option is the situation when the writer (seller)of the option does not have own any
underlying asset to honour the right of buyer (buy or sell)at the agreed price.It is also called
uncovered option.Naked options carry a chance of huge profit as well as of great risk, depending on
the market's direction.
What is warrants?
★ Warrants are securities (issued by a specific company) that give the holder the right, but not the
obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain
price before a certain time. While options are contract, warrants are security and options are
standardized derivative contract but warrants are unstandardized security.
What is Employee Stock Option (ESOP)?
★ The Employee Stock Options or ESOPs is the compensation scheme (to motivate employees). It
is the call options on a company's common stock granted to employees giving the right to buy a
certain amount of company shares at a predetermined price.
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Business Digest 58 Finance (Derivatives)
★ It argues that the risk/return relationship between puts and calls on the same security should be
identical, thus price of a call can be derived from the price of a put considering other things
identical. Put-call parity will not hold for American options unless they are held to expiration.
Arbitrage opportunities would be available if there is a divergence between the value of calls and
puts.
Futures contract:
★ A 'Future' is a derivative contract in which two parties come to an agreement to buy or sell the
underlying asset for a specific price at a pre-determined time. Futures are traded on an exchange.
Forward contract:
★ Forward contract is a non-standardized derivative contract between two parties to buy or to sell
an underlying asset at a specified future time at a price agreed upon today.They are mostly traded
at OTC market .
Forward vs Futures:
Forward Futures
Private contract between two parties Traded on an exchange
Not standardised Standardised contract
Some credit risk Virtually no credit risk
One specified delivery date Range of delivery dates
Delivery of underlying takes place Usually delivery of underlying asset is closed out pri-
or to maturity
Options vs Futures:
Option Futures/Forward
It gives the right to the holder It is an obligation for the holder
No margin required for buyer, required only for seller Margin is required
Risk/return potential is unlimited for seller but lim- Risk/return potential is unlimited
ited or buyer
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Business Digest 59 Finance (Derivatives)
★ In options/futures agreement, one wins at the expense of the other.When someone wins, the other
loses an equal amount.There is no addition to net wealth.Thus, these are usually called zero sum
game.
Factors affecting the price of an option:
★ LIBOR is the rate at which banks are prepared to make large wholesale deposits with other bank
whereas LIBID is the rate at which banks will accept deposit from other banks.LIBOR rate is
often used as a benchmark of floating rate.
Forward rate, basis and basis point:
Forward rate: A forward rate is an interest rate, implied by current zero rates, applica-
ble to a financial transaction that will take place in the future .
What is basis? The difference between the spot price and the futures price of a com-
modity
What is basis point? Basis point is the one-hundredth of one percent
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Business Digest 60 Finance (Derivatives)
Swaption:
★ A swaption is a combination of a regular swap and an option. It gives a holder the right to enter a
swap with another party at a given time in the future.
Plain vanilla interest rate swap:
★ Plain vanilla interest rate swap is a contractual agreement between two parties to exchange
interest payments on a certain notional principle where one pays at fixed rate and the other at
floating rate (LIBOR)on the same notional principal amount. Here, the principal is not
eventually exchanged and that’s why it is called “notional principal”.This is the simplest and
straightforward form of swap and thus called “plain vanilla”.
What is Forward Rate Agreement (FRA)?
★ A Forward Rate Agreement, or FRA, is an over the counter agreement between two parties (who
want to protect themselves against future movements in interest rates)to ensure that a certain
interest rate will be applied to borrowing/lending a certain principle amount for a specified period
of time starting at an agreed date in the future.
Assumptions in valuation of options:
No transaction cost
Same tax rate for all trading profits
Borrowing/lending possible at-risk free interest rate.
Trading strategies using options:
• Covered call- buying a stock and selling a call option (or selling a put)
• Protective put—buying a stock and buying a put option (or buying a call)
• Spread-Taking position in two (or more) calls or two put option
• Combination-Taking position in both call and put on same underlying stock.
• Straddle-long call and long put at same strike price and maturity date
• Strangle-long call and long put at different strike price and same maturity date
• Butterfly spread- buy one call at higher strike price, buy another call at lower strike price
and sell two call at intermediate strike price (between the strike price of first two calls.
Futures Option:
★ A futures option is an option contract in which the underlying is a single futures contract. The buyer
of a futures option contract has the right to enter into a particular futures position at a specified
price (the strike price).
What is real option?
★ Real option is a choice available to a company regarding an investment opportunity. The term ‘real’
means that it refers to a tangible asset, and not a financial instrument.
★ Managers are presented with the real option to generate value for the firm by some additional
investment embedded with a significant large investment decision.
★ Thus, when making investment decision, managers should look for any real options embedded with
major investment to be made.
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Business Digest 61 Finance (Derivatives)
★ Thus, when making investment decision, managers should look for any real options embedded
with major investment to be made.
Black-Scholes model:
★ Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call
or a put option based on six variables such as volatility, type of option, underlying stock price,
time, strike price, and risk-free rate. It often assumes percentage change in short-term stock
price follows normal distribution.
Binomial model:
★ Binomial model is very simple model used to pricing options based on the assumptions that
there is no arbitrage opportunity by constructing a binomial tree. The model is mainly based
on risk neutral valuation.
Risk neutral valuation (RNV):
RNV is very important principle in the valuation of derivatives. This principle assumes that
investors are risk neutral and thus they do not increase the expected return they require for an
investment to compensate for increased risk.
Delta: ►The number of the stock to be held for each option shorted to make the
portfolio riskless or
►It is a measure of sensitivity to the value of option in response to the change
in underlying share/asset price.
Theta: ►Theta is a measure of the rate of change in the value of an option with
respect to the passage of time
Gamma: ►It expresses how much the delta will change with a change in the price of
underlying asset
►It is the second partial derivative of the option price with respect to the value
of underlying
Rho: ►Rho is the rate of change in in the price of derivative in response to the
change in interest rate
Hedge ratio: ►A ratio of the value of the proportion of a position that is hedged to the value
of the entire position. A hedge ratio shows how exposed an investment is to
risk. For example, if a hedge ratio is .65, then 65% of the investment is
protected from risk
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Business Digest 62 Finance(Financial Statement Analysis)
Decision tree:
★ Trend analysis is a technique used in technical analysis that attempts to predict the future stock
price movements based on recently observed trend data. Trend analysis is based on the idea that
what has happened in the past gives traders an idea of what will happen in the future.
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Business Digest 63 Finance(Financial Statement Analysis)
★ Monte Carlo simulation is a computerized mathematical technique that furnishes the decision-
maker with a range of possible outcomes, and the probabilities they will occur for any choice of
action.
★ It shows the extreme possibilities—the outcomes of going for broke; and for the most conservative
decision; —along with all possible consequences for middle-of-the-road decisions.
Du Pont Analysis: (See Formula:F-41)
★ A leading indicator is any economic factor that changes before the rest of the economy begins to
go in a particular direction.
Changes in the Gross Domestic Product (GDP)
Income and Wages
Unemployment Rate
Consumer Price Index (Inflation)
Interest Rates, Share market.
What is lagging indicator?
★ A lagging indicator is a measurable economic factor that changes only after the economy has
begun to follow a particular pattern or trend. These are the followings:
•Income and wages
•Inflation rate
•CPI (Consumer Price Index)
•Unemployment rate
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Business Digest 64 Finance (Major Economic Collapse in History)
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Business Digest 65 Finance (Major Economic Collapse in History)
On 19th October 1987, stock markets around the world suffered one
of their worst days in history, known today as Black Monday.
Following a long-running rally, the crash began in Asia, intensified in
London and culminated with the Dow Jones Industrial Average down
a 22.6% for the day – the worst day in the Dow’ history, in percentage
terms. Black Monday is remembered as the first crash of the modern
Black financial system because it was exacerbated by new-fangled
Monday computerized trading.
(1987) The theories behind the reasons for the crash vary from a slowdown in
the US economy, a drop in oil prices and escalating tensions between
the US and Iran.
Unlike the 1929 market crash however, Black Monday didn’t result in
an economic recession.
The Wall During the 1920s, The US stock market saw rapid expansion, which
Street reached its peak in August 1929 after a lot of speculation. By that
Crash of time, production had declined and unemployment had risen, which
1929 had left stocks in great excess of their real value. On top of this,
wages were low, agriculture was struggling and there was
proliferation of debt, as well as an excess of large bank loans that
couldn’t be liquidated.
The crash remains to this day the biggest and most significant crash in
financial market history, signaling the start of the 12-year Great
Depression that affected the Western world.
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Business Digest
Chapter Contents
Page No.
Accounting, Book keeping, Bookkeeping vs accounting, Financial
Accounting, Accounting Information System, conceptual frameworks of 66-74
accounting, objectives of accounting, Users of Accounting Information
System, shadow accounting, Branches of Accounting, Types of accounting
based on profession, Other accounting types, four bases of accounting, Double
entry System, SingleEntry System, disadvantage of double entry system,
accounting Equation, accounting error, account, debit and credit, chart of
accounts, master account/control account, accounting period, economic
Event, Transaction and its Impact on Accounting Equation, classifications of
Account, Assets/Liabilities/Equity/Expense/revenues, Expenses vs
expenditure, Capital expenditure vs Revenue expenditure vs Deferred revenue
expenditure, Capital vs revenue income, Contra Account/Contra asset
Basics of Accounting
account/Contra Entry, Golden Rules of Accounting, Management
Information System (MIS)vs Accounting Information System
(AIS),Accounting Standards, The difference between IAS and IFRS, Basic
Characteristics of a company
Accounting Related Invoice/Voucher and debit/credit notes, Freight, FOB Shipping point vs 75
Documents destination, Debit vs credit memorandum, Consignment/Consignor Vs
Consignee, IOU,
Journal , Special Journals, Ledger, Cash Book, worksheet, Adjusting Entry, 76-80
Closing Entry (temporary vs permanent account, Post-Closing Trial Balance,
Reversing Entry, Correcting Entries, Trial Balance, Objectives of Trial
Balance, Limitation of Trial balance, Suspense account, When suspense
Accounting Cycle account created, When trail balance will give equal balance in spite of having
errors, by account reconciliation, Bank reconciliation statement (BRS)
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Business Digest
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Business Digest 66 Accounting( Basic of Accounting)
What is Accounting?
★ Accounting is an information system that identifies, records and communicates the economic
events of an organization to relevant economic decision maker.
★ Accountancy is the practice of recording, classifying and preparing financial statements based on
business transactions which thereby reflect entity’s financial position and performance resulting in
timely and appropriate decision making by the stakeholders.
What is Book keeping?
★ Bookkeeping usually involves only the recording of economic events. It is therefore just one part
of the accounting process.
Bookkeeping vs Accounting:
Bookkeeping Accounting
√ Bookkeeping is an activity of recording √ Accounting is an orderly recording and reporting of
the financial transactions of the the financial affairs of an organization for a
company in a systematic manner. particular period.
√ Major tools are Journal and Ledgers. √ Balance Sheet, Profit & Loss Account and Cash
Flow Statement.
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Business Digest 67 Accounting( Basic of Accounting)
Usually an information system consists of three steps: input, processing and output. Similarly, In
accounting, three steps happen. Here, input=economic events, Processing=use of accounting cycle,
output= information for decision makers. This is why accounting is nowadays called accounting
information system.
★The main objective of accounting is to provide interested users with necessary information to make
relevant decision.
★The primary objective of accounting is to identify and record economic events.
Users of Accounting Information System:
A) Internal Users: Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business for the interest of the organization. e. g.
Proprietor, Management authority, Internal auditor, Accounts departments, Company officers etc.
★ B) External Users: External users are individuals and organizations outside a company who want
financial information about the company for their own interest. For example, Government,
Shareholders, Lenders, Creditors, Investors, Customers, Researchers, Chamber of commerce,
General public, External Auditor, Stock Exchanges, Tax authority etc .
What is Shadow Accounting?
★ Shadow accounting refers to a system in which two separate sets of financial books and records
are kept for the purpose of detecting mistakes and inconsistencies. It involves to a set of records
maintained at a local, or departmental level independent of the centralized “system of record”
maintained by the larger institution.
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Business Digest 68 Accounting( Basic of Accounting)
Branches of Accounting:
★ Financial Accounting: The field of accounting that provides economic and financial information
to external users.
★ Managerial Accounting: The field of accounting that provides internal reports to help internal
users make decisions about their companies.
Types of accounting based on profession:
★ Private Accounting: An area of accounting within a company that involves such activities as cost
accounting, budgeting, design and support of accounting information systems and tax planning and
preparation.
★ Public Accounting: An area of accounting in which the accountant offers expert service to the
general public. Services provided by a public accountant include: auditing, taxation, and
management consulting.
Other accounting types:
★ Forensic Accounting: Forensic accounting uses accounting, auditing, and investigative skills to
conduct investigations into financial statements. This type accounting is frequently used in fraud
and financial misconduct cases.
★ Fair Value Accounting: Fair value accounting uses current market values as the basis for
recognizing certain assets and liabilities. Fair value is the estimated price at which an asset can be
sold or a liability settled in an orderly transaction to a third party under current market conditions.
★ Responsibility Accounting: Responsibility accounting involves accumulating and reporting costs
and revenues on the basis of the manager who has the authority to make decision about the items.
This is also called reporting on the basis of designated responsibilities
★ Offset Accounting: Offset accounting is not a kind of accounting. It means cancelling an accounting
entry with an equal and opposite entry. It is not permitted by IASs and subject to some exceptions.
What are the four bases of accounting?
1. Accrual Basis (Transactions are recognised when they occur, irrespective of when the cash flow
occurs; recognised by GAAP, IFRS & BFRS).
2. Cash Basis (Only the cash impact of a transaction is recorded; recorded only when cash inflow/
outflow take place; not recognised by GAAP and BFRS).
3. Going Concern Basis (Assumes entity will continue operation for foreseeable future- at least next 12
months).
4. Break-up Basis (Alternative to going concern basis and relevant when firm is at financial
difficulties and to liquidate).
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Business Digest 69 Accounting( Basic of Accounting)
★ The equality of debits and credits provide the basis for the double entry system.
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Business Digest 70 Accounting( Basic of Accounting)
What is account?
★ Simply, account means title of homogenous transactions. It is a formal record of increases and
decreases in specific asset, liability and owner equity items under a homogenous title expressed in
terms of money in a ledger.
What is debit and credit?
★ The directional sign that is used to indicate the left side of a T account is debit and the directional
sign that is used to indicate the right side of a T account is credit.
What is chart of accounts?
★ It is the list of all accounts maintained either through manually or automated system by the entity in
the books of accounts.
What is accounting period?
★ Any meaningful reporting time period that may be length of one month or three months or six
months or one year and such on.
★ But the period of one year is standard.
What is Master Account/Control Account?
★ Master account is an account which consists various homogenous account with small difference in
their identity.
★ In other words, when homogeneous accounts are summarised under a broad account, it is called
master account. It has subsidiary accounts. Accounts Receivable could be a master account for
various individual receivable accounts.
What is economic event?
★ Economic Event is the event which is related with the transfer of control of an economic resource
from one party to another party. Example: Shakib sold a laptop to Tamim for $5, 000. It is an
economic event because Shakib got cash in exchange of a laptop and Tamim transferred the cash in
exchange of cash.
Transaction and its impact of on accounting equation:
► A transaction is an economic event that has a monetary impact on an entity’s financial statements
and is recorded as an entry in its accounting records.
► Every transaction has an impact on the financial position of an entity. The impact can be qualitative
or quantitative:
√ Qualitative or structural change: by qualitative change only one side of accounting equation is
affected and the sum of the balance sheet remains unchanged.
√ Quantitative or net change: by quantitative change both sides of the accounting equation are
affected and the sum of the balance sheet is changed.
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Business Digest 71 Accounting( Basic of Accounting)
Expenses vs Expenditure:
★ Expenses are the decrease in economic benefits during an accounting period in the form of
outflows, or depletions of assets or increases of liabilities that result in decreases in equity incurred
to generate revenue. Simply, Expenses are the costs incurred to generate revenue. (salary/rent/
wages/depreciation etc)
★ Expenditure, on the other hand, can be defined as the amount spent for the long-term on an asset,
which gives a long-term benefit like building expenditure, furniture expenditure, plant expenditure,
etc. If the benefits are yet to consume, it is called expenditure.
★ The key difference between Expense vs Expenditure is that Expense refers to the amount spent by
the business organization for the ongoing operations of the business in order to ensure the
generation of the revenue, whereas, the expenditure refers to the amount spent by the business
organization for the purpose of purchasing the fixed assets or for increasing fixed assets value.
Capital income vs Revenue income:
★ Capital income: Capital income is the income generated by an asset over time, rather than from
using the asset. It means an income which does not come from the regular business activity.
Example includes income from the sale of a long-term assets.
★ Revenue income: Revenue income arises from the regular business activities of an organization.
For example, proceeds from the sale of products.
Capital expenditure vs Revenue expenditure vs Deferred revenue expenditure:
► Capital Expenditure: Capital Expenditure is a long term expenditure which has been incurred for
the purpose of obtaining a long-term advantage for the business such as operating efficiency,
productive capacity, or expected useful life of the asset. E. g. purchase of Machinery.
► Revenue Expenditure: Revenue expenditure is a short term expenditure that incurred in the course of
regular business such as maintaining the operating efficiency and productive life of an asset. E. g.
purchase of raw material, payment of salary of the staff, depreciation on fixed assets etc.
► Deferred Revenue Expenditure: Deferred revenue expenditure is an expenditure which is
revenue in nature and incurred during an accounting period, but its benefits are to be derived in
multiple future accounting periods. E. g. heavy advertisement, prepaid insurance.
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Business Digest 72 Accounting( Basic of Accounting)
Define: Assets/Liabilities/Equity/Expense/Revenues:
Assets:
★ Assets are the resources owned by a business which have the capacity to provide revenue, future
services or benefit to operations.
★ Similarly, Assets are the resources controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity. Example; machinery, furniture, building etc.
★ Deferred Asset: A deferred asset is an advance expenditure from which benefits will flow to the
entity beyond reporting period. Example: Prepaid insurance, Prepaid rent, Prepaid advertising,
Bond issuance costs.
Liabilities:
★ Liabilities are the claims against assets. (loans/debenture/bond/)
★ Liabilities are obligations of the entity as a result of past events and the settlement of which are
expected to cause outflow of future economic benefits from the entity.
Equity:
★ Equity also known as owner's equity is the residual claim of the owners in the assets of the
enterprise after deducting all the external liability. (Capital provided by owners or shareholders).
Revenues:
★ Revenue is gross increase in the owners’ equity resulting from operational activities. (Product sold at $700)
★ Revenue is the amount for which performance obligations are satisfied irrespective of cash received
for those. Revenue not necessarily be in the form of cash always.
★ Outstanding income: Outstanding income means that amount of income which is due and receivable
but yet not received. (Service worth of $200 is provided but payment is not received yet).
► Contra account: A contra account is an account that is created to reduce the balance of another
relevant account. Example: Sales return. It reduces the balance of revenue.
► Contra asset account: A contra asset account is a negative asset account that offsets the balance in
the asset account with which it is paired. The purpose of a contra asset account is to store a reserve
that reduces the balance in the paired account. Example: Accumulated Depreciation. It contains the
sum total of all the depreciation expense that has been charged against those assets over time which
offsets the amount of fixed asset.
► Contra Owners Equity account: A contra owner’s equity account is a negative owner’s equity account that
reduces the balance in the paired owners’ equity account. E. g. Drawings, Dividend, Treasury Stock etc.
► Contra entry: In double entry accounting system, a contra entry is an entry which is recorded to
reverse or offset an entry on the other side of an account. If a debit entry is recorded in an account,
contra entry will be recorded on the credit side and vice-versa. Example: Cash 50, 000 withdrawn
for an official purpose from the bank. Journal entry for this transaction will be:
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★ In the above example, both entries, debit and credit are a contra entry of each other, they both
offset each other. The narration is not required for such an entry and only a “C” is written in the
left column which depicts that it is a contra entry.
Golden Rules of accounting:
These rules are used to prepare an accurate journal entry and these form the very basis of
accounting and act as a cornerstone for all bookkeeping. Before going to rules, let us know three
types of account:
★ Real account: All assets of a firm, tangible or intangible, fall under the category “Real
Accounts”
★ Personal Accounts: These accounts are related to individuals, firms, companies etc. A few
examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts,
accounts of credit customers, accounts of goods suppliers, capital, drawings etc.
1. Persons:– Natural Person.
2. Artificial persons:– The person created by human.
3. Representative persons:– Those accounts which represent the person or group of persons.
★ Nominal Account: Accounts which are related to expenses, losses, incomes or gains.
★ MIS and AIS are computer-based information systems. MIS is the use of information
technology, people, and business processes to record, store and process data to produce
information that decision makers can use to make day to day decisions. Accounting Information
System, or AIS, on the other hand is a subset of MIS and pertains to a system of keeping a
record of accounting books and financial statements to provide info to the external users.
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★ Generally Accepted Accounting Principles (GAAP) are the common set of accounting
principles recognised as common guidelines for accounting recordings and reporting. GAAP
are the accepted accounting principles in America. GAAP is issued by Financial Accounting
Standards Board (FASB) (1973).
★ International Financial Reporting Standards (IFRS) are the accepted accounting standards in
most of the countries. IFRS is issued by International Accounting Standards Board (IASB).
★ Bangladesh Financial Reporting Standards (BFRS) are the accepted accounting standards in
Bangladesh. BFRS is adopted by ICAB from IFRSs. (IFRS (Officially renamed as IFRSs from
the reporting of 2018). Bangladesh Financial Reporting Standards (BFRS) in Bangladesh is
determined by -ICAB.
★ International Accounting Standards Committee Foundation (IASCF) is the parent entity of
International Accounting Standards Board (IASB).
★ In Bangladesh CA degree is provided by Institute of Chartered Accountants of Bangladesh
(ICAB)1973
★ In Bangladesh CMA degree is provided by Institute of Cost and Management Accountants of
Bangladesh (ICMAB)1977.
■Separate Legal Entity (distinct and different from its members in law)
■Limited Liability (limited up-to the face value of shares held by investor)
■Perpetual Succession (does not cease to exist)
■Transferability of Shares (Shares in a company are freely transferable)
■Common Seal (Contracts must be under the seal of the company)
■Capacity to sue and being sued
■Separate Management (managed by its managerial personnel)
■One Share-One Vote (Each shareholder will have one voting right).
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Business Digest 75 Accounting(Accounting Related Documents)
★ Debit Note: Debit Note is issued by the purchaser, at the time of returning the goods to the vendor,
which indicates that his/her account has been debited with the respective amount. .
★ Credit Note: The vendor issues a Credit Note to inform that he/she has received the returned
goods, which shows that his account has been credited with the amount indicated in the note.
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Business Digest 76 Accounting( Accounting Cycle)
★ Accounting cycle is a series of steps performed during the accounting period to analyse record,
classify, summarize and report useful financial information for the purpose of preparing financial
statements. Compulsory Steps of accounting cycle:
1. Identification of transaction 6. Adjusted Trail Balance
2. Journalizing 7. Preparation of Financial statement
3. Posting to the Ledger Account 8. Closing Entries
4. Preparation of Trail Balance 9. Post-Closing Trail Balance
★ There are also two optional steps in the accounting cycle e. g. Worksheet and Reversing Entries.
★ Correcting Entries is an avoidable step in accounting cycle.
Journal:
★ Journal is an accounting record in which transactions are initially recorded clarifying debit and
credit account in chronological order. The journal is referred to as the book of original entry.
㊣ Typically, a general journal has spaces for dates, account titles and explanations, references,
and two amount columns. Entering transaction data in the journal is known as journalizing.
㊣ Simple Journal Entries: Some entries involve only two accounts, one debit and one credit. When one
debit and one credit involved in journal entries then they are called simple journal entries.
㊣ Compound Journal Entries: Some transactions, however, require more than two accounts in
journalizing. An entry that requires three or more accounts is a compound entry.
Special Journals:
㊣Sales Journal: It includes all credit sales
㊣Cash receipt journal: It includes all cash receipts including cash sales
㊣Purchase Journal: It includes all credit purchase
㊣Cash Payments journal: It includes all cash payments including cash purchase.
㊣Sales Return Journal: In which seller records all the sales that have been returned by customers.
㊣Purchase Return Journal: It records the goods which are returned to the suppliers.
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Special Journals:
㊣Sales Journal: It includes all on credit sales
㊣Cash receipt journal: It includes all cash receipts including cash sales
㊣Purchase Journal: It includes all on credit purchase
㊣Cash Payments journal: It includes all cash payments including cash purchase.
Ledger:
★ Ledger is the collection of all the accounts maintain by a company. Ledger is called king of all
books. It is the permanent store house of all the transactions. The ledger keeps in one place all the
information about changes in specific account balances. The process of transferring journal entries
to the ledger account is known as posting.
㊣ General Ledger: Companies may use various kinds of ledgers, but every company must
maintain general ledger. A general ledger contains all the asset, liability, and owner’s
equity accounts.
㊣ Subsidiary Ledger: Subsidiary Ledger is a ledger in which individual (Asset, Liability &
Owner’s Equity) accounts of the same type are kept in details. Two main types of
subsidiary ledger are: Accounts Payable Ledger and Accounts Receivable Ledger.
Cash Book:
★ Cash book is the Journal in which all cash receipts and payments (including bank deposits and
withdrawals) are recorded in chronological order, for posting to the ledger. Cash book is regularly
reconciled with the bank statements as an internal auditing measure. Cash Book is called both
Journal and Ledger.
㊣ Discount: Discount is the incentive for early payment. Discount is of two types-
㊣ Trade Discount: Trade discount is the percentage deduction from the list price of goods at
the time of selling.
㊣ Cash Discount: The credit terms of a purchase on account may permit the buyer to claim a
cash discount (also called purchase discount) for prompt payment. Cash discount is usually
allowed for making the payment early; example; 2/10, net30- If cash is paid within 10 days,
2% discount will be achieved.
What is Worksheet:
► It is a multiple column form used in the adjustment process and in preparing financial statements.
Using a worksheet, companies can prepare financial statements before they journalize and post
adjusting entries. However, the completed worksheet is not a substitute for formal financial
statements. A worksheet is a working paper used by the accountant.
► As its name suggests, the worksheet is a working tool. It is not a permanent accounting record; it is
neither a journal nor a part of the general ledger. The worksheet is merely a device used in
preparing adjusting entries and the financial statements. The use of worksheet is optional.
Companies do not distribute it to management and other parties.
► The steps of worksheet are:1) Trial balance 2) Adjustment 3) Adjusted Trail Balance 4) Income
Statement 5) Balance Sheet.
What is Adjusting Entry?
★ Adjusting entries are journal entries made at the end of an accounting period to allocate income
and expenditure to the period in which they are actually occurred. Adjusting entries ensure that the
revenue recognition and matching principles are followed.
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Trial Balance
★ Trial Balance is a list of closing balances of general ledger accounts on a certain date and is the first
step towards the preparation of financial statements. It is usually prepared at the end of an
accounting period to assist in the drafting of financial statements.
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Business Digest 80 Accounting( Accounting Cycle)
★ Bank reconciliation statement is a report which compares cash book balance and passes book
balance and subsequently conciliates the balances as shown in the cash Book and pass book.
√NSF check= Not sufficient fund and thereby not honoured
√Check in transit: deposit recorded by depositor but not by bank
√Outstanding check: check issued and recoded by client but not paid by bank.
Example
I. XYZ Company is closing its book and must prepare a bank reconciliation for the following items:
II. Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the
company’s ledger shows an ending balance of $260,900
III. Bank statement contains a $100 service charge for operating the account
IV. Bank statement contains interest income of $20
V. XYZ issued checks of $50,000 that have not yet been cleared by the bank
VI. XYZ deposited $20,000 but this did not appear on the bank statement
VII. A check for the amount of $470 issued to the office supplier was misreported in the cash payments
journal as $370.
VIII.A note receivable of $9,800 was collected by the bank.
IX. A check of $520 deposited by the company has been charged back as NSF.
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Business Digest 81 Accounting(Financial statements and Analysis )
Liquidity position, Funds flow, Capital structure and long-term solvency, Return on
capital invested
Operating performance
Asset utilization
★ Unclassified Balance Sheet:An unclassified balance sheet has three major categories; assets,
liabilities, and stockholder’s equity.
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Note:
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Business Digest 83 Accounting(Financial statements and Analysis )
► Fair Market Value: Fair market value is the price received for an item sold in the normal course
of business.
► Appraised value: An appraised value is an expert’s opinion of an item’s fair market price if the
items were sold.
► Book Value: The book value of an asset is its recorded cost less accumulated depreciation.
Capital:
★ Capital is the total funds and resources the firm used, collected from internal and external sources
in order to generate revenue and profit.
Equity vs Capital:
★ Equity is the owner's claim on the assets (Cash, inventory, equipment, movable/immovable
property, profits) of a business.
★ Capital is the owner's investment in assets of the business. Capital is received from the equity
holder and debtholder.
★ Capital=Equity + Debt.
★ Share capital can be categorized as authorized share capital, issued share capital, subscribed share
capital, called up share capital and paid up share capital.
► Authorised/Nominal/Registered Capital: The maximum amount of capital a company is
authorised to raise from the public by selling shares is known as Authorised Capital
► Issued Capital: It is a part of the total authorized share capital which has been issued by a
company for subscription by investors.
► Subscribed Capital: The part of issued share capital for which subscription has been received is
known as subscribed share capital.
► Called-Up Capital: The part of subscribed share capital which has been asked for payment by
the issuer is called-up share capital.
► Paid Up Capital: The amount actually paid by the shareholders is known as paid-up Capital.
Paid up capital = Called up capital – Call in arrears. Paid up capital is the amount for which the
company has received the full amount from the investors
► Reserve Capital: Reserve Capital shows the part of the authorized capital that has not yet called
up by the company and is available for drawing, if necessary.
► Seed Capital: Seed capital is the initial capital used when starting a business, often coming from
the founders' personal assets, friends or family, for covering initial operating expenses and
attracting venture capitalists.
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Business Digest 84 Accounting(Financial statements and Analysis )
Capital Reserve is created out of the profit earned not in the normal course of business. For
example, to a bookseller, profit on sale of books is a regular profit. But profit earned on sale of
something other than books is capital profit. It is usually not available for the payment of dividends.
General Reserve is created out of profit earned in the normal course of business. It is available for
the payment of dividends.
Two conditions to keep provision out of income for a contingency:
1.The probability of creation of labiality for due to an event is very high
2.The amount of probable loss can reasonably be estimated.
Appropriation:
★ Appropriation is the act of setting aside money for a specific purpose.
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► Tangible Assets: Tangible assets are those that maintain a physical existence or form. They can be
seen and touched and occupy space. Equipment, land and automobiles are examples of tangible
assets.
► Intangible Assets; Intangible assets have no physical existence but exist in contracts or rights.
Patents, copyrights and goodwill are examples of intangible assets.
► Patent: A patent is an exclusive right of the developer of an innovation or technology-based
product or process. Patent gives the owner the supreme authority over the product or process. He
might rent, grant or render it to specific people.
► Copyright: A copyright is a legal right created by the law of a country that grants the creator of an
intellectual work or product, exclusive rights to its use and distribution, usually for a limited time.
Reserve VS Provision:
Reserves Provisions
■ Reserves are made to strengthen the ■ Provisions are made to meet specific liability
financial position of a business and to or contingency, e. g. a provision for doubtful
meet unknown liabilities & losses. debts.
■ Reserves are only made when the business ■ Provisions are made irrespective of profits
is profitable earned When following conditions are met:
√Present obligations (legal or constructive)
√Probable payment
√Reliable measurement
■ They can be used to distribute dividends ■ They cannot be used to distribute dividends
■ Reserves are shown on the liability side ■ Provisions are either shown on the liability side
of a balance sheet or as a deduction from the
concerned asset.
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Copyright VS Patent:
★ Copyright protects creative and intellectual works, which covers artistic, literary, musical and
dramatic work. On the other hand, a patent protects new inventions from being used or produced
by others such as solar panels, engines, batteries etc. Simply, Copyright protects idea while Patent
protects innovation.
Franchise:
★ A franchise is a contract between two parties granting the franchisee (the purchaser of franchise) a
certain rights and privilege. Such privileges might include: the business or brand name, the system
of doing business, the operations manual, marketing materials or software
Trade Mark:
★ A trade mark is a symbol, design or logo used in conjunction with a particular product or company.
Goodwill:
Generally, goodwill can be defined as the extra profit or super profit earning capacity of a firm
Goodwill is an intangible asset associated with the purchase of one company by another.
Specifically, purchased goodwill is recorded in a situation in which the purchase price is higher
than the sum of the fair value of all identifiable tangible and intangible assets purchased in the
acquisition and the liabilities assumed in the process. (Simply, Goodwill=Purchase Price – book
value)
Non-purchased goodwill is the value of a company’s brand name, solid customer base, good
customer relations, good employee relations, and any patents or proprietary technology that ensures
extra profit or super profit earning capacity of a firm.
Other usual assets:
Cash Equivalents
★ Cash equivalents are the short-term highly liquid investments that are readily available to be
converted to known amounts of cash and subject to insignificant risk of change in value. Example:
commercial paper, treasury bills, short term government bonds, marketable securities.
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Credit terms:
★ Credit terms indicate payment requirements or conditions to be obliged for sales made on account
(or credit). For example, the credit terms might be 2/10, net 30. This means the amount is due in 30
days; however, if the amount is paid in 10 days a discount of 2% will be permitted.
Factoring:
★ Factoring is a service of financial institution involving the conversion of credit bills into cash at a
lower value stated in the face of the bill.
★ Example: ABC Company Ltd. has notes receivable worth of $7, 500 which is expected to be
received 3 months later. Suddenly ABC faces lack of money of $7, 000 to execute a necessary
transaction in this month. So, ABC is to go to bank to discount the notes receivable at $7, 000. This
event is considered as Factoring and the profit of the bank is 7, 500-7, 000=500 which the bank will
receive after 3 months.
Operating Cycle (OC):
★ An Operating Cycle (OC) refers to the days required for a business to receive raw material, convert
it into products, sell the inventory, and collect cash from the sale of the inventory. The cycle plays a
major role in determining the efficiency of a business.
★ Operating Cycle = Inventory Period + Accounts Receivable Period
Cash Conversion Cycle (CCC):
★ The time requires for the company to covert its investment in inventory and other resources into
cash flows from sales.
★ CCC = Days Inventory Outstanding +Days Sales Outstanding - Days Payable Outstanding .
Inventory:
★ Inventory can be defined as the physical substances or components that is used in the different levels
of production
3 Types of inventory
1.Raw material
2.Work-In-Progress (WIP)
3.Finished Goods
Work in process (WIP)
★ Work in process (WIP) or in-process inventory are a company's partially finished goods waiting for
completion
Cost of Goods sold (CGS)
a) Adjusted purchase= Beginning inventory+ cost of goods Purchased- ending inventory
b) Goods available to sale= beginning inventory+ cost of goods Purchased
c) Goods available to sale = Cost of goods sold+ ending inventory
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Periodic Perpetual
Inventory is updated only at the end of Updated continuously during the period.
the period.
√ In periodic inventory system, only one √ Sale Transaction is recorded via two journal
entry is mad for the sale of goods. entries in perpetual system. One of them
records the sale value of inventory whereas the
other records cost of goods sold.
Journal for Cash Purchase: Journal for Cash Purchase:
Treasury Stock:
► Treasury stock represents the number of shares repurchased from the open market by the issuing
company, it reduces shareholder's equity by the amount paid for the stock and the corporation has
not retired the repurchased shares
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► Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end
of the Stockholders' Equity section of the balance sheet. Treasury stock will be a deduction from
the amounts in Stockholders' Equity.
Retained Earnings:
★ Retained earnings are the cumulative net earnings or profits of a corporation that is retained after
dividend payments. It represents the reserve money which is available to the company management
for reinvesting back into the business.
Deferred tax as asset or liability.
★ Deferred tax is the difference between tax liability as per provisions of tax ordinance and tax
reported in the financial statements. Such discrepancy happens because the treatment of
depreciation under reporting system and taxing system is not identical. If tax paid is higher than tax
reported, it is reported as asset and if the opposite happens it is recorded as liability.
Deferred tax as asset or liability.
★ Deferred tax is the difference between tax liability as per provisions of tax ordinance and tax
reported in the financial statements. Such discrepancy happens because the treatment of
depreciation under reporting system and taxing system is not identical. If tax paid is higher than tax
reported, it is reported as asset and if the opposite happens it is recorded as liability.
Letter of Credit
★ It is a documentary guarantee provided by banks on behalf of its client ensuring the payment in
case client’s default in foreign trade.
★ A letter of credit is a promise by a bank on behalf of the buyer (customer/importer) to pay the seller
(beneficiary/exporter) a specified sum in the agreed currency, provided that the seller submits the
required documents by a predetermined deadline.
CAD (Cash Against Documents)
★ Cash against documents is a financial arrangement in which an importer can only have possession
of goods ordered after paying for them in full. CAD financing is a method in which an importer
pays for goods before receiving them.
LC vs CAD (Cash Against Documents)
★ Both the terms are related to international trade. Letters of credit tend to be more secure but also
costlier to obtain, making them a good choice for two parties who are new to doing business with
each other.
★ In the case of cash against documents, banks have no responsibilities against exporters. CAD is a
little easier to deal with in operational terms and much less costly to obtain than letters of credit but
doesn't offer quite as much security. In contrast to letters of credit, cash against documents are well
suited to partners who have a history of trade together, a mutual trust and confidence in or
familiarity with the country of destination.
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Prize Bond:
► A Prize Bond is a lottery bond, a non-interest bearing security issued on behalf of the Minister
for Finance. Funds raised are used to offset government borrowing and are refundable to the
bond owner on demand.
► Interest is returned to bond owners via prizes which are distributed by means of random
selection of bonds,
► Prize Bond, a public savings scheme, was introduced by the government of Bangladesh in 1974
with a view to mobilizing domestic resources and providing incentive to the small savers.
Off Balance Sheet Items:
★ Off balance sheet refers to those assets and liabilities not appearing on balance sheet, but which
nonetheless effectively belong to the enterprise. These are presented as the notes to the financial
statements according to full-disclosure principle. These are not presented in balance-sheet because,
the events have not yet come to reality or ended in transaction but sooner or later they will surely
come into existence as liability or asset. Banks might keep provision for such off-balance sheet
items.
Banks’ off-Balance sheet items:
Letters of credit (L/C)
Inland bill purchases (IBP),
Foreign bill purchases (FBPs),
Loans against trust receipts (LTRs),
Bills for collection,
Payments against documents (PADs),
Loans against Imported Merchandise (LIM) etc.
Loan guarantee.
Contingent Asset:
★ A contingent asset is a possible asset that may arise on the happening or non-happening of any
future events that are not under an entity’s control.
★ Examples: A lawsuit filed by Company A against Company B for infringement of Company A's
patent.
Contingent Liability:
★ A contingent liability is a possible liability that may arise because of an obligation that is
contingent on future events that are not under an entity’s control.
★ Examples: Acceptances and Endorsements, Letters of Guarantee, Irrevocable Letters of Credit,
Bills for Collection.
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What method should be used as layouts for cash generated from operation?
★ BAS (Bangladesh Accounting Standards) allows two possible layouts for cash generated from
operation:
Indirect method Direct Method
Net income Cash collected from customers for sales goods
Add: interest expense Add: Cash collected for services rendered
Add: tax expense Add: Cash inflows related to royalties, dividends and
interest earned
Add: loss on disposal of assets Less: Cash paid to suppliers and service providers
Add: depreciation expense Less: Other operating expenses paid
Add: increase in current
liabilities
Less: increase in current assets
Less: interest paid
Less: Profit on disposal of PPE
Net cash flows from operating Net cash flows from operating activities
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★ Ratio analysis is a medium to understand the financial position, performance and the strengths and
weakness of an organization. Simply stating, ratio analysis is a tool to evaluate the performance &
Financial position of an organisation from different point of views.
Liquidity Ratio: (See Formula: F-121-124)
★ Those ratios are calculated to judge the short-term capabilities of paying current liabilities. These
ratios measure liquidity position of a business organisation. Example: Current ratio, Acid-test
(quick) ratio etc.
Activity Ratio: (See Formula: F-135-141)
★ These ratios measure the effectiveness of the invested capital of an organization. These determine
the efficiency in using resources of the business. Example: Stock or inventory turnover, Debtor or
receivable turnover, Creditor or Payable turnover etc.
Profitability Ratio: (See Formula: F-126-132)
★ The ratios, that measure the earning capabilities of an organization are called the profitability
ratios. It includes ratios such as gross profit margin, net profit margin, return on equity, return on
asset, return on capital ratio. Example: Gross Profit margin, return on assets (ROA), Return on
equity (ROE), Earning per share (EPS)
Debt Service Coverage Ratio:
★ The debt service coverage ratio (DSCR), also known as "debt coverage ratio" (DCR), is the ratio of
cash available for debt servicing to interest, principal and lease payments. Example: Interest
coverage ratio or, Times interest earned.
Coverage Ratio/Solvency Ratio: (See Formula: F-133-134*)
★ Coverage ratios measure the ability of an organization to meet its financial obligations and
liabilities. In general, a higher coverage ratio denotes a greater ability of the organization to meet
its creditors' obligations while a lower coverage ratio means less ability. Example: Debt to assets
ratio, Debt to equity ratio
Leverage Ratios: (See Formula: F-42,46,45,77-79)
★ Leverage ratios are financial ratios used to measure a company’s capital structure, financial
obligations and its ability to clear those obligations. It is meant to evaluate a company's debt levels.
The most common leverage ratios are the debt ratio and the debt-to-equity ratio.
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Business Digest 93 Accounting(Financial statements and Analysis )
Xclusive Publications
Statement of Financial Position
As at 30 June 2020
PROPERTY AND ASSETS LIABILITIES AND SHAREHOLDERS'
EQUITY
Cash Liabilities
Cash in Hand Borrowings from Other Banks,
Balance with Bangladesh Bank Financial Institutions and Agents
Balance with Other Banks and Financial Subordinated non-convertible bonds
Institutions Deposits and Other Accounts
Money at Call and Short Notice
Current Accounts
Investments Savings Bank Deposits
Fixed Deposits
Investments in Government Securities Bills Payable
Treasury bills Other Liabilities
Government notes/bonds/other securities
Shareholders' Equity
Prize bond
Reverse –repo Paid-up capital
Other Investments Statutory/Legal reserve
Revaluation reserve
Debentures General reserve
Corporate bond Retained earnings
Ordinary shares Foreign Currency Translation Reserve
Preference share
Loans and Advances
Loans
Cash Credits
Overdrafts
Bills Purchased and Discounted
Fixed Assets including
Land, Building, Furniture and Fixtures
Other Assets
Investment in subsidiary companies
Stationery, stamps and materials
Interest accrued on investment
Advance deposit
Suspense account
Non-Banking Assets
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Business Digest 94 Accounting( Audit)
Auditing:
★ Audit is an independent examination of accounting and financial records and financial statements
of a firm to determine whether the financial statements of the entity present fairly or give true &
fair view and conform to the law (accepted principles & standards, IFRS, BFRS etc) and to
generally accepted accounting principles (GAAP).
★ It is the most important type of assurance in Bangladesh. It enables the auditor to express an
opinion whether the financial statements are prepared, from all materials aspect, in accordance with
applicable accounting standards and framework.
Accounting vs Auditing:
★ Accounting involves tracking, reporting, and analysing financial transactions whereas audit is an
independent examination of accounting and financial records and financial statements to determine
if they conform to the law and to generally accepted accounting principles (GAAP).
Audit vs Inspection:
Audit Inspection
■ An audit is most often associated with a higher- ■ Inspection is most often associated with
level review of the system that is designed to inspecting a product or a service to make sure
produce and inspect the product or service. it is right
■ Audit includes visual, document based, ■ Inspection has only visual observation
interview oriented observation
■ Audit analysis effectiveness, efficiency and ■ Inspection analyses safety, physical conditions
compliance and probable hazards
■ Audit is an actual consultation, verification of ■ Inspection is an observation
items, goods and documents
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Business Digest 96 Accounting( Audit)
Limitation of audit:
►Auditors cannot provide absolute assurance.
►Auditor does not oversee start to finish financial statements building process
►Accounting systems might have some inherent limitations in responding to users’ needs
►Auditor does not test every item in subject matter rather tests based on sampling
►Auditors are dependent on staffs and responsible parties to get information.
Internal Audit:
★ Internal Audit is the appraisal and monitoring activity established within the entity to examine,
evaluate and report to the management and directors on the adequacy and effectiveness of the
accounting and internal control system.
1) Control Environment
2) Risk Assessment
3) Control Activities
4) Information and Communication
5) Monitoring
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Business Digest 97 Accounting( Audit)
Accounting Transparency:
★ Transparency is the extent to which investors have ready access to required financial information
about a company such as price levels, market depth and audited financial reports.
What do you mean by true and fair view of financial statements?
► True means factually accurate and correctly extracted from the books and accounts within the
boundary of materiality and fair means unbiased and objective.
► True and fair view of financial statements thus ensures the statements are prepared in compliance
with accounting standards and adherence to the all applicable laws, rules and regulations.
Reliability and Materiality:
★ Reliability ensures the information being Information free from material error and bias and can be
depended by users to represent faithfully
★ Information can be said material if its omission or misstatements could influence the economic
decision of user.
Sufficiency and Appropriateness:
Sufficiency is the measure of the quantity of audit evidence whereas appropriateness is the
measure of quality or reliability of the audit evidence.
Types of assurance Evidence sought Conclusion given
Reasonable assurance Sufficient and appropriate Positive (unqualified opinion)
Limited assurance Sufficient and appropriate (lower level) Negative (qualified opinion)
Fraud Triangle:
★ It’s a common internal control related jargon which states that when opportunity, financial
pressure and rationalisation push together a fraudulent activity is done by the employee.
Sampling risk and Non-Sampling risk:
★ Sampling risk is the possibility that the auditor’s conclusion based on a sample might be different
from the conclusion they would reach if they examined every item in the entire population.
Sampling risk is reduced by increasing the size of the sample.
★ Non-sampling risk arises If auditor’s conclusion could be erroneous from any factors other than
sampling size chosen by the auditors.
Audit Risk:
★ Audit risk refers to the risk that an auditor may issue an unqualified report due to the auditor's
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Business Digest 98 Accounting( Audit)
Segregation of Duties:
► Segregation of Duties (SOD) is a basic building block of sustainable risk management and internal
controls for a business. It is designed to prevent error and fraud by ensuring that at least two
individuals are responsible for the separate parts of any task.
► Different individual should be responsible for related activities
► Responsibility for record keeping of an asset should be separate from responsibility of physical
custody of that asset.
Restructuring:
1.Restructuring might include:
2.Material change in business scope
3.Material change in product/service delivery process.
Window Dressing:
★ Window dressing is the deceptive practice of using accounting tricks to make a company’s
financial statements appear better than they really are.
★ It is the act of showing an unfavourable financial condition as favourable condition in an artificial way
★ Example: Showing current asset items at higher amount and debt instrument at lower amount so
that current ratio and debt to equity ratio will seem to be satisfactory. And it will help the business
to get loan from bank as bank will see their creditworthiness is good.
Objectives of window dressing:
► To obtain funding (to borrow money),
► To increase profits and liquidity ratios,
► Showing the firm as profitable and sustainable,
► Showing less liability, mainly to impress and attract investors, financial lenders and employees-
mostly managers.
Code of Ethics for Professional Accountants:
The Code of Ethics is a statement of principles and expectations governing behaviour of individuals
and organisations in the conduct of auditing. Code of Ethics for Professional Accountants includes:
★ Integrity
★ Objectivity
★ Professional Competence and Due Care
★ Confidentiality
★ Professional Behavior
Why Ethics are so Important in Auding?
Ethical conduct is essential when performing an audit in order to meet the defining characteristics of
the auditing profession which are trust, independence and integrity. The auditing standards, along with
the code of ethics, reflect ethical behaviour. Respecting the audit rules and standards is not enough,
while in fact legislation is a minimum to respect in the audit process. Often the rules need to be
interpreted and auditors find themselves is a need for reliance on good judgment and so, professional
awareness as well as respect of moral and ethical precepts are key in conducting an audit.
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Business Digest 99 Accounting( Audit)
Types of Audit:
★ 3 primary types of audit performed by CPAs are;
• Financial audit,
•Operational audit, and
•Compliance audit.
Financial Audit:
★ Financial audit refers to the audit of the entity’s financial statements by an independence auditor
where audit opinion will be provided on those financial statements after auditing works are done.
Operational audit:
★ Operational audit is the type of audit service that the review is mainly focused on the key
processes, procedures, system, as well as internal control which the main objective is to improve
productivity, as well as efficiency and effectiveness of the operation.
Compliance audit:
★ A compliance audit examines your business’s policies and procedures to see if they comply with
internal or external standards. Compliance audits can help determine whether or not your business
is compliant with paying workers’ compensation or shareholder distributions.
Other Types of Audit:
Forensic Audit
★ The forensic audit is normally performed by a forensic accountant who has the skill in both
accounting and investigation.Forensic Accounting is the type of engagement that undertaking the
financial investigation in response to a particular subject matter, where the findings of the
investigation normally are used as evidence in court or conflict resolution among the shareholders.
Environmental & Social Audit
★ Environmental & Social Audits involve the assessment of environmental and social footprints that
an organization leaves as a consequence of its economic activities.
Management Audit
★ A management audit is an independent appraisal activity for the review of the control of
managerial functions to ensure compliance with the organizational objectives, policies and
procedures and management methods and purposes.
Tax Audit
★ Tax audit is a type of audit that performing by the government’s tax department or tax authority.
★ A tax audit could be performed as the result of in-compliant found by a government agency or the
schedule set by the government tax department.
Performance Audit
★ Performance audits, the public version of operational audits, are conducted to determine if an
entity's operations, programs, or projects are functioning effectively and efficiently to achieve
goals established.
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Business Digest 100 Accounting( Audit)
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Business Digest 101 Accounting(Principles ofAccounting )
In preparing financial statements firms follow GAAP. GAAP is an acronym for Generally
Accepted Accounting Principles. GAAP can be defined as, “The common set of accounting
principles, standards and procedures that companies use to compile their financial statements. ” In
addition to that, Bangladeshi companies follow Bangladesh Financial Recordings Standards
(BFRS) adopted by ICAB (In support with International Accounting Standard Boards-IASB) in
preparing financial statements. Firms are also supposed to comply with provisions of Companies
Act 1994 (regarding format and additional information), Bangladesh Bank ordinance 1972,
Banking Company act 1991 and financial institution act 1993.
Business Entity assumption (Separate entity/Economic entity assumption):
★ Business entity concept states that the transactions related to a business must be recorded
separately from those of its owners and any other business.
★ For example, if the owner of a company lends loan to his company. It would be strictly recorded as
company’s liability and that has to be paid back to the own.
Objectivity Principle:
► The objectivity principle states that financial and accounting information needs to be independent
straightforward.
► This means that financial reporting like a company’s financial statements need to be based on
evidence and not opinions.
► The two concepts of relevance (have predictive value and feedback value) and reliability (can be
verified by evidence) encompass the objectivity principle.
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Business Digest 102 Accounting(Principles ofAccounting )
Materiality Concept:
★ The materiality concept, also called the materiality constraint, states that financial information is
material if it would change the opinion or view of a reasonable person.
Historical Cost Principle:
★ The historical cost principle states that businesses must record and account for most assets and
liabilities at their purchase or acquisition price.
★ Historical cost of an asset is completely reliable whereas market value is subject to estimate and opinion.
★ The record of PPE at acquisition cost (long term asset) follows historical cost principle
Matching Principle:
► The matching principle states that expenses should be recognized and recorded when those
expenses can be matched with the revenues those expenses helped to generate.
► This is the key concept behind charging depreciation, bad debt.
► COGS (instead of purchase) is deducted from sale based on this principle
► Adjusted journals are prepared due to this principle.
Revenue Recognition Principle (Realization Principle):
★ The revenue recognition principle states that revenue should be recognized and recorded when it is earned.
★ In other words, companies shouldn’t wait until revenue is actually collected
★ This is a key concept in the accrual basis of accounting because revenue can be recorded without
actually being received.
Conservatism Principle:
► The principle of conservatism states that you should always error on the most conservative side of
any transaction.
► The principle of conservatism also applies to estimates. Generally, a more conservative estimate
should always be used
► Current assets are recorded at LCM (Lower of Cost or Market Value)
► Account receivables are recorded at net realizable value.
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Business Digest 103 Accounting( Managerial Accounting )
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Business Digest 104 Accounting( Managerial Accounting )
Relevant Range:
★ In most business situations, a straight-line relationship does not exist for variable costs throughout
the entire range of possible activity. The range over which a company expects to operate during a
year is called the relevant range of the activity. Within the relevant range a straight-line
relationship generally exists for both variable and fixed costs.
Overhead:
★ Overhead is those costs required to run a business, but which cannot be directly attributed to any
specific business activity, product or, service.
Direct cost vs Indirect cost:
★ Direct costs are traceable to the production of a specific good or service. Indirect costs may be
necessary to production, but they are not traceable to the act of production.
★ Direct costs are expenses that a company can easily connect to a specific "cost object, " which may be a
product, department or project. Indirect costs go beyond the expenses associated with creating a
particular product to include the price of maintaining the entire company. Examples of direct costs are
direct labour, direct materials, commissions, piece rate wages and manufacturing supplies. Examples of
indirect costs are production supervision salaries, quality control costs, insurance and depreciation.
Classification of direct cost:
1.Direct raw material cost
2.Direct labour cost
3.Other direct manufacturing overhead.
Explicit cost vs Implicit cost:
★ An implicit cost is a cost that has occurred but it is not initially shown or reported as a separate cost and
doesn’t require cash outflow. For example: expanding a factory onto a land already owned.
★ On the other hand, an explicit cost is one that has occurred and is clearly reported as a separate
cost and requires cash-out flow. For example: payments for wages and salaries, rent or, materials.
Opportunity Cost, Prime Cost, Sunk Cost, Marginal Cost, Cost Driver:
► Opportunity cost is the next most potential benefit that is given up when one alternative is
selected over another. Examples of Opportunity cost:
i) Someone gives up going to see a movie to study for a test in order to get a good grade. The
opportunity cost is the cost of the movie and the enjoyment of seeing it.
ii) When the government spends $15 billion on interest for the national debt, the opportunity
cost is the programs the money might have been spent on, like education or healthcare.
► Prime cost is the direct material cost plus direct labour cost. Example: Raw material cost, wages.
► Sunk Cost is a cost that has already been incurred and that cannot be changed by any decisions
made now or in the future. Example: A restaurateur is considering expanding his restaurant into a
chain. They spend $10,000 on market research, and using that research determine that opening a
new location in a specific area isn't likely to be profitable. They don't move forward with the
expansion, and that $10,000 is a sunk cost..
► Marginal cost is the additional cost incurred for the production of an additional unit of output.
Example: The total cost of producing one pen is $5 and the total cost of producing two pens is $9,
then the marginal cost of expanding output by one unit is $4 only (9 - 5 = 4).
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Business Digest 105 Accounting( Managerial Accounting )
Budget:
★ Budget is a detailed formal statement or plan of estimated income and expenses based on future
plans and objectives expressed in formal quantitative terms.
★ A budget is an estimation of revenue and expenses over a specified future period of time; it is
compiled and re-evaluated on a periodic basis.
Master budget:
★ The master budget is the aggregation of all lower-level budgets produced by a company's various
functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan.
Budgetary control:
★ Budgetary control is the use of budgets and budgeting reports throughout the period to coordinate,
evaluate and control day-to-day operations in accordance with the goals specified by the budget.
What is Zero-based budgeting?
★ Zero-based budgeting (ZBB) is an approach to making a budget from scratch. The budget is not
based on previous budgets. Instead, the budget starts at zero.
★ With zero-based budgeting, you need to justify every expense before adding it to the official budget. The goal of
zero-based budgeting is to reduce spending by looking at where costs can be cut.
Conversion cost:
★ A conversion cost is the amount incurred during the transformation of raw materials inventory into
finished goods. Conversion costs exclude the cost of direct materials
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Business Digest 106 Accounting( Managerial Accounting )
Stock-out costs:
√Delays in supply of sales
√Lost production
√Loss from profit sale
√Loss of future profit due to loss of goodwill.
Cost estimation methods:
High-Low Method
Least square regression method.
★ High-Low method is one of the several techniques used to split a mixed cost into its fixed and
variable components or similarly away of attempting to separate out fixed and variable costs given
a limited amount of data assuming linear relationship. Variable cost = (change in cost/change in
activity)
CVP (Cost-Volume-Profit) Analysis/Break-Even Analysis:
★ CVP/BE analysis is a technique to examines the interaction of a firm’s sales volume, selling price,
cost structure and profitability.
★ It is used to determine how changes in costs and volume affect a company's operating income and
net income.
Contribution Margin/ratio (CM ratio): (See Formula: F-87-100)
√ Contribution margin is defined as revenues minus variable expenses. In other words, the
contribution margin reveals how much of a company's revenues will be contributing (after
covering the variable expenses) to the company's fixed expenses and net income.
√ This is the amount which is left to cover the fixed expenses of an organization, or to add to the
profits of the organization.
√ Contribution margin ratio (CM ratio) is the ratio of contribution margin to net sales. It tells
what percentage of sales revenue is available to cover fixed cost and generate profit.
Break-Even Point (BEP) :
★ Break-even point can be defined as a point where total costs (expenses) and total sales (revenue)
are equal. Break-even point can be described as a point where there is no net profit or loss. The
firm just “breaks even”.
Financial Break-Even Point:
★ It denotes the level at which a firm’s EBIT is just sufficient to cover interest and preference
dividend.
Margin of Safety (MOS):
► Margin of safety (MOS) is the difference between actual sales and break-even sales. In other
words, all sales revenue above the break-even sale represents the margin of safety.
► It’s called the safety margin because it’s kind of like a buffer. This is the amount of sales that the
company or department can lose before it starts losing money.
Value Chain Analysis:
► A value chain is the full range of activities – including design, production, marketing and
distribution – businesses conduct to bring a product or service from conception to delivery.
► Value chain analysis leads to creating or strengthening business's competitive advantage.
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Business Digest 107 Accounting( Managerial Accounting )
Six-sigma:
√ Six Sigma is a disciplined, statistical-based, data-driven approach and continuous improvement
methodology for eliminating defects in a product, process or service based on customer feedback,
fact-based data gathering analysis techniques. It is sometimes associated with the term zero defects
√ Six Sigma is a system of statistical tools and techniques focused on eliminating defects and reducing
process variability.
Just-in-Time or JIT:
★ Just-in-Time or JIT is an inventory management system wherein the material, or the products are
produced and acquired just before the material is needed in the manufacturing process in order to
reduce inventory storage and maintenance expense.
Lean thinking model:
★ Simply, lean means creating more value for customers with fewer resources. The core idea is to
maximize customer value while minimizing waste. Lean is about focus, removing waste and
increasing customer value.
★ It is a model of five step management approach that organizes resources around the floor of business
process and that pulls units through these processes in response to customer order.
Lean Production:
★ Lean Manufacturing is all about the optimizing processes and eliminating way, a systematic
manufacturing method used for eliminating waste within the manufacturing system. It takes into
account the waste generated from uneven workloads and overburden and then reduces them in order
to increase value and reduce costs.
Activity-Based Costing (ABC):
★ Activity-based costing (ABC) is a method for assigning costs to products (services projects, tasks, or
acquisitions) based on the activities that go into them or resources consumed by these activities.
★ It precisely allocates overhead to those items that actually use it (directly traceable).
Absorption Costing:
► Absorption costing means that all of the manufacturing costs are absorbed by the units produced.
► In other words, the cost of a finished unit in inventory will include direct materials, direct labour and
both variable and fixed manufacturing overhead.
► As a result, absorption costing is also referred to as full costing or the full absorption method.
Absorption costing vs Variable costing:
★ Under variable costing the fixed manufacturing overhead costs are not assigned to (not absorbed by)
the products manufactured but in absorption costing such fixed costs are absorbed. In absorption
costing a large proportion of a product's costs may not be directly traceable to the product which is
not true in variable costing. Manufacturing cost under absorption costing tends to be higher than
variable costing.
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Business Digest 112 Accounting (Lease Finance )
Lease is a contract between two parties where the owner of the asset gives the right to use the
asset to another party over an agreed period of the time for payment or series of payment. Lessor
is the owner of the asset and lessee is the user of the asset. There are mainly two types of lease:
Financial lease and operating lease. In finance lease (capital lease) substantially all the risk and
rewards of ownership are transferred to the lessee whereas in operating lease the risk and reward
keep with original owner (lessor). Sometimes all other lease other than finance lease are classified
as operating lease. A finance lease’s lease term can be subdivided into two parts: primary period
(non-cancellable time length) and secondary period (cancellable time period). The lessee can
terminate the contract in secondary period. In Bangladesh many firms such as IDLC, Lanka
Bangla Finance, BIFFL are engaged in lease business.
Now we know:
What is lease/lessee/lessor?
What is finance lease and operating lease (difference)?
When lease contract can be terminated?
Situations that would normally lead to a lease being classified as a finance lease:
► Terms are such that ownership of the asset transfers to the lessee by the end of the lease term.
► The lessee has the option to purchase the asset at a price which is expected to be sufficiently
lower than fair value at the date of inception of option.
► The lease term is for the major part of the economic life of the asset.
► The present value of the minimum lease payments amounts to at least substantially all of the
fair value of the leased asset.
► The lease assets are of a specialised nature such that only the lessee can use them without
major modifications being made.
Sale and Leaseback:
√ In sale and leaseback arrangement, a firm sells an asset to another party who in turn leases it
back to the firm.
√ First, the owner sells it to another party and subsequently leases it back from the buyer.
√ Thus, original owner receives the sales price in cash, on the one hand, and economic use of the
asset sold, on the other.
Leveraged Leasing:
★ A lease arrangement in which the lessor provides an equity portion (say 25%) of the leased
asset’s cost and the third-party lenders provide the balance of the financing.
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Business Digest 113 Accounting (Lease Finance )
Inception vs Commencement:
★ Inception is the date when the lease terms are agreed (classified and determined the terms)
whereas commencement is the date when the lessee can use the leased asset.
Hire purchase:
★ Hire Purchase is a kind of instalment purchase where the businessman (hirer) agrees to pay the
cost of the equipment in different instalments over a period of time. This instalment covers the
principal amount and the interest cost towards the purchase of an asset for the period the asset is
utilized.
Lease vs Hire purchase:
Lease Hire purchase
In a lease, ownership lies with the The hirer becomes the owner of the asset/equipment
lessor. immediately after the last instalment is paid.
Down payment is not required Down payment is required
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Business Digest 114 Accounting( Depreciation)
Depreciation is the systematic allocation of the cost of a long-term tangible asset to expense over its
useful life in a rational and systematic way. To determine the depreciation, one must know (3 Factors):
depreciable base (acquisition cost minus scrap vale), estimated useful life, method of cost
apportionment or rate of depreciation. Depreciation (cost allocation) is charged to match costs with
revenues according to the matching principle. The term “depletion” is used to describe the reduction
in the value of natural resources (timber, oil, coal) over a period of time whereas amortization is the
allocation of cost of an intangible asset such as patents or copyrights over its estimated useful life. On
the other hand, as a result of significant fall in the market value of long-lived assets companies prefer
to write-off some of their long-lived assets and these write-offs (reduction) are referred to as
impairments. Impairment of Assets seeks to ensure that an entity's assets are not carried at more
than their recoverable amount.
Now we know:
What is depreciation? Formula for every method is prescribed
Factors need to know to calculate depreciation at the end of the book.
Depreciation vs depletion vs amortisation vs
impairment .
Accumulated depreciation:
★ Accumulated depreciation is the total amount of a plant asset's cost that has been allocated to
depreciation expense since the asset was put into service.
What are the common methods of depreciation? (See Formula: F-101-104)
1. Straight Line Method (same rate or amount are always charged against the assets)
2. Activity method (calculated on the basis of asset's activity such as the number of units produced or
the number of hours the asset is used during the period)
3. Declining balance method (depreciation is calculated on book value and size of depreciation falls
over time and it does not deduct salvage value)
4. Double declining method
5. Sum of the years’ digit method
6. Special depreciation method (composite or hybrid or combination).
Problems with straight line method:
★ Economic usefulness is considered same for every year
★ The repair and maintenance expense is not essentially same for each period.
Salvage Value (scrap/residual value):
★ An estimate of an asset’s value at the end of its useful life. Salvage value is an estimated amount
that is expected to be received at the end of a plant asset's useful life.
Why most firms use declining balance method?
√ It charges high depreciation in the initial periods and low at later periods thereby the asset’s high
productivity and high use in the beginning is reflected.
√ It does best suit with expense recognition principle
√ It helps to get tax benefit as higher depreciation will result in lower income which will result in
lower tax.
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Business Digest 115 Accounting( Depreciation)
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Business Digest 116 Accounting (Bad debt and Allowance)
★In modern Business world most of the of the transactions are credit transactions. For different
reasons sometimes collecting all the amounts from receivables becomes impossible. The
amount which becomes uncollectible is called bad debt. And allowance for that bad debt is
called allowance for bad debt. Bad debt is an expense account where as bad debt allowance is a
contra asset account.
► Bad debt (Charged according to matching principle and determined according to going
concern principle)
► Bad debts usually refers to part of the accounts receivable that will not be collected.
► The portion of accounts receivable that a company believes is uncollectible is called “bad debt
expense.
Methods of recording bad debt:
★ Direct Write-Off Method of recording Bad Debt
★Records bad debt expense when the amount ★ Firms estimate the amount of receivables
become uncollectible. that may become uncollectible and create a
provision for bad debt. After that, firms
write off accounts receivables when it
becomes uncollectible.
★ Journal to record bad debt expense: ★Journal to record provision for bad debt:
Bad Debt Expense-------Dr Bad debt expense-----Dr
Accounts Receivable ------------Cr Bad debt allowance-----Cr
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Business Digest 117 Accounting (Investment, Financial investment and Reporting)
Investment:
► An investment is an asset or item that is purchased with the hope that it will generate income or
appreciate in the future.
► Investment can be defined allocating money to assets with the hope that in the future it would provide
some benefit such as generation of income.
Financial asset:
► Financial assets refer to assets that arise from contractual agreements on future cash flows or from
owning equity instruments of another entity.
► A contractual agreement to receive cash or another financial asset from another entity.
► Financial assets, defined is a contractual security that possesses a claim upon a company or person's real assets
Types of financial asset:
► Money, shares, bonds, checks, loans, accounts receivable and marketable securities rather than a
physical asset such as property or machinery.
Classification of investment in equity securities:
★ Investment in Financial Asset: less than 20% equity holdings (no significant influence)—Recorded
mostly at fair market value
★ Investment in Associate: 20% to 50% equity holdings (significant influence but not significant
control); To record, equity method is used
★ Investment in Subsidiaries: more than 50% equity holdings (significant control); To record,
consolidated financial statements are prepared.
Recording of investment in financial asset:
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Business Digest 118 Accounting (Investment, Financial investment and Reporting)
Subsidiary :
★ A subsidiary is company controlled by another company, often called the parent company,
which owns at least 50% of its voting stock.
Minority Interest:
★ Minority interest represents a percentage of ownership in a company by less than 50% of the
outstanding shares with a voting right
★ Minority interest is reported in the consolidated financial statements of the parent company.
Equity method:
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Business Digest 119 Accounting (FAQ)
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Business Digest 120 Accounting (FAQ)
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Business Digest 121 Accounting (FAQ)
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Business Digest
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Business Digest 121 Banking (Basics of Banking )
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Types of loans:
► Line of Credit: An agreement between a customer and the bank that the bank will entertain
requests from that customer for a loan up to a predetermined amount.
► Revolving Credit: Similar to line of credit. There are two differences between line of credit
and revolving credit. First one, in revolving credit there is maximum and minimum amount of
bracket that may be borrowed. Second one, revolving credits usually have a maturity of two
years or more while lines of credit are usually for shorter period.
► Term Loan: A single loan for a stated period of time or a series of loans on specific dates.
► Bridge Loan: A short-term financing that is made in anticipation of receiving longer-term
financing on which an agreement has been reached.
► Asset based lending: A commercial lending where the assets of a company are used to secure
the company’s obligation to the lender.
► Leasing
Seven ways to make loans:
1. Banks Solicit Loans: Banks actively solicit loans in person, by mail, and on the internet.
2. Buying Loans: Banks buy parts of loans, called participations, from other banks.
3. Commitments: Agreement between a bank and a firm to lend funds under terms that are
agreed upon in writing.
4. Customer request loan
5. Loan brokers: Individuals or firms who act as agents or brokers between the borrower and
the lender.
6. Overdrafts: An overdraft occurs when a customer writes a check on uncollected funds or
when there are insufficient funds in the account to cover the withdrawal.
7. Refinancing.
What is a loan agreement?
★ When the bank decides to grant a loan, all of the terms of the loan are put into a contract called a
loan agreement. It includes:
■The type of credit facility
■The amount to be borrowed
■The term of the loan
■The method and timing of repayment
■Interest rates and fees to be paid by the borrower to the banker
■Collateral if required
■Other covenants.
What does ‘Pricing commercial loan’’ mean?
★ It means determining what interest rate to charge to the borrower and how to calculate the rate.
What is Collateral?
★ Collateral refers to an asset pledged against the performance of an obligation.
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Business Digest 124 Banking (Basics of Banking )
1.Character 4.Collateral
2.Capacity 5.Conditions
3.Capital 6.Compliance
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Business Digest 125 Banking (Basics of Banking )
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Business Digest 126 Banking ( Banking Instruments )
★ Cheque: An order to a bank to pay a stated sum from the drawer's account, written on a specially
printed form.
★ Bank Draft: Bank draft is a type of check issued by one branch of a bank on another branch of the
same bank containing an order to a certain sum on demand to the person named on the draft. It is
issued to transfer funds to a different location. Typically, banks will review the bank draft
requester's account to see if sufficient funds are available for the check to clear. Once it has been
confirmed that sufficient funds are available, the bank effectively sets aside the funds from the
person's account to be given out when the bank draft is used. One must have account and sufficient
funds in the account for a bank draft.
★ Bill of Exchange: A bill of exchange is a written order used primarily in international trade that
binds one party to pay a fixed sum of money to another party on demand or at a predetermined
date.
★ Promissory Note: A signed document containing a written promise to pay a stated sum to a
specified person or the bearer at a specified date or on demand.
What is Demand Draft?
★ It is an instrument used for effecting transfer of money. It is a negotiable instrument. Cheque and
Demand-Draft both are used for transfer of money. We can 100% trust a DD.
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Business Digest 127 Banking ( Banking Instruments )
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Business Digest 128 Banking ( Banking Instruments )
2. Special crossing- the name of bank is written between two transverse parallel lines.
What are the causes of dishonour of a cheque by a bank?
√If bank balance is less than the amount of cheque
√If the amount written on cheque in words and figure is different
√If the cheque is reported as lost/stolen.
√If the drawee becomes unsound mind and the notice is given to the bank.
√If court order the bank to stop payment of any account
√If the person is declared insolvent by the court
√If the cheque is torn bank refuse payment
√If drawer does not mention the date.
√If the cheque becomes outdated after six months of its date of issue.
√If the signature of drawer is not matched with specimen signature bank refuse its payment
What is stale cheque?
★ It is a cheque presented at the paying bank after a certain period (typically 6 months) of its payment
date. A bank may refuse to honour it unless its drawer reconfirms it payment either by inserting a
new payment date or by issuing a new check.
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Business Digest 129 Banking ( Banking Sector in Bangladesh)
★ After the independence, banking industry in Bangladesh started its journey which has now 6
Nationalized commercial banks, 3 State-owned Specialized banks and 9 Foreign Banks. In the
1980's banking industry achieved significant expansion with the entrance of private banks. Now,
banks in Bangladesh are primarily of two types: Scheduled and non-scheduled.
★ There are 59 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:
Þ State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly
owned by the Government of Bangladesh. These are Sonali bank ltd, Janata Bank Ltd,
Agrani Bank Ltd, Rupali Bank Ltd, Basic Bank Ltd and Bangladesh Development Bank
Ltd.
Þ Specialized Banks (SDBs): 3 specialized banks are now operating which were established
for specific objectives like agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh. These are Bangladesh Krishi
Bank, Rajshahi Krishi Unnayan Bank and Probashi Kallyan Bank.
Þ Private Commercial Banks (PCBs): There are 41 private commercial banks which are
majorly owned by individuals/the private entities. PCBs can be categorized into two
groups:
Þ Conventional PCBs: 33 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i. e interest-based operations.
Þ Islamic Shariah based PCBs: There are 8 Islamic Shariah based PCBs in Bangladesh and
they execute banking activities according to Islamic Shariah based principles i.e.Profit-
Loss Sharing (PLS) mode.
Þ Foreign Commercial Banks (FCBs):9 FCBs are operating in Bangladesh as the branches of
the banks which are incorporated in abroad. These are Bank Al-Falah, Citibank N. A,
Commercial Bank of Ceylon PLC, Habib Bank Limited, HSBC, National Bank of
Pakistan, Standard Chartered Bank, State Bank of India and Woori Bank.
Non-Scheduled Banks:
★ Non-scheduled banks have special and definitive objectives and operate under the acts
that are enacted for meeting up those objectives.These banks are not under the direct
control of Bangladesh Bank and they also do not get clearing system and rediscounting
of bill facilities. There are now 5 non-scheduled banks in Bangladesh which are:
1)
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Business Digest 130 Banking ( Banking Sector in Bangladesh)
★ Non-Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 34
NBFIs are operating in Bangladesh while the maiden one was established in 1981. Out of the
total, 2 is fully government owned , 1 is the subsidiary of a SOCB , 15 were initiated by
private domestic initiative and 15 were initiated by joint venture initiative.
★ Major sources of funds of FIs are Term Deposit (at least three months tenure), credit facility
from banks and other FIs, call money, bond and securitization.
NBFI VS Banks:
The major differences between banks and NBFIs are as follows:
► NBFIs cannot issue cheques, pay-orders or demand drafts.
► NBFIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments,
private placement of equity etc.
List of some mobile banking service providers in Bangladesh:
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Business Digest 131 Banking (Bangladesh Bank)
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Business Digest 132 Banking (Bangladesh Bank)
Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS)
twice (January and July) in a year.
The monetary policy undertaken by Bangladesh Bank is Balanced Contractionary Monetary
Policy.
A commercial bank has to mandatorily deposit 13%+5. 5%=18.5% of its total deposit with
Bangladesh Bank (accumulation of the CRR+SLR).
Governors and board of the Bangladesh Bank:(4-year time period):
√ N. M. Hamidullah was the first governor.
√ Fazle Kabir is the 11th and current governor.
√ The Board of Directors of Bangladesh Bank consists of 10 members.
What is the Vision of Bangladesh Bank (From website of Bangladesh Bank)?
★ To develop continually as a forward-looking central bank with competent and committed
professionals of high ethical standards, conducting monetary management and financial sector
supervision to maintain price stability and financial system robustness, supporting rapid broad
based inclusive economic growth, employment generation and poverty eradication in Bangladesh.
What is the Mission of Bangladesh Bank (From website of Bangladesh Bank)?
Bangladesh Bank is carrying out its following main functions as the country's central bank:
Formulating monetary and credit policies;
Managing currency issue and regulating payment system;
Managing foreign exchange reserves and regulating the foreign exchange market;
Regulating and supervising banks and financial institutions and advising the government on
interactions and impacts of fiscal, monetary and other economic policies.
What are the functions of Bangladesh Bank (From website of Bangladesh Bank)?
Formulation and implementation of monetary and credit policies
√
Regulation and supervision of banks and non-bank financial institutions.
√
Promotion and development of domestic financial markets
√
Management of the country's international reserves
√
Issuance of currency notes
√
Regulation and supervision of the payment system
√
Acting as banker to the government
√
Money Laundering Prevention
√
Collection and furnishing of credit information
√
Implementation of the Foreign Exchange Regulation Act.
√
Collection and furnishing of credit information
√
Implementation of the Foreign Exchange Regulation Act.
√
How does Bangladesh Bank control the banks and NBFIs?
★ Bangladesh Bank controls these types of institutions by controlling the interest rate, money supply,
reserve requirements (CRR and SLR) and open market operations.
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Business Digest 133 Banking (Bangladesh Bank)
► Bangladesh Bank indirectly makes the decision how much amount of money will be in the
hand of general public — thus supply of money may decline or rise which have further effect
on aggregate demand. In order to mobilize/accelerate the growth of the economy of
Bangladesh, Bangladesh Bank can do so.
► Bangladesh bank targets inflation and gives a boost to growth by making credit available at
cheaper rate for investors are two major important concerns which Bangladesh Bank looks at
before taking a stance on monetary policy as these two are on opposite path (one happens at the
expense of other. For example: if we want loan at cheap rate and subsequent growth, we will
have to experience inflation and vice-versa).
► Bangladesh Bank also controls the value of Taka — how well it performs in comparison to
other currencies (Exchange Rate). Foreign exchange reserve is one of the important tools at
Bangladesh Bank ‘s hand which it can use to control exchange rate. If the Taka as a currency
appreciates, exports will reduce because it gets more expensive for buyers to buy. As a result,
imports will increase because it is cheaper than it was before the appreciation.
► Bangladesh Bank regulates the banks in the country and also works as a banker to the government.
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Business Digest 134 Banking (Bangladesh Bank)
★ Bangladesh Bank earns income mainly from interests. Its main source of income is interest
earned on bond holdings through open market operations or purchase and sale of government
securities. Other sources include:
√ Interest income related to banknote issuance (known as ―seigniorage income)
√ Capital gain on securities and exchange gains
√ Profit on sale of securities (mainly Treasury bills)
√ Yields on government securities and bonds
√ Interest received from foreign exchanges reserves, gold and domestic assets. Interest on these
foreign holdings makes for another major share of the revenue
√ Interest received on loans given to the government.
√ Interest received on loans given to commercial banks by means of liquidity adjustment
facilities (Repo & Reverse Repo) and marginal standing facilities
√ Interest received on loans and advances given to bank employees
√ Discount received from bank rate where Bangladesh Bank earns on rediscounting of bills
from banks
√ Commission received from the government accounts management (by managing public debt)
√ Fees, fines and rents realized.
What is discount window?
★ The discount window is an instrument of monetary policy (usually controlled by central banks)
that allows eligible institutions to borrow money from the central bank, usually on a short-term
basis, to meet temporary shortages of liquidity caused by internal or external disruptions.
Discuss on off-site Supervision of BB:
entails reviewing and analyzing of the audited financial statements statutory returns and any other
reports submitted by licensees.
Commemorative notes in Bangladesh:
★ Bangladesh Bank released some six types of commemorative notes to make the special events
memorable and the Taka 200 note is the latest version (Tk 200 notes in March to mark
‘Mujib Year’) . Besides, some 12 types of commemorative coins were also released in the past.
★ Earlier,Bangladesh Bank introduced a Taka-40 note to commemorate the “40th Victory
Anniversary of Bangladesh” in 2011.
★ The Taka-40 commemorative note featured a portrait of the Father of the Nation and the National
Martyrs’ Memorial in Savar in the front, and six armed men on the back.
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Business Digest 135 Banking (Bangladesh Bank)
►In conventional banks, CRR is 5.5% and SLR is 13%. In total it is 18.5%
►In case of Islamic banks, CRR is 5.5% and SLR is 5.5%. In total it is 11%.
Some requirements for banks in Bangladesh:
√ It will be regulated under Banking Company Act 1991 and Basel- II (Basel-3 coming)
√ Status of the new commercial bank must be a public limited.
√ The paid-up capital of new commercial bank shall not be less than Taka 400. 00 Crore and in case
of Islamic bank it should not be less than Taka 200 Crore.
√ New Bank has to ensure finance at least 5% of its total lending into agricultural sector or as per
instruction issued by Bangladesh Bank from time to time.
√ Proposed bank should take part in Corporate Social Responsibility (CSR) activity. The new bank
should spend 10% or more of its previous year's net income to CSR.
√ Cash Reserve Requirement (CRR) at 5. 5% and Statutory Liquidity Ratio (SLR) is 13%. In total it
is 18. 5%
√ In case of Islamic Banks, Cash Reserve Requirement (CRR) at 5. 5% and Statutory Liquidity
Ratio (SLR) is 5. 5%. In total it is 11%.
√ A Director or Advisor to any banking company other than the proposed bank shall not be a
Director of the proposed bank.
√ The Member of Board of Directors shall be restricted to 13.
√ Maximum number of directors from a family shall be restricted to two in case of the total
shareholding of that family exceeds 5% and if the total shareholding is up to 5%, it will be one
director from a family.
√ The Chief Executive Officer (CEO) of the proposed bank shall have at least 15 (fifteen) years of
experience in the banking profession.
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Business Digest 136 Banking ( Risk Management)
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Business Digest 137 Banking ( Risk Management)
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Business Digest 138 Banking ( Risk Management)
√ Liquidity Asset Ratios: This is the ratio of liquid assets to total liabilities with liquids defined to
include items such as cash and cash equivalents, trading account securities, repos investments into
government securities etc
√ Concentration Ratios: This is an important ratio that reassures the funding from a particular
source compared to assets /liabilities or capital.
√ Liquidity Stress Measurement: A number of ratios can be examined here looking at multiple low
stress and high stress scenarios.
How to manage liquidity risk?
Sound liquidity risk management employed in measuring, monitoring and controlling liquidity risk is
critical to the viability of any bank. Each bank should have an agreed liquidity strategy for the day-to-
day management of liquidity. Such as:
★ Composition of assets and liabilities: The strategy should outline the mix of assets and liabilities
to maintain liquidity. Liquidity risk management and asset/liability management should be
integrated to avoid high costs associated with having to rapidly reconfigure the asset liability
profile from maximum profitability to increased liquidity.
★ Diversification and stability of liabilities: The board and senior management should specify
guidance relating to funding sources and ensure that the bank has diversified sources of funding
day-to-day liquidity requirements.
★ Managing liquidity in different currencies: The bank should have a strategy on how to manage
liquidity in different currencies.
★ Dealing with liquidity disruptions:The bank should put in place a strategy on how to deal with
the potential for both temporary and long-term liquidity disruptions.
★ Shorten asset maturities:If the maturity of some assets is shortened to an extent that they mature
during the duration of a cash crunch, then there is a direct benefit. In addition to that, shorter
maturity assets are basically more liquid.
★ Lengthen liability maturities: The longer duration of a liability, the less it is expected that it will
mature while a bank is still in a cash crunch.
★ Reduce contingent commitments: Cutting back the amount of lines of credit and other contingent
commitments to pay out cash in the future is a way to reduce cash requirement. It limits the
potential outflow thus reconstructing the balance of sources and uses of cash.
★ Obtain liquidity protection: A bank can scale another bank or an insurer, or in some cases a
central bank, to guarantee the connection of cash in the future, If required.
What is Basel Agreement/Accord?
★ Basel agreement is an agreement between the United States, Japan, Canada and the nations of
Western Europe to adopt common capital requirements for all of their banks.
What is Basel-I? what was the problem of it?
★ Basel-1 is a set of international banking regulations put forth by the Basel Committee on bank
supervision (BCBS) that sets out the minimum capital requirements of financial institutions with
the goal of minimizing credit risk. Banks that operate internationally are required to maintain a
minimum amount of capital (8%) based on a percent of risk-weighted assets.
Problems of Basel-I:
► It addresses only credit risk not considering operational risk, market risk, liquidity risk etc.
► It deals with only minimum capital requirement.
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Business Digest 139 Banking ( Risk Management)
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Business Digest 140 Banking ( Risk Management)
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Business Digest 141 Banking ( Risk Management)
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Business Digest 142 Banking ( Risk Management)
★ CAMELS Rating is the rating system wherein the bank regulators or examiners evaluate overall
performance of the banks and determine their strengths and weaknesses. CAMELS Rating is
based on the financial statements of the banks. In this Rating system, the officers rate the banks on
a scale from 1 to 5, where 1 is the best and 5 is the worst.
★ Because of the government safety net and in support of financial stability, bank supervisors
monitor the health of banks through periodic examinations. At the conclusion of its exam, each
bank is assigned a rating—called CAMELS—that allows comparisons of bank health over time
and with peers. CAMELS is an acronym representing its six components:
1.Capital adequacy- Capital to Risk Weighted Assets determines the bank’s capital adequacy
(CAR) .
2.Asset quality-- Through this indicator, the performance of an asset can be evaluated. The ratio
of Gross Non-Performing Loans to Gross Advances is one of the criteria to evaluate (NPL).
3.Management- effectiveness of the board of directors and top-level managers are the key
persons who are responsible (ROA).
4.Earnings- Return on Assets Ratio measures the earnings of the banks. (NIM/ROE).
5.Liquidity- The ratio of Cash maintained by Banks and Balance with the Central Bank to Total
Assets determines the liquidity of the bank. (Quick Ratio).
6.Sensitivity to market risk-- the bank’s sensitivity towards the changing market conditions is
checked (Duration).
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Business Digest 143 Banking ( Risk Management)
★ VAR is a statistical technique that measures the amount of potential loss that could happen in a
portfolio of investment/loan assets over a period of time.
★ A statistical model for measuring a bank’s portfolio exposure to change in market prices or market
rates of interest over a given period of time subject to a given probability model.
★ It measures and quantifies the level of financial risk within a firm, portfolio or position over a
specific time frame.
How Value at Risk model helps?
★ Value at Risk (VaR) analyses provides a single measurement of risk faced by a company at a
particular time. The VaR approach attempts to give an indication of the maximum loss that a
company could face when market rates (i;e:interest rates) change adversely. The typical VaR
statistic includes three elements –a time period, a confidence level and a loss amount (or loss
percentage). VaR is therefore the maximum loss that a company is likely to face within a given
time period for a specific, typically 95%, probability.
Define Monte Carlo simulation:
★ The Monte Carlo method simulates the effect of random events on a company’s portfolio. This
involves the development of a model that would be able to incorporate more exotic instruments, for
which companies often do not have sufficient data to employ the historical method. This method
expresses the results in a histogram generated from a simulation of interest rate price changes and
their effects on asset value volatility. A Monte Carlo simulation is typically the most complex,
expensive and time-consuming method.
What is credit rating?
★ It is an assessment of the likelihood of an individual or business being able to meet its financial
obligations. Credit ratings are provided by credit agencies or rating agencies to verify the
financial strength of the issuer for investors.
㊣There are 8 credit rating agencies in Bangladesh:
1. Credit Rating Agency of Bangladesh Ltd. (CRAB)
2. Credit Rating Information and Services Limited (CRISL)
3. Bangladesh Rating Agency Ltd (BDRAL)
4. ARGUS Credit Rating Services Ltd. (ACRSL)
5. Emerging Credit Rating Limited (ECRL)
6. National Credit Ratings Limited (NCR)
7. Alpha Credit Rating Ltd.
8. WASO Credit Rating Company (BD) Ltd. (WCRCL).
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Business Digest 144 Banking ( Risk Management)
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Business Digest 145 Banking (Duration Analysis)
► Unadjusted duration assumes a linear relationship between asset/liability prices and interest rate
changes even though the relationship is actually convex. Thus, there should have adjustment for
this convexity.
What is convexity?
★ The extent to which the price or value of bonds or interest-rate sensitive asset-liabilities changes
asymmetrically, other than extent of change explained by duration, in response to change in interest
rate is called convexity.
Aggressive vs Defensive management relating duration:
★ In aggressive management, the banks continuously change its portfolio of assets and liabilities to
change the duration either positive or negative in order to capitalize the changes in interest rate
resulting positive impact on net worth. If it expects interest rate fall, positive gap is positioned if it
expects interest rate rise, negative gap is expected to increase net worth of the bank.
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Business Digest 146 Banking (Duration Analysis)
★ In defensive managenet, zero gap is always expected because zero gap protects equity from the
valuation effects of interest rate changes. Whatever interest rate changes, there will be no effect on
net worth.
What are the limitations of duration?
► Duration assumes linear relationship between price and interest rate although in reality the
relationship is convex.
► Management through duration would be effective if interest rate changes for all maturity
securities, in either direction, is exactly the same. But in reality, short term rate is more sensitive
and volatile than long term rate. Thus, same interest rate change for all maturity is not realistic
Duration drift:
★ Duration of different financial assets with different initial maturity changes differently with the
passage of time at different speeds. Although at the beginning duration were matched as time
passes the mismatch will be higher as durations were matched but maturities were not matched.
The alternative consequences of duration gap, interest rate changes and change in
net worth
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Business Digest 147 Banking ( New Trends in Banking)
What is Sustainability?
★ Some projects/activity/development/plans are called sustainable when it meets the needs of the
present without compromising the ability of future generations to meet their own needs.
What is Green Banking?
★ Green Banking means promoting environment-friendly banking practices and reducing carbon
footprint from banking activities. It aims to make banking processes as efficient and effective as
possible, with zero or minimal impact on the environment through the use of IT and physical
infrastructure
√Finance green technology and pollution reducing projects
√Setting up Solar-powered branches or Green branches
√Incorporation of paperless checking through IT based banking activities
√Formulation of bank specific environmental risk management plan and guidelines
√E-Payment Gateway facilities.
What is Green Finance?
► Green Finance encompasses all the financial tools and initiatives taken in developing, promoting,
Implementing and supporting projects with sustainable and positive externalities.
► The promotion of renewable energies, energy efficiency, water sanitation,
► The reduction of transportation and industrial pollution, climate change, deforestation, carbon
footprint.
Online Banking:
★ Online banking, also known as internet banking or web banking, refers to banking services where
depositors can manage more aspects of their accounts over the Internet, rather than visiting a
branch or using the telephone. It allows a user to execute financial transactions via the internet. It is
comprised of a secure connection to banking information through the depositor's home computer or
another device.
Advantages of online banking:
* 24/7 account and service access
* Speed and efficiency
* Online bill payment
* Low overhead means low fees
Drawbacks of Online Banking:
* Risk of identity theft if hackers gain unauthorized access to one’s account via a hacked
or stolen password.
* Requires internet connection which is difficult for the poor and in the remote area.
Relation between Online Banking and Green Banking:
★ Online Banking is an electronic payment system that enables customers of a financial institution to
conduct financial transactions on a website operated by the institution. It is also referred as internet
banking, e-banking and virtual banking. Online banking reduces the use of papers and thereby
cutting trees and thus considered as pro-green banking approach.
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Business Digest 149 Banking ( New Trends in Banking)
√Internet Banking
√Phone Banking
√Automated Teller Machines (ATMs)
√Fund Transfers remotely and immediately
√Point of Sale systems.
School Banking:
★ It is a banking service, meant for inclusion of unaddressed students, the future generations, who are
to be introduced to financial institution, to grow their saving habit and to make them provident. It
enables students to save money in a bank account without paying any service charges.
Offshore Banking:
★ Offshore banking is a term used to describe banking activity in currencies other than the currency
of the country in which the bank accounts are held.
★ When the customers have money deposited in or invested with a bank in a country outside the
home country in foreign currency they are, in fact, banking offshore. Reasons to engage in offshore
banking includes:
► Greater privacy.
► Low or no taxation (i. e. Tax havens).
► Easy access to deposits (at least in terms of regulation).
► Protection against local, political, or financial instability.
Visa Card:
► A Visa card is any type of payment card utilizing the Visa network and branded by Visa Inc.
Cards may include credit, debit or prepaid cards.
Mastercard:
★ It is an American multinational financial services corporation. Its principal business is to process
payments between the banks of merchants and the card issuing banks or credit unions of the
purchasers who use the "Mastercard" brand debit, credit and prepaid to make purchases.
Smart Card:
★ Smart Card is a security device that uses a small microchip to store and process data. It is the
advanced paid debit card by which the cash money is transferred from the client ‘s account
electronically. This is a card with all personal information of any individual in financial and money
market. For example: phone card is a smart card used in Bangladesh.
ATM:
★ ATM is a machine that serves as a computer terminal and allows a customer to access account
balance and information on a bank (through the use of a magnetically encoded plastic card) and
conduct financial transactions. ATMs are available 24 hours.
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Business Digest 150 Banking ( New Trends in Banking)
VIP Banking:
★ VIP Banking offers a thoughtful bouquet of exclusive services, benefits and banking solutions to
the Bank's prime customers through dedicated relationship manager. Services might include
specially priced services and products.
Fast Track:
Fast track banking service avails the customer of banking services for round the clock and 365
days a year. It enables the depositor to deposit money through a cash deposit machine installed in a
single room branch. Reporting of lost card, collecting cheque books, PIN (personal identification
number) collection and reissue, internet banking, SMS and alert banking would be among the
other services of the Fast Track.
★ These FTs are comprised of ATMs, Deposit Kiosks and Customer Service help desk officers.
Nexus Gateway- E-payment:
★ It gives a person the liberty to purchase online, pay utility bills etc. Most importantly, the person
does not need to be a bank cardholder. It allows customers in e-ecommerce trade and they can use
their regular PIN for e-commerce transactions.
What does POS mean on a bank statement?
If one has a checking account at a bank or credit union, he receives a monthly statement showing
the account's beginning and ending balances, as well as all the transactions for the month. A
transaction type labelled "POS" means that your debit card was used to make a purchase at a point-
of-sale location, such as a store's cash register or electronic checkout terminal. It also allows him/
her to watch for any unauthorized use of his/her debit card. If s/he sees a POS transaction at a shop
that s/he never made or authorized, s/he can check with his/her bank. Banks may offer
reimbursement for unauthorized card use. A new card also is issued when the bank thinks
transactions are fraudulent.
Point-of-Sale Transfer Terminals:
★ Point-of-Sale Transfer Terminals allow consumers to pay for retail purchase with a check card, a
new name for debit card. This card looks like a credit card but with a significant difference, the
money for the purchase is transferred immediately from your account to the store's account.
POS or Point Of Sale:
★ POS or point of sale purchase is the “point” where a transaction is finalized or the moment where a
customer executes payment in exchange for goods and services. Any form of payment can be
used, such as cash, debit cards, credit cards, mobile payments and even Bitcoin.
Automated Clearing House (ACH):
★ A computerized facility used by member depository institutions to electronically combine, sort and
distribute inter-bank credits and debits.
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Business Digest 151 Banking ( New Trends in Banking)
Biometric Account:
★ Biometric Account is an account opened by the customer registering his Finger-Print.
Standby Credit Agreement:
A bank pledges to guarantee repayment of a customer’s loan received from third party.
Liquidity Indicators:
★ Ratios or other measures of changes in a bank’s liquidity position.
NOW accounts:
Interest bearing deposits that allow checks to be written against them (available in the United
States only to individuals and non-profit associations).
STD Account:
★ The term “Short Term Deposit (STD)” refers to an account in which an amount of money is placed
in a bank or financial institution for a term no longer than 01 year. An STD will usually earn a
fixed rate of interest.
Plastic Money:
★ Plastic money is a kind of card working as the alternative to the cash or the standard currency to
purchase items or withdraw money. Plastic Money is referred to all Cards that can be used to
purchase commodities from market
★ It is a card made out of polymer and acts as money in transaction. Example includes debit card,
credit card, master card, visa card, cash card and ATM card.
Consumer Card:
It is a debt that someone incurs for the purpose of purchasing a good or service. This includes
purchases made on credit cards, lines of credit and some loans. Consumer credit is basically the
amount of credit used by consumers to purchase non-investment goods or services that are
consumed and whose value depreciates quickly.
What is Adverse Selection?
★ Adverse Selection means that high risk borrowers try to get loans from banks they are willing to
pay the average rate of interest, which is less than they would have to pay if their true condition
were known to the bank.
What is Moral Hazard?
★ Moral Hazard is the risk that the borrower who now has the loan might use the funds to engage in
higher risk activities in expectation of earning higher returns.
What is Asymmetric Information?
★ The inequality of information between the bank and the borrower is called asymmetric
information.
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Business Digest 152 Banking ( New Trends in Banking)
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Functions of CEO:
Þ Formulates policies and planning recommendations to the Board
Þ Making major corporate decisions, managing the overall operations and resources of a
company
Þ Coordinates between departments, subsidiaries, organization and community
Þ Maintaining good relationship with all the stakeholders of the firm.
CEO vs Chairman:
★ Sometimes this means the guidelines issued by Bangladesh Bank for financial institutions. The
KYC guidelines of Bangladesh Bank mandate banks to collect three proofs from their customers.
They are- (1) Photograph, (2) Proof of identity and (3) Proof of address.
What is Black Monday?
★ It refers to October 19, 1987 when stock markets around the world crashed — shedding a huge
value in a very short time. The crash began in Hong Kong and spread west to Europe — hitting the
United States after other markets had already declined by a significant margin. The Dow Jones
Industrial Average (DJIA) lost almost 22% in a single day.
What is Black Monday?
★ It refers to October 19, 1987 when stock markets around the world crashed — shedding a huge
value in a very short time. The crash began in Hong Kong and spread west to Europe — hitting the
United States after other markets had already declined by a significant margin. The Dow Jones
Industrial Average (DJIA) lost almost 22% in a single day.
Mobile Banking:
★ It is a system that allows customers of a financial institution to conduct a specific number of
financial transactions and some banking services through a mobile device such as a mobile phone
or tablet.
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Business Digest 154 Banking ( Financial Statements of Banks)
★ Credit management: NPL ratio is often used to determine the credit managementt performance
and NPL ratio is calculated by dividing NPL with total loan and advance. Other mechansms
include:
CAR (Capital adequacy ratio)
VAR (Value at risk)
Non-Performing loan ratio
Provision for loss ratio (a percentage of total loan asset)
Interest rate risk:
Duration is mostly used to determine the impact on net worth due to change in interest rate.
Dollar gap ratio (Dollar gap/total asset)
Define Loans and Advances:
★ Loans and Advances made by the banks are the most important assets for all banks. Loans are the
primary source of interest revenue. While a loan is a liability for the borrower, it is an asset for the
bank, for the lender. This asset includes loans to consumers (home loans, personal loans,
automobile loans, credit card loans) and businesses (real estate development loans, capital
investment loans).
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Business Digest 155 Banking ( Financial Statements of Banks)
★ Fictitious Assets are not assets at all, but they are shown as assets in the financial statements only
for the time being. They are recorded as assets in financial statements only to be written off in a
future period. Fictitious assets are shown in the balance sheet on the asset side under the heading
―Miscellaneous Expenses‖. Examples of Fictitious Assets:
√ Promotional expenses of a business
√ Preliminary expenses
√ Discount allowed on issue of shares
√ Loss incurred on issue of debentures .
What are the contingent liabilities of a bank?
★ Contingent Liability is a liability or a potential loss that may occur in the future depending on the
outcome of a specific event. Potential lawsuits and product warranties are some examples of
contingent liability. Contingent liabilities related to banks include both explicit guarantees (such as
deposit insurance programmes) and implicit guarantees (such as guarantees on bank debt that may
be provided during a banking crisis).
What is Funds-Flow statement?
★ A report of the sources and uses of funds for a bank as reflected in its net income, non-cash
expenses, and balance sheet changes.
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Business Digest 156 Banking ( Financial Statements of Banks)
★ Loans and advances are the largest asset and deposits are the largest liability of a typical bank.
★ Asset liaquidity is the primary means by which banks met cash demands. Example- T-bills and
short-term obligations like municipal securities.
★ Two roles of asset liquidity:
1.As an alternative source of funds for the bank to meet cash needs
2.As a reserve to maintain business operations
What is SDR?
► SDR (Special Drawing Rights) is a form of imaginary international money created by the IMF
in 1969. It is designed to augment international liquidity by supplementing the standard reserve
currencies. IMF provides loans to its members in case of exchange rate instability in SDRs.
► SDR basket now consists of the following five currencies: U.S. dollar 41.73%, Euro 30.93%,
Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%
► 1 SDR= Taka 116.11 (till 21 August, 2019).
► Loan Write-off is a reduction in the value of asset or earnings by the amount of an expense or loss.
Banks use write-offs to remove toxic loans from their balance sheets and reduce their overall tax
liability.
What is Non-Performing Loan (NPL)?
► Non-Performing Loan (NPL) is an obligation payable to the bank which has not been made or
the interest and principal amount has not been paid on the due time. Institutions holding non-
performing loans in their portfolios may choose to sell them to other investors in order to get
rid of risky assets and clean up their balance sheets. If a bank has too many bad loans on its
balance sheet, its profitability will suffer because it will no longer earn enough money from its
credit business.
What are the Non-Performing Assets (NPA) of a company?
★ An NPA is an obligation payable to the bank which has not been made or the interest and principal
amount has not been paid on the due time. NPA is the loan or credit provided by the bank to its
customers which could not be recovered in due time. NPA is also known as ―bad debts.
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Business Digest 157 Banking (Digital payment Sysytem)
► Clearing House is the computerised inter-bank central office for exchanging cheques and bills.
It is a central collection place where banks exchange cheques. The participants maintain an
account against which credits or debits are posted.
► CHIPS (Clearing House Interbank Payments System) is an electronic funds transfer system
that handles over 95 percent of all international dollar payments. It is the largest private-sector
US dollar funds-transfer system in the world, clearing and settling an average of $1. 5 trillion in
cross-border and domestic payments daily.
► With the launching of Bangladesh Real Time Gross Settlement (BD-RTGS) System in 2015,
the large value payments have also been modernised. These modernisations took the Payment
Systems of Bangladesh as per with the international standard.
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Business Digest 158 Banking ( Banking Scams in Bangladesh)
Sonali, Janata, NCC, Bank loan of BDT4.89 On August 1st 2013, the ACC filed cases
Mercantile and Dhaka crores with forged land against Sonali Bank, Fahim Attire Limited
Bank documents and some individuals; after the
(2008 -2011) (Dhaka Tribune, 28th investigation BDT 1 crore was returned to
August 2013) SonaliBank (making the total BDT 4.89
from initial 5.89 crore). (Dhaka Tribune,
2nd August 2013; New Age, 2ndAugust
2013; The DailyStar, 2ndAugust 2013)
BASIC Bank Embezzlement of BDT4, In September 2015, the ACC filed 56
(2009-2013) 500 crores through fake cases against 120 people on charge of
companies and dubious swindling.
accounts. (New Age Bangladesh, 13th August 2018)
(The Daily Star, 28th June
2013)
Sonali Bank Hall Mark and some other In October 2012, the ACC filed 11 cases
(2010-2012) businesses embezzled against 27 people, including Hallmark
BDT 3,547 crores. Group Chairman and Sonali Bank's 20
(The Daily Star, 14th former and present officials.
August 2012) (Dhaka Tribune, 11th July 2018)
Janata Bank, Prime Embezzlement and On November 3, 2013, the ACC filed
Bank, Jamuna Bank, laundering of BDT1, 12 cases against 54 people over the
Shahjalal Islami Bank 174.46 by Bismillah scam.
Ltd and Premier Bank Group and its fake (The Independent, 11th September
(June 2011-July 2012) sister concerns. 2018)
(The Daily Star, 7th
October 2016)
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Business Digest 159 Banking ( Banking Scams in Bangladesh)
NRB Commercial Gross irregularities over On December 29, 2016, the central bank
Bank disbursing loans of BDT701 appointed an observer at the bank to
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Business Digest 160 Banking ( Regulatory Changes)
Banking and Financial Institution Division is formed within the Ministry of Finance,
curtailing the authority of Bangladesh Bank and acting as an obstacle to the monitoring of
state-owned commercial banks (FID, 2010)
‘Guidelines on Risk Based Capital Adequacy for Banks’ is introduced by Bangladesh
Bank, in line with Basel II (Bangladesh Bank, 2008)
2011 Whistleblowers' Protection Act 2011 states that no criminal, civil or departmental
proceedings can be initiated against a person for disclosing information in the public
interest to the authorities, and his or her identity will not be disclosed without his or her
consent. (GoB, 2011)
2012 Customer Interest Protection Centre' (CIPC) is established in the head office and branch
offices of Bangladesh Bank
Money Laundering Prevention Act gives Bangladesh Bank responsibility for money
laundering offences (GoB, 2012)
Bangladesh Financial Intelligence Unit (BFIU) is established for analyzing Suspicious
Transaction Reports (STRs), Cash Transaction Reports (CTRs) & information related to
money laundering (ML) or financing of terrorism (TF) received from reporting agencies
and other sources and disseminating information/intelligence thereon to relevant law
enforcement agencies. (Bangladesh Bank, 2012)
Financial Integrity and Customer Services Department (FICSD) department is established
in Bangladesh Bank with a view to minimizing fraud and forgery in the banking industry.
(Bangladesh Bank, 2014)
2013 Anti-Terrorism Act is amended to make provisions for the prevention of terrorist activities
and ensure effective punishment for such activities (GoB, 2013)
Bank Company Act is amended. More than two members of the same family are not
allowed to be on the board of directors, and the tenure of the directors is restricted to six
years. (GoB, 2013)
2014 ‘Guidelines on Risk Based Capital Adequacy for Banks’ is introduced by Bangladesh
Bank, in line with Basel III (Bangladesh Bank, 2014)
Bangladesh Bank imposes “Regulations on Electronic Fund Transfer” (Bangladesh Bank,
2014)
Bangladesh Payment and Settlement Systems Regulations is introduced by Bangladesh
Bank (Bangladesh Bank, 2014)
2015 Money Laundering Prevention Act is amended to reenact a law regarding the prevention of
money laundering and other connected offenses (GoB, 2015)
Financial Reporting Act is passed which requires the establishment of a new oversight
body, referred to as the Financial Reporting Council (FRC), whose main purpose will be to
regulate the financial reporting process followed by the quoted companies (GoB, 2015)
Bangladesh Bank introduces “Guideline on ICT Security for Banks and Non-bank
Financial Institutions” (Bangladesh Bank, 2015)
2017 Code of Conduct for banks and non-bank financial institutions introduced by Bangladesh
Bank to implement National Integrity Strategy in the financial sector of Bangladesh
(Bangladesh Bank, 2017)
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Business Digest
Basics of Marketing, Need vs Wants vs Demand, market, the marketing management orientation, 162-166
Marketing five main marketing management orientations, marketing myopia, marketing
management, Marketing mix 4P/7P, Marketing Process, Buyer decision making process,
Business buying process, New product development process, The Keys To Marketing
Success, marketing information system (MIS), sustainable marketing, Vertical marketing
system (VMS), Market potential, experience curve, environmentalism, Market
penetration, Positioning, competitive advantage, the 8 Ps of marketing, marketing
environment, market leader, challenger, follower and niche, Business portfolio, return on
marketing investment crowdsourcing or open innovation, commercialization, supply
chain management, Net marketing contribution (NMC), Cannibalization, marketing
logistics, intermarket segmentation, Some frequently asked question in Viva
Product Marketing Offering, value proposition, Product vs Service vs Experience, the levels of 167-169
product, consumer products, Types of consumer products, Deficient products, Pleasing
products, Salutary products, Desirable products, the characteristics of a Service, How
service marketing different from product marketing, product/market expansion grid, line
extensions and brand extension, Product line vs Product mix, Stages in product life cycle,
Steps in launching a new product, Boston Matrix/Boston Consulting Group matrix/BCG
matrix/Growth share matrix
Types of pricing strategies, market-skimming pricing, market,penetration pricing, 170-171
Price psychological pricing, customer value-based pricing , reference price , Price skimming,
market penetration pricing, reference price, lump-sum payment, Major considerations in
pricing a product, Sources of unit cost fall, price elasticity
Place/ Major Consideration in selecting Place/distribution channel, the common distribution 172-173
Distribution channels, the major types of retailer, location economies, Marketing channel, marketing
intermediaries, Disintermediation, Third-party logistics (3PL) provider, perceptual map,
localization Network marketing, Workload method, category killer
Promotion Various Promotional tools, Sales promotion, Push vs Pull strategy, False Advertising, 174-175
public relations (PR), Word-of-mouth, Direct-response television (DRTV) marketing,
Discount vs Allowance, return on advertising investment, first mover advantage,
disruptive technology, Styles vs fashion vs fade, Ambush Marketing, inbound marketing
Customer, Value Customer-perceived value, Customer satisfaction, customer lifetime value, customer 176-177
and Brand value analysis, customer relationship management (CRM), customer equity, Opt-out
provision/clause, Lifestyle, Personality, Perception, Belief and Attitude,
Culture,Group,value,value proposition,brand value/brand equity, Branding, brand
equity,Brand valuation,Co-branding,Motive (drive)
Marketing Marketing strategy, concentrated/niche marketing, differentiated marketing strategy 178-181
Strategy undifferentiated (mass) marketing, inbound marketing, market segmentation, Types of
market segmentation, Four global strategies for expansion/Ansoff matrix, Distinctive
competencies of a firm, Buzz marketing Mobile marketing, Online
marketing, Tele-marketing, Kiosk marketing, Steps in a Marketing Plan, Porter's Generic
Competitive Strategies (ways of competing), Porter's 5 forces/Considering in new
entrance/forces in industry competition, PESTLE analysis, SWOT analysis, do you know
about Ambush Marketing, Six available options for a declining stage industry, divestiture
Marketing Plan The aspects you look while launching a product, essential elements of a marketing 182
campaign of aMarketing Plan, the limitations of online marketing
Online Online Marketing, Vertical marketing system (VMS), Content marketing, How do you 183
Marketing use social media for marketing, Viral marketing, E-procurement, Content marketing
International 183
Marketing International Marketing, the challenges with International Marketing, Globalization,
Choices of entry mode in the global market, Franchising vs Licensing, Off-shoring vs
Outsourcing, Insourcing vs Freelancing, intellectual property
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Business Digest 162 Marketing (Basic of Marketing)
What is Marketing?
► Marketing is the art and science of persuasive communication.
► The management process through which goods and services move from concept to the customer.
► It is the process by which companies create value for customers and build strong customer
relationship in order to capture value from customers in return.
► Philip Kotler is considered as the father of Marketing or father of modern marketing.
Need vs Wants vs Demand:
► Needs is the state of feeling deprived of something such as food, clothing and shelter.
► Wants are form of human needs and shaped by culture and individual personality; For example,
French fries, which is a form of food.
► Finally, demand is human needs when backed by purchasing power. For example, If Rahat wants
French fries and has adequate money to buy, we say that he has demand for French fries.
What is market?
★ In marketing, the term market refers to the set of all actual and potential buyers of a product or
services.
What is the marketing management orientation?
★ Marketing management orientation are different marketing concepts that focus on various
techniques to create, produce and market products to customers.
There are five main marketing management orientations:
1.Production concept (heavily focused on production processes and improving efficiencies)
2.Marketing concept (reacts on customers’ want. Decisions are based on customers' needs and
wants)
3.Selling concept (focusing on sales and selling techniques)
4.Product Concept (continually improving and refining its products)
5.Social marketing concept (policy must consider society's long-term interests, consumers' wants,
company's profit etc. )
What is marketing myopia?
★ Marketing myopia' is a situation when a company views marketing strictly from the standpoint of
selling a specific product rather than from the standpoint of fulfilling customer needs.
What is marketing management?
★ Marketing management is the process of developing strategies and planning for product or
services, advertising, promotions, sales to reach desired customer segment.
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Business Digest 163 Marketing (Basic of Marketing)
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Business Digest 164 Marketing (Basic of Marketing)
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Business Digest 165 Marketing (Basic of Marketing)
★ The 8 Ps of marketing are – product, place and time, price, promotion, process, physical
environment, people, and productivity and quality.
Define marketing environment:
★ The microenvironment consists of the actors close to the company that affect its ability to serve its
customers—the company, suppliers, marketing intermediaries, customer markets, competitors, and
publics.
★ The macroenvironment consists of the larger societal forces that affect the microenvironment—
demographic, economic, natural, technological, political, and cultural forces. We look first at the
company’s microenvironment.
Define market leader, challenger, follower and niche:
★ Market leader is the firm in an industry with the largest market share.
★ Market challenger is a runner-up firm that is fighting hard to increase its market share in an
industry.
★ Market follower is a runner-up firm that wants to hold its share in an industry without rocking the
boat.
★ Market niche is a firm that serves small segments that the other firms in an industry overlook or
ignore.
Define Business portfolio:
★ Business portfolio is the collection of businesses and products that make up the company.
★ Return on marketing investment (or marketing ROI) is the net return from a marketing investment
divided by the costs of marketing investment.
★ It measures the profits generated by investments in marketing activities.
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Business Digest 166 Marketing (Basic of Marketing)
Define commercialization:
★ Commercialization means introducing a new product into the market.
★ Supply chain management means managing upstream and downstream value-added flows of
materials, final goods, and related information among suppliers, the company, resellers, and final
consumers.
Define Net marketing contribution (NMC):
★ Net marketing contribution (NMC) is a measure of marketing profitability that includes only
components of profitability controlled by marketing. .
Define Cannibalization:
★ Cannibalization is the situation in which one product sold by a company takes a portion of its sales
from other company products.
Define marketing logistics?
★ Marketing logistics (or physical distribution) explains planning, implementing, and controlling the
physical flow of materials, final goods, and related information from points of origin to points of
consumption to meet customer requirements at a profit.
What is intermarket segmentation?
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Business Digest 167 Marketing ( Producct )
► Value proposition refers to a business or marketing statement (promise) that a company uses to
summarize why a consumer should buy a product or use a service.
► In another way, a value proposition is a promise of value to be delivered, communicated, and
acknowledged.
Product vs Service vs Experience:
★ Product is an offering that has physical appearance deriving value or utility for the consumer, for
example, football.
★ Service is an offering that is intangible in nature, deriving value or utility for the consumer; for
example, Playing soccer for a team or treatment by doctor etc.
★ Experience is the sum of all the interactions a customer has with a business and its products or
services. It is the customer's perception of a company. It is known as empirical knowledge.
What are the levels of product?
► Core product:the core customer value that solves the consumer’s problem (transportation service)
► Augmented product:The non-physical part of the product. It usually consists of lots of added
value (warranty, customer support service).
Define consumer products:
★ Consumer products are products and services bought by final consumers for personal
Consumption. For example, bread.
Types of consumer products:
4 types of consumer products:
1. Convenience products:That makes the customer's life easier, save time and simplify
2. Shopping products:A product that the customer usually compares on attributes such as
quality, price and style in the process of selecting and purchasing
3. Specialty products:With unique characteristics or brand identification
4. Unsought products:A product that has little or no demand.
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Business Digest 168 Marketing ( Producct )
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Business Digest 169 Marketing ( Producct )
★ It’s a tool to help with long-term strategic planning, to help a business consider growth
opportunities by reviewing its portfolio of products to decide where to invest, to discontinue or
develop products. It's also known as the Growth/Share Matrix.
√ Dogs:Products with a low share and low growth in market. They do not generate cash for the
company. Get rid of these products.
√ Cash Cows:Products with high share and slow growth in market. Cash Cows generate more
than invested in them. So, keep them in your portfolio.
√ Question Mark (Problem children):Products with a low share of a high growth market. They
consume resources and generate little in return. They absorb most money as you attempt to
increase market share.
√ Stars:Products that are in high growth with a relatively high market share. Stars tend to
generate high amounts of income. Keep and build your stars.
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Business Digest 170 Marketing (Price)
Þ Value-based pricing—setting a price based on how much the customer believes what you’re
selling is worth.
Þ Price skimming—setting a high price and lowering it as the market evolves.
Þ Penetration pricing—setting a low price to enter a competitive market and raising it later.
What is market-skimming pricing?
★ In market-skimming pricing (price skimming) firms set a high price for a new product to skim
maximum revenues layer by layer from the segments willing to pay the high price; the company
makes fewer but more profitable sales.
★ When Apple first introduced the iPhone, its initial price was as much as $599 per phone. The
phones were purchased only by customers who really wanted the sleek new gadget and could
afford to pay a high price for it. Six months later, Apple dropped the price to $399 for an 8GB
model and $499 for the 16GB model to attract new buyers. Within a year, it dropped prices again
to $199 and $299, respectively, and you can now buy an 8GB model for $99. In this way, Apple
skimmed the maximum amount of revenue from the various segments of the market.
What is market-penetration pricing?
★ Market-penetration pricing means setting a low price for a new product to attract a large number of
buyers and a large market share.
★ For example, the giant Swedish retailer IKEA used penetration pricing to boost its success in the
Chinese market.
Define psychological pricing:
★ Psychological pricing is the pricing strategy that considers the psychology of prices, not simply the
economics; the price says something about the product.
What is customer value-based pricing?
★ Customer value-based pricing is the pricing strategy to set price based on buyers’ perceptions of
value rather than on the seller’s cost.
Define reference price:
★ Reference price is the price that buyers carry in their minds and refer to when they look at a given
product.
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Business Digest 171 Marketing (Price)
★ A lump-sum payment is a large sum that is paid in one single payment instead of instalments.
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Business Digest 172 Marketing (Place))
★ Discount Stores:Sold at lower prices, lower margins and high volumes (Walmart)
★ Supermarkets:Relatively large, low cost, low margin, high volume self-service store
★ Superstores:Giant retail outlets that meets consumers’ total needs (Walmart supercenter)
★ Specialty store:Carries narrow product line with deep assortment (Perfume shop)
What is location economies?
★ They are the cost advantages obtained by performing a value creation activity at the optimal
location for that activity.
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Business Digest 173 Marketing (Place))
★ Marketing channel (or distribution channel) is the set of interdependent organizations that help to
make a product or service available for use or consumption by the consumer or business user.
Define marketing intermediaries:
★ Marketing intermediaries are the firms that help the company to promote, sell, and distribute its
goods to final buyers.
Define Disintermediation:
★ Disintermediation means the cutting out of marketing channel intermediaries by product or service
producers or the displacement of traditional resellers by radical new types of intermediaries.
Define Third-party logistics (3PL) provider:
★ Third-party logistics (3PL) provider is an independent logistics provider that performs any or all of
the functions required to get a client’s product to market.
What is perceptual map?
★ Perceptual mapping is a diagrammatic technique used by asset marketers that attempts to visually
display the perceptions of customers or potential customers.
What is localization?
★ Network marketing, also known as multi-level marketing, is a business model which involves a
pyramid structured network of people who sell a company’s products. The participants in this
network are usually remunerated on a commission basis.
What is Workload method?
★ Workload method is an approach to determining sales force size based on the workload required
and the time available for selling.
Define category killer:
★ Category killer is a giant specialty store that carries a very deep assortment of a particular line and
is staffed by knowledgeable employees. e.g., Best Buy, Home Depot.
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Business Digest 174 Marketing (Promotion )
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Business Digest 175 Marketing (Promotion )
Discount vs Allowance:
★ Discount is a straight reduction in price on purchases during a stated period of time or of larger
quantities. The many forms of discounts include a cash discount, trade discount, quantity discount,
seasonal discount.
★ Allowance is the promotional money paid by manufacturers to retailers in return for an agreement
to feature the manufacturer’s products in some way. Allowances are another type of reduction
from the list price. For example, trade-in allowances are price reductions given for turning in an
old item when buying a new one. Trade-in allowances are most common in the automobile
industry but are also given for other durable goods. Promotional allowances are payments or price
reductions to reward dealers for participating in advertising and sales support programs.
Define return on advertising investment:
★ Return on advertising investment is the net return on advertising investment divided by the costs
of the advertising investment.
What is first mover advantage?
★ A first mover is a service or product that gains advantage by being the first to market.
Being first typically enables a company to establish strong brand recognition and customer loyalty
before competitors enter the arena. Eg.Sony walkman.
What is disruptive technology?
★ A disruptive technology is one that displaces an established technology and shakes up the industry
or a ground-breaking product that creates a completely new industry.
Styles vs fashion vs fade:
► Style is a basic and distinctive mode of expression
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What is Group?
★ Group means two or more people who interact to accomplish individual or mutual goals.
What is value?
★ Value in marketing, also known as customer-perceived value, is the difference between a
prospective customer's evaluation of the benefits and costs of one product when compared with
others.
Value = Benefits-Efforts-Risks-Price
What is value proposition?
★ The full positioning of a brand is called the brand’s value proposition—the full mix of benefits on
which a brand is differentiated and positioned.
★ It is the answer to the customer’s question “Why should I buy your brand?”
★ Volvo’s value proposition hinges on safety but also includes reliability, roominess, and styling, all
for a price that is higher than average but seems fair for this mix of benefits.
What is brand value/brand equity?
★ Brand equity refers to a value premium that a company generates from a product with a
recognizable name while brand value refers to the financial asset that the company records on its
balance sheet.
★ Brand strength = reputation X visibility
What is Branding?
★ It is a process involved in creating a unique name and image for a product in the consumers' mind.
Define brand equity:
★ Brand equity is the differential effect to capture consumer preference and loyalty.
★ A brand has positive brand equity when consumers react more favourably to it than to a generic or
unbranded version of the same product. It has negative brand equity if consumers react less
favourably than to an unbranded version.
★ Brands vary in the amount of power and value they hold in the marketplace. Some brands—such
as Coca-Cola, Nike, Disney, GE, McDonald’s, Harley-Davidson, and others—become larger-than-
life icons that maintain their power in the market for years, even generations.
Define Brand valuation:
★ Brand valuation is the process of estimating the total financial value of a brand. Measuring such
value is difficult.
Define Co-branding:
★ Co-branding is the practice of using the established brand names of two different companies on the
same product.
★ For example, Nike and Apple co-branded the Nike_iPod Sport Kit, which lets runners link their
Nike shoes with their iPods to track and enhance running performance in real time.
Define Motive (drive):
★ Motive (drive) is the need that is sufficiently pressing to direct the person to seek satisfaction of
the need.
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Business Digest 178 Marketing (Marketing Strategy)
★ A marketing approach in which most of the marketing efforts are focused on a specific consumer
segment. Eg. CPAs who do taxes for the self-employed.
What is differentiated marketing strategy?
★ A differentiated marketing strategy is one where a company develops several different brands to
meet the unique needs of each of the consumer segments. Let’s take the example of the organic dog
food business. At first, a differentiated marketing strategy may target the dog-lovers in the local
area. As the business thrives locally, the company may choose to extend their reach to other cities
and states.
What is undifferentiated (mass) marketing?
★ It is a market-coverage strategy in which a firm decides to ignore market segment differences and
go after the whole market with one offer.
What do you mean by inbound marketing?
★ Inbound marketing involves a strategy to pull the audience close to the products/services and create
brand awareness. Some of the popular elements of inbound marketing are – blogs, events, SEO
blogs, social media posts, video content, influencer outreach, and public speaking. Inbound
marketing helps a brand to educate prospects about the products/services they offer, and at the
same time, it helps in establishing trust and credibility of the brand.
What is market segmentation?
★ Market segmentation is the process of dividing a market of potential customers into groups, or
segments, based on different characteristics.
Types of market segmentation:
► Demographic segmentation.
► Behavioral segmentation.
► Psychographic segmentation.
► Geographic segmentation.
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1. Market Penetration:Market penetration is when firm decides to market existing products within
the same market it has been using. The only way to grow using existing products and markets is to
increase market share.
2. Market Expansion/Market Development: It entails selling current products in a new market.
3. Product Expansion/product Development:Firms expand its product line or add new features to
increase its sales in the existing market.
4. Diversification:Selling new products to new markets.
Distinctive competencies of a firm:
★ Distinctive competencies refer to some characteristics of a business that it does better than its
competitors. It may include a number of areas including
√ Name recognition,
Management, administration,
√
√ Interpersonal relationship,
√ Marketing, technology,
√ Manufacturing,
√ Economics of scale,
√ Talented workforces.
What is Buzz marketing?
★ Buzz marketing refers to marketing strategies used to capture the attention of the customers and
other influencers to amplify the marketing message to an extent where talking about the brand,
product, or service becomes entertaining, fascinating, and newsworthy.
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Business Digest 180 Marketing (Marketing Strategy)
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Business Digest 182 Marketing (Marketing Plan) )
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Business Digest 182 Marketing( Online Marketing)
★ eProcurement, also known as electronic procurement, is the purchase and sale of goods,
works and services through a web interface or other networked system. Bangladesh government
has introduced e-GP method to complete hassle free and transparent tender.
Content marketing:
★ Content marketing is a marketing technique of creating and distributing valuable, relevant and
consistent content (infographics, webpages, podcasts, videos etc) to attract and acquire a clearly
defined audience – with the objective of driving profitable customer action.
What is Vertical marketing system (VMS)?
★ Vertical marketing system (VMS) is a distribution channel structure in which producers,
wholesalers, and retailers act as a unified system. One channel member owns the others, has
contracts with them, or has so much power that they all cooperate.
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Business Digest 183 Marketing (International Marketing )
Intellectual Property Rights) to protect the intellectual properties from being copied.
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Business Digest 184 Management(Basics of Management)
What is management?
★ Management is the art of getting things done by and through Others-Mary Parker Follet.
★ Management is the process of reaching organizational goals by working with and through people
and other organizational resources.
★ Management is the continuous process of planning, organizing, motivating, coordinating,
marketing, directing and controlling to achieve an organization’s goal.
√Peter F. Drucker is the father of management theory.
√Henry Fayol is the father of modern management.
√Frederick Winslow Taylor is the father of scientific management
Successful managers Successful entrepreneurs
Tim Cook:CEO, Apple Bill Gates:Microsoft
Jack Dorsey:CEO, Twitter Jeff Bezos:Amazon
Reed Hastings:CEO, Netflix Jack Dorsey:Twitter and Square
Bill Gates: Microsoft Jack Ma:Alibaba Group
Jeff Bezos:CEO, Amazon Mark Zuckerberg:Facebook
Satya Nadella:CEO, Microsoft
What is strategy?
★ Strategy is a set of related actions that managers take to increase their companies’ performance.
What is Management by Objective:(MBO):
★ Management by objectives (MBO) is a management model that aims to improve the performance
of an organization by clearly defining objectives that are agreed to by both management and
employees. According to the theory, participation in goal setting and action plans encourages
participation and commitment among employees.
Steps in MBO:
The organization’s overall objectives and strategies are formulated.
Major objectives are allocated among divisional and departmental units.
Unit managers collaboratively set specific objectives for their units with their managers.
Specific objectives are collaboratively set with all department members.
Action plans, defining how objectives are to be achieved, are specified and agreed upon by
managers and employees.
The action plans are implemented.
Progress toward objectives is periodically reviewed, and feedback is provided.
Successful achievement of objectives is reinforced by performance-based rewards.
What is Negotiation?
★ A negotiation is a strategic discussion that resolves an issue in a way that both parties find
acceptable.
★ Negotiation is a process where two or more parties with different needs and goals discuss an issue
to find a mutually acceptable solution.
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Business Digest 185 Management(Basics of Management)
What is Leadership?
★ Leadership is the ability of an individual or a group of individuals to influence and guide followers
or other members of an organization, eg. Sheik Mujibibur Rahman and Mahatma Gandhi.
★ Leadership is the art of motivating a group of people to act towards achieving a common goal.
Define Scientific Management:
★ It is an approach that involves using the scientific method to find the “one best way” for a job to
be done.
What is Open-book management?
★ A motivational approach in which an organization’s financial statements (the “books”) are shared
with all employees.
What is Business model?
★ Business model is something that tells how a company is going to make money.
Procedure, rule and policy:
Procedure: A series of sequential steps used to respond to a well-structured problem.
Rule: An explicit statement that tells managers what can or cannot be done.
Policy: A guideline for making decisions.
What is Capabilities?
★ Capabilities are an organization’s skills and abilities in doing the work activities needed in its
business.
What is Core competencies?
★ Core competencies are the organization’s major value-creating capabilities that determine its
competitive weapons.
Define BCG matrix
★ It is a strategy tool that guides resource allocation decisions on the basis of market share and
growth rate of SBUs.
What is First mover?
★ First mover can be an organization that’s first to bring a product innovation to the market or to use
a new process innovation.
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Business Digest 186 Management(Basics of Management)
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Business Digest 188 Management(Basics of Management)
★ The phenomenon explains that If you take a frog and put it in a pot of extremely hot water, it's
obvious that frog will jump and try to get out of the water. However, if you put that same frog in a
pot of water that is tepid, and turn the heat on very low, that frog will lay there very quietly; and as
the water gradually heats up the frog will calmly fall in a state of unconsciousness; and eventually
allow itself to be boiled to death.
★ Well a big reason why the Frog did not jump is due to the fact his threat sensing capability is
generated by unexpected changes, not slow ones but changes that are gradual.
★ The whole inference is that we as a whole should try and identify the threats of our survival at an
early stage when we still have time to plan rather than react to that particular threat; which will be
too late.
How to go global:
1.Global sourcing: Global sourcing is purchasing materials or labour from around the world
wherever it is cheapest.
2.Export-Import: Exporting is making products domestically and selling them abroad.
Importing is acquiring products made abroad and selling them domestically.
3.Licencing: Licensing is used by manufacturing organizations that make or sell another
company’s products and gives that organization the right to use the company’s brand name,
technology, or product specifications.
4.Franchising: Franchising is similar but is usually used by service organizations that want to
use another company’s name and operating methods.
5.Strategic Alliance: Global strategic alliance is a partnership between an organization and
foreign company partners in which they share resources and knowledge to develop new
products or build facilities.
6.Joint Venture: Joint venture is a specific type of strategic alliance in which the partners agree
to form a separate, independent organization for some business purpose.
7.Foreign subsidiary: Foreign subsidiary is a direct investment in a foreign country that a
company creates by establishing a separate and independent facility or office.
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Business Digest 189 Mangement (Managers and Employees)
Define Manager:
★ Manager is someone who coordinates and oversees the work of other people so that organizational
goals can be accomplished.
★ Manager manages in three ways: by managing actions directly, by managing people who take
action, and by managing information that impels people to take action.
Define First-line managers:
They are the lowest level of management. First-line managers manage the work of nonmanagerial
employees who typically are involved with producing the organization’s products or servicing the
organization’s customers.
First-line managers may be called supervisors or even shift managers, district managers,
department managers, or office managers.
What are the Managers’ roles?
•Interpersonal roles: involve people and other ceremonial/symbolic duties
•Informational roles: involve collecting, receiving, and disseminating information
•Decisional roles: involve making choices.
What are the Managerial skills?
Technical (job-specific knowledge and techniques), Technical skills are most important for lower-
level managers.
Human (ability to work well with people), Human skills are equally important for all.
Conceptual (ability to think and express ideas), conceptual skills are most important for top
managers.
Effective vs Efficient Manager:
► Efficient means accomplishing the task in the least amount of time possible with the least
amount of resources possible, by utilizing certain time-saving strategies.
► The difference between effectiveness and efficiency can be summed up shortly, sweetly and
succinctly – Being effective is about doing the right things, while being efficient is about doing
things right.
► For example, if you were to call someone an effective speaker, you might think of someone
who is convincing or persuasive, someone whom people understand, someone who is
relatable, etc.
► Conversely, if you were to call someone an efficient speaker, you might think of someone who
says what needs to be said and nothing more. He or she gets to the point and doesn’t waste
time with small talk or pleasantries.
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Business Digest 190 Mangement (Managers and Employees)
Leader vs Manager:
★ leader is the one who inspires, encourages and influence his men, to work willingly, in the
attainment of the organization’s objectives whereas a manager manages people and resources
to ensure things are done as aforementioned; a person who manages the organisation and is
responsible for planning, direction, coordination and control.
Executives vs Managers:
★ Managers are the people who plan, decide, organise, lead and control the performances.
Executives are to implement the policies and programs, which have been approved by the top
management.
Define Self-efficacy:
★ Self-efficacy refers to an individual’s belief that he or she is capable of performing a task. The
higher your self-efficacy, the more confidence you have in your ability to succeed in a task.
Discuss various leadership styles:
Autocratic style: A leader who dictates work methods, makes unilateral decisions, and limits
employee participation.
Democratic style: A leader who involves employees in decision making, delegates authority,
and uses feedback as an opportunity for coaching employees.
Define Laissez-faire style: A leader who lets the group make decisions and complete the work
in whatever way it sees fit.
Transactional leaders: Leaders who lead primarily by using social exchanges (or
transactions).
Transformational leaders: Leaders who stimulate and inspire (transform) followers to
achieve extraordinary outcomes.
Charismatic leader: An enthusiastic, self-confident leader whose personality and actions
influence people to behave in certain ways.
Visionary leadership: The ability to create and articulate a realistic, credible, and attractive
vision of the future that improves upon the present situation.
What is Committee?
★ A group of persons convened for the accomplishment of some specific purpose, typically with
formal protocols
★ The Committees are the association of organizational people who come together to analyse,
investigate and discuss the issues of concern and reach to the final conclusion.
What is change agent?
★ A change agent is a person from inside or outside the organization who helps an organization
transform itself by focusing on such matters as organizational effectiveness, improvement,
and development.
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Business Digest 191 Mangement (Managers and Employees)
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Business Digest 192 Management(Organisation)
★ An organizational chart is a diagram that shows the structure of an organization and the
relationships and relative ranks of its parts and positions/jobs.
Types of organizational structure:
► Line organizational structure:Authority flows directly and vertically from the top of the
managerial hierarchy ‘down to different levels of managers
► Functional authority organizational structure: In such, Functions are divided such as finance,
production, sales, personnel, office and research and development and each of functions are
performed by an expert. It was evolved by F. W. Taylor.
► Matrix organisational structure:In which the reporting relationships are set up as a grid, or
matrix, rather than in the traditional hierarchy. In other words, employees have dual reporting
relationships - generally to both a functional manager and a product manager.
Vision vs Mission:
► Vision is a company’s defined future desired state. It defines what the company would like to
achieve
► Mission is the purpose of the company or a statement of what the company strive to do
► Mission answers the question “Why do we exist?” Vision answers the question “What will the
future look like as we fulfil our mission? What will be different?” While mission is about
today, vision is about the future, what we will become.
Define Vision Statement:
★ A mission statement is a short statement of an organization's purpose, what its overall goal is,
identifying the goal of its operations:what kind of product or service it provides, its primary
customers or market, and its geographical region of operation.
Centralization vs Decentralization:
Centralization Decentralization
The retention of powers and authority with The dissemination of authority,
respect to planning and decisions, with the top responsibility and accountability to
management, is known as Centralization. the various management levels, is
known as Decentralization.
Define Authority:
★ Authority is the rights inherent in a managerial position to tell people what to do and to expect
them to do it.
Define Chain of Command:
★ Chain of command is the line of authority extending from upper organizational levels to the lowest
levels, which clarifies who reports to whom.
Define Line authority:
★ Such authority that entitles a manager to direct the work of an employee.
What is Means-ends chain?
★ It is an integrated network of goals in which the accomplishment of goals at one level serves as the
means for achieving the goals, or ends, at the next level.
Goal vs Objective:
► Goal is long term whereas objective is mid or short term
► Goal gives a general statement firm's purpose, objectives are more concrete and specific in
how the goal will be achieved
► Goals are the agreed outcomes of a project whilst SMART (Specific, Measurable, Articulate,
Reasonable and Timely) performance objectives are the set of operations that need to take
place for achieving the project goal.
► "I want to achieve success in the field of genetic research and do what no one has ever done.
" This is a goal. "I want to complete the thesis on genetic research within this month. " This is
an objective.
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Business Digest 194 Management(Motivation)
Motivation:
★ Motivation is the reason for people's actions, willingness and goals. It can be defined from
three perspectives
√Enthusiasm for doing something
√The need or reason for doing something
√Willingness to do something.
A) Maslow’s Need Hierarchy Theory:
★ According to this theory, once a given level of need is satisfied, it no longer serves to motivate
human being. Then, the next higher level of need has to be activated in order to motivate him.
Maslow identified five levels in his need hierarchy:
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Business Digest 196 Management (Communication)
★ Communication is the process of transmitting information from one person to another. It is the
act of sharing of ideas, facts, opinions, thoughts, messages or emotions to other people, in and
out the organisation, with the use of the channel to create mutual understanding and
confidence.
Modes of Communication:
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Business Digest 197 Management(Quality Management)
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Business Digest 198 Management(Project Management)
What is project?
★ Project is a temporary, well-defined, one-time endeavour
undertaken to create a unique product or service.
★ Project is defined as a specific, finite activity that produces an
observable and measurable result under certain pre-set
requirements.
What is project management?
★ Project management is the discipline of initiating, planning, executing, controlling, and closing the
work of a team to achieve specific goals and meet specific success criteria
What is project Charter?
★ A project charter is the statement of scope, objectives and people who are participating in a project.
It begins the process of defining the roles and responsibilities of those participants and outlines the
objectives and goals of the project. The charter also identifies the main stakeholders and defines the
authority of the project manager.
Define project scope:
★ Project scope is the part of project planning that involves determining and documenting a list of
specific project goals, deliverables, features, functions, tasks, deadlines, and ultimately costs. In
other words, it is what needs to be achieved and the work that must be done to deliver a project.
Core project Objectives:
►Required performance/Goals
►Within Budget Limit /Budget
►Within scheduled time/Scope
Criteria to choose a project:
√Realistic goal, objectives, limitations and associated risk
√Capability of the firm internally and externally
√Flexible enough to modify if needed
√Ease of use in understanding, executing and measuring
√Economically profitable
What is Real Option?
★ A real option is a project choice made available to the managers of a company with respect to
business investment opportunities. It is referred as “real” because it typically refers projects
involving a tangible asset instead of a financial instrument.
★ Real options may be classified into different groups. The most common types are:option to expand,
option to abandon, option to wait, option to switch, and option to contract.
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Business Digest 199 Management(Project Management)
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Business Digest 200 Management(Project Management)
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Business Digest 201 Management(Project Management)
PERT VS CPM:
PERT CPM
Used to manage uncertain activities of a project. Used to manage well defined activities of a project.
Research and Development Project Non-research projects like civil construction, ship
building etc.
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Business Digest
Basic of Human Human Resource Management, Human Resource Planning or HRP, 202-204
Resource Human Resources Management System (HRMS), Why it is called Human
Management Resource, the main task of HR Manager, Objective of HR, Demonstrate
HR Model, Performance Management, Difference between PM and HRM,
Difference between Management and Administration, Group vs Team,
Blue-collar vs White collar vs Gold- Collar employee, Think Tank,
turnover rate, brain drain, Difference between salary and incentives and
wages
Recruitment and Recruitment And Selection, Difference between Recruitment and 205-207
Selection Selection Talent Management,
Resume vs CV vs Bio-data, job requisition, Job Design, Enlargement,
Specification and Evaluation, Job analysis vs Job description vs Job
rotation vs Job enlargement vs Job enrichment, Difference between Job
analysis and Job description, Difference Between Job description and Job
specification, Replacement charts, Job enlargement vs Job enrichment, Job
satisfaction vs Job involvement, Probationary Period, cognitive ability,
Succession Planning, Fringe benefits
Career and Job vs Career, Job Shadowing, on-boarding, Difference between Training 208
Training and Development, Different types of training method, internship
Appraisal and Performance Appraisal, How Do You Endow With Performance 209-210
Evaluation Appraisal, Types of performance evaluation method, Key Performance
Indicator (KPI), Some indicators of KPI
Employee Differentiate Personality, perception, beliefs and attitudes, values and 211-212
Behaviour and custom, Emotional Intelligence, Hawthorne effect, Aptitude Testing,
Relationship Prima facie, Johari Window, Intelligence Quotient (IQ)
Some Frequently If You Were Hiring A Person For The Job, what Would You Look For
Are You Willing To Show Interest Towards The Organization Ahead Of Your Own 213-215
Asked Interview Tell us your Ability To Work Under Pressure
Questions What is more Important To You, The Money Or The Work
What are your strengths and weaknesses
What are your strong points or What are your strengths
What are the difference between hard work and smart work
How Long Would You Expect To Work For Us If Hired
How do you work under pressure, Can you handle the pressure
Employee Retention
How much salary you expect
Your interview is more or less coming to an end when the interviewer asks you, “Do you
have any questions for me ”
Give me an example of your creativity
Why should I hire you
Why do you want to work at our company
What are the difference between confidence and over confidence
What are the three things that are most important for you in a job
Are You A Team Player
Why Did You Choose Hr
Why Do Want To Make Your Career In Hr
What are the Difference Between Job Role And Job Profile
Have You Ever Had To Fire Anyone
How Did You Feel About That
What will you do if the most performing employee in your team is leaving the organization
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Business Digest 202 HRM ( Basics of HRM )
What is HRM?
► Human Resource Management is the set of organizational activities directed at attracting,
developing and maintaining an effective workforce.
► Human Resource Management is the process of recruiting, selecting, inducting employees,
providing orientation, imparting training and development, appraising the performance of
employees.
What is Human Resource Planning or HRP?
★ It is the ongoing, continuous process of systematic planning to achieve optimum use of an
organization's most valuable asset, i,e; its human resources.
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Business Digest 203 HRM ( Basics of HRM )
The main difference is that PM was reactive, focused on the immediate and short-term needs of
the labour force of an organization while HRM expanded into a proactive strategy of aligning
the needs of the workforce to the strategic objectives of the organization
Difference between Management and Administration:
Basis Management Administration
Meaning Management is an executive Administration is a decision-making
function. Management is focused function. The administration is focused
on "doing" because managers get on "thinking" because it is determining
work done under Administrative the plans and policies
supervision
Authority Middle and Lower Level Top level
Role Executive Decisive
Concerned with Policy Implementation Policy Formulation
Area of operation It works under administration. It has full control over the activities of
the organization.
Focus on Managing work Making best possible allocation of
limited resources.
Key person Manager Administrator
Represents Employees, who work for Owners, who get a return on the capital
remuneration invested by them.
Function Executive and Governing Legislative a
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Business Digest 204 HRM ( Basics of HRM )
Group vs Team:
Group Team
A group is a collection of mutually A team is an interdependent group of
independent individuals with separate individuals who share responsibility and are
goals who are brought together by focused on a common goal.
common interests and experience.
Individually Mutually
Blue-collar vs White collar vs Gold- Collar employee:
★ A "Blue-collar worker" is a member of the working class, who performs manual labour and
earns an hourly wage. It is the low-class Job.
★ White-Collar means a salaried professional, typically referring to general office workers and
management
★ Gold-collar employees are highly skilled professionals who may be in high demand, such as
engineers, doctors and lawyers.
Define Think Tank:
★ A think tank or think factory or policy institute is a research institute/centre or organization that
performs research and advocacy on concerning topics such as social policy, political strategy,
economics, military, technology, and culture.
What is turnover rate?
★ Turnover rate refers to the percentage of employees leaving a company within a certain period
of time.
Define brain drain:
★ Brain drain is the movement of skilled individuals from a less developed area to a more
developed area, by which a country or area loses it most talented and educated workers to other
countries or areas.
Difference between salary and incentives and wages:
Salary Incentive Wage
Salary is well-defined Incentives are given according Wage is the variable amount of
through the contract or the to extra work depending on the compensation which is paid on the basis of
agreement between two performance and quality. hours spent in finishing a certain amount of
parties. work
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Business Digest 205 HRM( Recruitment and selection)
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Business Digest 206 HRM( Recruitment and selection)
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Business Digest 207 HRM( Recruitment and selection)
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Business Digest 208 HRM (Career and Training )
Job vs Career:
JOB CAREER
A job is an activity or task performed by an A career can be defined as a journey of a
individual to earn livelihood. work life of an individual.
Short term Long term
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Business Digest 209 HRM (Appraisal and Evaluation)
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Business Digest 210 HRM (Appraisal and Evaluation)
☛ Essay Evaluation Method: In the essay method of evaluation the appraiser writes an
elaborate statement about the employee who is being evaluated.
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Business Digest 211 HRM( Employee Behaviour and Relationship))
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Business Digest 212 HRM( Employee Behaviour and Relationship))
★Heuristics are the rules of thumb that managers use to simplify decisions.
► Confirmation bias:Tendency to search for, interpret, favor, and recall information in a
way that confirms one's pre-existing beliefs or hypotheses.
► Availability heuristic:Mental shortcut that relies on immediate examples that come to a
given person's mind when evaluating a specific topic, concept, method or decision
► Anchoring:A cognitive bias for an individual to rely too heavily on an initial piece of
information offered (known as the "anchor") when making decisions.
► Availability heuristic:Mental shortcut that relies on immediate examples that come to a given
person's mind when evaluating a specific topic, concept, method or decision
► Anchoring:A cognitive bias for an individual to rely too heavily on an initial piece of
information offered (known as the "anchor") when making decisions.
► Halo effect:A consumer's bias toward a maker's products because of a favorable experience
with their other products. In another way, it means drawing a general impression about an
individual on the basis of a single characteristic.
► Sunk cost fallacy/Escalation of commitment:A human behavior pattern in which an
individual or group facing increasingly negative outcomes from a decision, action, or
investment nevertheless continues the behavior instead of altering course.
► Selective Perception:People selectively interpret what they see on the basis of their interest,
background, experience, and attitudes.
► Contrast Effects:Evaluations of a person’s characteristics that are affected by comparisons
with other people recently encountered who rank higher or lower on the same characteristics.
► Projection:Attributing one’s own characteristics to other people
► Stereotyping:Judging someone on the basis of one’s perception of the group to which that
person belongs.
Big five personality model:
★ The big five personality model identifies five types of personalities and every individual
fall into at least one of these types.
1.Openness to Experience:Intellectually curious, creativity and a preference for novelty and
variety within a person.
2.Conscientiousness:It is the tendency of being standardized, self-disciplined, and prioritizing
planned instead of spontaneous behaviour.
3.Extraversion:Positive energy, positive emotions, confidence, sociability and the tendency to
explore stimulation in the organization with others.
4.Agreeableness:Agreeableness is the tendency of being compassionate and cooperative instead
of suspicious and antagonistic towards each other.
5.Emotional Stability:It contradicts sensitive or nervous nature with secure or confident
one.
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Business Digest 213 HRM( FAQ)
If You Were Hiring A Person For This Job, What Would You Look For?
★ In my point of view, I would recommend the following things:
►Required skills for the role
►Team player
►Pro-activeness
►Loyalty to the work.
Are You Willing To Show Interest Towards The Organization Ahead Of Your Own?
★ Yes, but in return I would expect the organization to take care of my needs as an individual.
What Is Your Ability To Work Under Pressure?
★ I have always enjoyed working under pressure. It is like a tonic, which boosts me, but I always
keep it under control so it does not take a toll on me.
What Is More Important To You: The Money Or The Work?
★ Money and work both are like siblings. However, I believe that when you work hard, you
could earn more. Therefore, work is more important than money. It is the hard work that can
help you put another feather in your success cap.
What are your strengths and weaknesses?
★ Possible Answer: “I have several strengths namely – I am patient, committed, honest and
self-motivated. I am the biggest dreamer I have ever come across! I forgive easily and hate to
keep grudges in my heart. My greatest weakness is that I don't like getting interrupted when I
am seriously into something. Another one of my weaknesses is that I trust people very easily.
As I already said, I am a very patient person, so I am actively working on this lacuna.”
“I am a perfectionist and that is my main weakness, which I also think is my strength.”
What are your strong points? or What are your strengths?
★ “I’ve been told that I’m a very good manager. My team tells me that I give them a lot of
freedom in how to do their work, which they really appreciate. They also say that I’m really
enthusiastic, so when we’re faced with too much work, they tell me that my manner really
helps to keep them motivated and calm. My boss also tells me that I’m very innovative in
terms of finding new ways of working that cut out inefficiency.”
What is the difference between hard work and smart work?
★ Hard work is delivering work on time with more effort and smart work is delivering work on
time, with lesser effort. I feel that is the basic difference. Most of the times, in the corporate
world, I feel a combination of both is needed to attain excellence.” good people. When
there's no other way, I’ve found its better for all concerned to act decisively in getting
rid of offenders who won't change their ways."
How Long Would You Expect To Work For Us If Hired?
★ I will be satisfied until the time I am able to learn and contribute and my contribution's are
recognized.
★
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Business Digest 214 HRM( FAQ)
How do you work under pressure? Can you handle the pressure?
★ Possible Answer #1: “Working under pressure is what I have done a lot during my college
days. I have realized that I can actually work well under pressure. It is the pressure factor that
brings out maximum efficiency in me.”
What Is Employee Retention?
★ Keeping your key, quality employees happily so that, the company would not lose them to the
peer, competitive companies.
How much salary you expect?
★ Sir as a fresher, my priority is to gain knowledge and experience. I will accept the salary which
is stated according to the company's norms.
Your interview is more or less coming to an end when the interviewer asks
you, “Do you have any questions for me?”
★ Never say “no” as this is perhaps the worst response ever given by any interview candidate!
Remember that interviews are not integrations but are business conversations where both the
parties should ask and respond to questions. Coming back to the situation, the best answer for a
fresher is as follows:
★ Possible Answer #1: “Yes, I do!” This is probably your very first chance during the interview,
to ask a question. Questioning will indicate that as a fresher, you came well-prepared for the
interview and you are still absorbed in the conversation. It will also show that you do take
interest in the organization. Make a general list of five questions (such as the secret of success
of the company, what they want from the employees etc) about the company and ask them to
your interviewer, after all other HR interview questions and answers are over.
Give me an example of your creativity:
★ Possible Answer #1: “I can’t exactly recollect. Since I am hoping to become a software
developer, I have to be creative at all times. Writing code not only requires technical expertise
and logic but also creativity to a great extent. Only then the solutions developed will be
flexible and be accommodating.”
★ Possible Answer #2: “Recently, the company that I work for, inaugurated a new store. On the
day of the opening, the air conditioning of the outlet failed. In order to keep all the new
customers comfortable, I immediately cracked the idea of organizing a sidewalk open-air sale!
It was a life saver as the shop was super-hot inside. This is an example of how resourceful and
creative I can be when the situation demands!”
Why should I hire you?
★ Sir, as I'm fresher I need the best platform to improve myself and you need hard work and
dedicated person. So, I hope this company deserves me. As it was my 1st platform I never quit
because my motto is :to never give up in any difficulties.
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Business Digest 215 HRM( FAQ)
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Business Digest
“The invisible hand”, External Economies of Scale, Transfer Price, dumping, Types of 247-255
Trade Barriers, Protective Tariff, Import Quota, Local Content Requirement, Trade
Embargoes, Voluntary Export Restraints, Anti-dumping Measures, Countervailing
Measures, Safeguard Measure, Subsidies, Export Subsidies, Free Trade Agreements,
SAARC Preferential Trading Arrangement (SAPTA) (In force-1995), North American
International Trade Free Trade Agreement (NAFTA), Trade-Related Aspects of Intellectual Property
Rights (TRIPS), Foreign Aid vs foreign Loan, Purchasing and purchasing power
parity (PPP), FDI (Foreign Direct Investment), Some incentives that Bangladesh offer
to the foreign investors, Soft Loan, Cartel, Gresham Law, SDR (Special Drawing
Rights), The Bretton woods system, Why Bretton- System failed.
Foreign exchange, The objectives of Regulating Foreign Exchange Transactions, 256-258
Direct vs indirect quotation, the types of exchange rate, Foreign Exchange Market in
Foreign Exchange Bangladesh, Appreciation vs Depreciation vs Devaluation, Why devaluation sometime
pursued, Gold Standard, influence the variations and fluctuations in exchange rates,
Foreign exchange reserve and its components (Composition of foreign exchange
reserves), Three categoriesreserve currency, Advantages of holding a large amount of
foreign exchange reserves, Disadvantages of holding a large amount of foreign
exchange reserves, How does Bangladesh Bank create foreign exchange reserves
when it has a trade deficit always
Optimum theory of Population, Solow Growth model for long run, Endogenous 259-263
Theories of Growth Theory, The general theory (Keynes):Keynesian Theory:, IS-LM (Investment
Economics Savings- Liquidity-money) (Short-run), Classical vs Keynesian theory, Baumol-Tobin
model, Fisher’s Quantity theory of money, Modern Quantity Theory of Money
(Friedman), Permanent income hypothes(Friedman), Classical Theory (Adam smith,
David Ricardo, Thomas Malthus, Jean-Baptiste Say), Game Theory, Game theory and
prisonner’s dilemma
Normal and Economic profit,Cobb-Douglas production function,Production 264-270
Possibilities Frontier (PPF)? ,productive efficiency or inefficiency ,productive
efficiency or inefficiency ,Law of Diminishing Marginal Utility,Pareto
Efficiency,Indifference Curve,Indifference Curve,Properties of Indifference
Curves,Properties of Indifference Curves,Law of Increasing Opportunity
Costs,Increasing Returns to Scale,Law of Increasing Return,Law of Constant
Various Concepts Returns,Marginal Rate of Transformation ,Marginal Rate of Substitution ,Marginal
Rate of Substitution ,Marginal Propensity to Consume ,Marginal Propensity to
Consume ,Economies of Scale, Diseconomies of Scale, Economies of
Scope,Economies of Scale, Diseconomies of Scale, Economies of Scope,Keynesian
model,Keynesian model,Pigoue Effect,Income Effect,Substitution Effect,Contract
Curve,Contract Curve,Laffer Curve,Ratchet Effect ,Demonstration Effect,Okun's
Law,Supply creates its own demand,Assumptions of Say’s Law,Short vs long vs very
long run,Inside vs Outside Lag,Accounting vs Economic
profit,Hoarding,Capitalism,Mortgage,Vicious Cycle,Collective bargaining
agent ,Permanent-income-Hypothesis, Hypothesis, Absolute,Income,Hypothesis,
Mercantilism, Mercantilism, Monetarism , price/budget,line/constraints,price/budget
line/constraints,Lorenz Curve,Lorenz Curve,Diamond-Water Paradox,Kaldor-Hicks
CriterionPositive externalities,Phillips curve,Phillips curve,Paradox of Thrift,Kaldor-
Hicks Criterion, Permanent-income.
Tax return, Tax holiday, Tax holiday, Financial Year, Financial Year, Assessment 271-278
Year, Tax Base, Tax Bracken, Tax Break, Tax Burden, Direct Tax, Direct Tax,
Electronic Filing, Tax heaven, Tax heaven, Double Taxation, Estate ,Tax Deducted at
Source ,Classification of taxes, Other types tax, Regressive Tax, Tariff, Progressive
Taxation tax ,main causes of tax evasion and the creation of black money, Surcharge,
Collection of indirect tax in Bangladesh, Collection of direct Tax in Bangladesh, Sin
Tax, Carbon Tax, Carbon Tax, Wealth tax,Flat Tax (unit tax),Negative income tax,
National Board of Revenue and its structure, Functions of Introflection in 2017-
2018 ,Tax not collected by NBR,Tax not collected by NBR, Different tax rates in
Bangladesh ,Different tax rates in Bangladesh ,Individual Income Tax, Other tax rates
in Bangladesh ,Country Comparison for corporate taxation
Economics and Economic Growth, Growth vs Development, Sustainable Economic Growth. 279-280
development Sustainable Development, 3 Pillars of Sustainable Development, Big-Push Theory,
Human Development Index HDI, four divisions of the Ministry of Finance, economic
development models, Bail-out vs Bail-in, Nationalization vs Privatization,
Nationalization vs Privatization. Public- Private Partnership, financial inclusion,
Challenges for the economy of Bangladesh
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Business Digest 216 Economics (Basics of Economics)
What is Economics?
★ Economics is the study of the allocation of limited resources to satisfy unlimited human wants.
★ Economics is the science which studies human behaviour as a relationship between ends and scarce
means, which have alternative uses.
What is Microeconomics?
★ Microeconomics is a branch of economics that studies individuals, households and firms' behaviour
in decision making and allocation of scarce resources. It generally applies to markets of goods and
services and deals with individual and economic issues.
Macroeconomics: (3 pillars of macroeconomics)
► Macroeconomics is the branch of economics that studies the behaviour and performance of
economic indicators, especially gross domestic product, the inflation and the unemployment rate.
► It is the study of how these variables are determined, why they change over time and how they
interact with each other.
► Macroeconomics looks at the economy as a whole.
Positive vs Normative economies:
√ Positive economics is a stream of economics that focuses on the description, quantification and
explanation of economic developments based on objective data analysis, relevant facts and
associated figures.
√ Normative economics looks at how the economy should be or should have been rather than how it
actually is or was–it suggests policies for improving economic welfare based on ideological, opinion
-oriented, prescriptive, value judgments and "what should be" statements.
√ Positive economics is objective and fact based, while normative economics is subjective and value
based.
√ Positive economics explains how economy works or predicts some future trends by examining cause
-effect relationship.
√ Normative economics deals with social welfare and policy recommendations. It is concerned with
what should be.
Welfare Economics:
★ Welfare economics is a branch of economics that focuses not only on efficiency, but also improving
human welfare and social conditions. Often known as economics with a heart, it is done principally
through the optimum distribution of wealth – the best allocation of resources.
First Fundamental Theorem of Welfare Economics:
★ The first fundamental theorem of welfare economics (also known as the “Invisible Hand Theorem”)
states that any competitive equilibrium leads to a pareto efficient allocation of resources. Pareto
efficiency can be defined as efficiency where society would not find another allocation that is
unanimously better.
★ The main idea here is that markets lead to social optimum. Thus, no intervention of the government
is required, and it should adopt only “laissez faire” policies.
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Business Digest 217 Economics (Basics of Economics)
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Business Digest 219 Economics (Basics of Economics)
Merit goods:
★ Merit Goods are socially desirable goods which are either under-produced or under-consumed due
to positive externalities and market. For example; education, vaccination, museum, health care.
Main 2 characteristics of merit goods are:
√ People underestimate true personal benefit. For example, people underestimate the benefit of
education or getting vaccination.
√ Merit goods have a positive externality.
Poverty, Primary vs Absolute vs Relative poverty:
√ Poverty is not having enough money or access to resources to enjoy a decent standard of living
such as lack of access to healthcare, education or water and sanitation facilities etc.
√ Primary poverty means not having enough money to meet basic needs. It can also be considered
as ‘living below the poverty line.’
√ Someone is absolutely poor if his income does not allow him to consume enough to purchase a
minimum bundle of consumer goods and services.
√ On the other hand, a person/household is in relative poverty if his income is considerably lower
than the median level of income within a country or society.
Poverty Trap and Poverty Gap:
► Poverty trap is a mechanism which makes it very difficult for people to escape poverty. A poverty
trap is created when an economic system requires a significant amount of various forms of capital
in order to earn enough to escape poverty.
► When individuals lack this capital, they may also find it difficult to acquire it, creating a self-
reinforcing cycle of poverty.
► Poverty Gap is the average shortfall of the total population from the poverty line. This
measurement is used to reflect the intensity of poverty.
Endogenous vs Exogenous variable:
★ Endogenous variable are those variables that a model tries to explain and exogenous variables are
those variables that a model takes as given.
What is opportunity Cost?
★ Opportunity cost is the value of the next best alternative that is forfeited when a choice is made. It
is the price of the next best thing one could have done if he had not made his first choice.
What is scarcity?
★ It is the condition in which our wants are greater than the limited resources available to satisfy
those wants.
What is deficit?
★ When a government, business, or household spends more in a given period of time than they
generate in income, the situation is called deficit.
What is Multiplier?
► Multiplier refers to an economic factor that, when increased or changed, causes increases or
changes in many other related economic variables.
► It’s a factor, the change of which, causes chain reaction of activities that stimulate the economy.
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Business Digest 220 Economics (Basics of Economics)
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Business Digest 221 Economics (Basics of Economics)
Business Cycle:
★ The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle
is a useful tool for analysing the economy.
★ It is the fluctuations in economic activity, such as employment and production.
Consumer Surplus; Producer Surplus; Total Surplus:
★ Consumer surplus is defined as the
difference between the total amount that
consumers are willing and able to pay for a
good or service and the total amount that
they actually pay.
★ The Producer Surplus is the area under
the supply curve that represents the
positive difference between the price at
which a producer is willing and able to
sell a product and the price at which
producer sells it.
★ Total surplus, also known as economic
surplus or economic welfare, is the sum of producer surplus and consumer surplus.
Blue Economy Initiative:
★ It involves integrated development strategy for fisheries, aquaculture, marine tourism and
ecosystem preserving local system of production and consumption, using the ocean resources,
without harming the interest of future generation.
★ Sustainable development of blue economy is possible through utilization of the existing natural and
mineral resources in the Bay of Bengal and its adjoining oceans.
Stock vs Flow:
★ Stock is a quantity which is measurable at a particular point of time. It is the stock of accumulated
capital. Like a balance-sheet
★ Flow is a quantity which is measured with reference to a period of time. Examples of flow variables
are national income, expenditure, savings, depreciation, interest, exports, imports, change in
inventories.
LDC (Least Developed Country):
► LDC (Least Developed Country) are the countries whose 80% population depends on
agriculture, more than half of population are unemployed, most of the people are the
victim of malnutrition & the illiteracy rate is high.
► Bangladesh got listed as a member of LDC in 1975 and expectedly is going to get out
in 1924.
► Five countries have already got out of the list and Equatorial Gini is the latest one.
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Business Digest 222 Economics(Market)
Market:
★ Market is a mechanism through which buyers and sellers interact to set prices and exchange goods
and services.
What is price mechanism?
★ Price mechanism refers to the system where the forces of demand and supply determine and change
the prices of commodities.
★ It is the buyers and sellers who actually determine the price of a commodity. A price mechanism
affects both buyers and sellers who negotiate prices.
What is price discrimination?
★ Price discrimination refers to the charging of different prices by the monopolist for the same
product, for reasons not associated with cost or supply.
★ In pure price discrimination, the seller charges each customer the maximum price he or she will
pay.
What is shadow price?
★ Shadow price is the price indicating the intrinsic or true value or real economic price of a factor/
product/projects/activities/goods, or services that sometimes may have no market price or may
deviate from market price. These prices may be different for different time periods and
geographically different areas (in the case of labour).
★ Shadow price is sometimes represented as the proxy value of a good or project.
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Business Digest 223 Economics(Market)
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Business Digest 224 Economics(Market)
► Unitary Elastic Demand (Ep=1):The demand is said to be unitary elastic if the percentage
change in quantity demanded is equal to the percentage change in price. The numerical value
for unitary elastic demand is equal to one (ep=1). The demand curve for unitary elastic
demand is represented as a rectangular hyperbola.
► Cross Elasticity of Demand:The cross elasticity of demand or cross-price elasticity of
demand measures the responsiveness of the quantity demanded for a good to a change in the
price of another good (e. g. Good Y) keeping other things unchanged.
► Income Elasticity of Demand:Income elasticity of demand measures the responsiveness of
the quantity demanded for a good or service to a change in real income of consumers who
buy this good, keeping all other things constant.
► Positive Income Elasticity of Demand:It refers to a situation when the demand for a product
increases with increase in consumer’s income and decreases with decrease in consumer’s
income. The income elasticity of demand is positive for normal goods.
Negative Income Elasticity of Demand:(Giffen Goods) :
√ Negative income elasticity refers to a kind of income elasticity of demand in which the
demand for a product decreases with increase in consumer’s income. The income elasticity of
demand is negative for inferior goods, also known as Giffen goods.
√ Zero Income Elasticity of Demand:In this case there is no effect of change in consumer’s
income on the demand of product. The income elasticity of demand is zero (ey = 0) in case of
essential goods.
√ Price Elasticity of Supply:Price elasticity of supply is a measure of responsiveness of the
quantity supplied of a good or service to a change in its price.
Who is a Price taker?
or company that has no control to dictate prices for a good or service.
★ A price taker is a person
All economic participants are considered to be price-takers in a market of perfect
competition.
What is Monopoly?
★ Monopoly is a market structure characterized by a single seller, selling a unique product in the
market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods
with no close substitute. In this market producer enjoys the power of setting the price for his
goods.
What is Duopoly?
★ Duopoly is a form of oligopoly. In its purest form two firms control all of the market, but in reality,
the term duopoly is used to describe any market where two firms dominate.
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Business Digest 225 Economics(Market)
★ A price ceiling is the government mandated maximum price a seller is allowed to charge for a
product or service.
★ A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the
government to prevent prices from being too low. A price floor must be higher than the
equilibrium price in order to be effective.
Open Market vs Free Market:
Open market is an economic system with no trade barriers between countries. The term ‘open
market’ is used in international trade.
Free market is an economic system where price level is determined by the interaction of demand
and supply. The term ‘free market’ is used in capitalism.
What is Perfect competition?
★ Perfect competition describes a market structure where competition is at its greatest possible level.
To make it clearer, a market which exhibits the following characteristics in its structure is said to
show perfect competition:
Large number of buyers and sellers
Homogenous product is produced by every firm
Free entry and exit of firms
Zero advertising & transportation cost
Absence of Government and artificial restrictions
Every firm is a price taker.
What is Oligopolistic competition?
★ Oligopoly refers to a market structure in which a few firms control the supply of a commodity.
The competing firms are few in number but each one is large enough so as to be able to affect
the total industry output and none of which can keep the others from having significant
influence.
What is Monopolistic competition?
► Monopolistic competition is a market structure which combines elements of monopoly and
competitive markets.
► In Monopolistic Competition, there are many small firms who all have minimal shares of the
market. Firms have many competitors, but each one sells a slightly different product. Firms are
neither price takers (perfect competition) nor price makers (monopolies).
► There are no barriers to entry. It ensures that there are neither supernormal profits nor any
supernormal losses to a firm in the long run. (Nike, Adidas, New Balance, ASICS, etc. ).
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Business Digest 226 Economics( Inflation)
‘Inflation is a disease that can wreck a society’— US economist Milton Friedman (received the Nobel
Prize in Economics in 1976)
What is inflation?
►Inflation is the overall rise in the price level that reduces the purchasing power of that country’s
currency.
►It refers to the measure or rate by which the cost of goods and services rises and purchasing
power declines.
►Inflation might take place due to the increases in the money supply or excess demand or supplu
shortage or rises in public expenditure etc.
What is deflation?
★ Deflation is defined as the decrease in the average price level of goods and services. It means a
general decrease in consumer prices and assets, but the increase in the value of money. If the
inflation rate is negative, i.e., below 0%, then the economy is experiencing deflation.
Types/Reason of Inflation:
★ Cost-push inflation: Inflation caused by persistent rises in costs of production.
★ Demand-pull inflation: Inflation caused by persistent rises in aggregate demand.
Types of inflation (Based on mode):
√Mild inflation: When price level increase slowly.
√Galloping inflation: When price level increases rapidly.
Types of Inflation (Based on extent):
㊣ Creeping Inflation: A sustained rise in price level generally less than 3% per year.
㊣ Walking Inflation:3% to 6% per year
㊣ Running Inflation: around 10% per year
㊣ Hyperinflation:20% to 30% or more (Inflation in Argentina and Brazil during 1970-80 was 50% to
700%; Zimbabwe also experienced hyperinflation recently).
Types of Inflation (Based on calculation method):
► Point to Point Inflation: Point to point inflation is the percentage change in the CPI during the last
12 months (e. g. 1 march 2017 to 1 march 2018). The general point-to-point inflation rate of
Bangladesh was recorded to be 5. 54 percentage point in June, 2018.
► Average Inflation (12 months moving average): It is the percentage difference, between the
average Price Index of last 12 months and the average Price Index of previous 12 months.
► In the 2017-2018 financial year, the average general inflation of Bangladesh was 5. 78%. [As per
the Bangladesh Bureau].
Methods of calculating inflation:
㊣Consumer Price Index (from consumers’ point of view)
㊣Wholesale price Index (used by Government, banks, industry)
㊣GDP deflator.
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Business Digest 227 Economics( Inflation)
CPI WPI
Considers commodities, at retail level. Considers commodities at wholesale level
Measured at final stage of transaction Measured at first stage of transaction
Covers Goods and Services Goods only
Focuses on prices of goods purchased Focuses on prices of goods traded between
by consumers. business houses.
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Business Digest 228 Economics( Inflation)
GDP Deflator:
★ It is the ratio of nominal GDP to real GDP. It reflects what’s happening to the overall price levels in
the economy.
★ It is a measure of the impact of inflation on the gross domestic product during a specified period,
usually a year.
What is inflation tax?
★ Inflation tax is not an actual legal tax paid to a government; instead "inflation tax" refers to the
penalty for holding cash at a time of high inflation. When the government prints more money or
reduces interest rates cash held in hand is worth less after inflation has risen. The decrease in the
value of cash is termed as inflation tax.
What are the social costs of expected Inflation?
► Epected inflation causes inflation tax on the amount of money people hold by someone.
► High inflation induces firms to change their prices more often. Changing prices is sometimes
costly
► Firms facing menu costs change prices infrequently: thus, the can not adjust the higher the rate
of inflation with high variability in relative price.
► Inflation can alter individual’s tax liability, often in the ways that lawmakers did not intend.
► Finally, it is inconvenient to live in a world with a changing price level.
Other costs of inflation:
★ Due to inflation, the purchasing power of the people decreases. So, the cost of living and the
cost of production increases.
★ Inflation tends to discourage investment & long-term economic growth.
★ It also reduces the value of savings.
CPI vs GDP deflator:
CPI GDP Deflator
Considers only goods and services bought Considers all the goods and services
by consumers produced
CPI includes anything bought by consumers GDP Deflator includes only domestic
including foreign goods. goods
CPI assigns fixed weights to the prices of GDP deflator frequently changes weights
goods
What are the benefits of inflation?
㊣ Moderate level of inflation allows economic growth and higher employment.
㊣ It helps in labour market since nominal wages can’t be cut and inflation causes the real wages fall
resulting the labour market in equilibrium. Without inflation real wage would be stuck above
equilibrium resulting higher unemployment.
㊣ Moderate inflation enables adjustment of prices and wages.
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Business Digest 229 Economics( Inflation)
★ If return form investment increase with inflation and if the borrower already owed the money
before the inflation occurred, the inflation benefits the borrower.
★ However, if wages/return do not increase with inflation, it benefits lenders (banks) because people
need more time to pay off their previous debts, allowing the lender to charge more interest on the
money. However, this could backfire if it results in higher default rates.
Define Shoe-Leather Cost:
★ Essentially, shoe-leather costs refer to the time and effort people take to minimize the effect of
inflation on the eroding purchasing power of money. People wear out their shoes on the way back
and forth to the bank, so to speak, trying to protect the value of their assets.
Define Fiscal Drag:
★ Fiscal drag occurs when earnings growth and inflation push more earners into higher tax brackets.
Consequently, the government’s tax revenue rises without any increases in tax rates. In other
words, fiscal drag is the automatic restraint applied to a fast-expanding economy under a
progressive tax system
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Business Digest 230 Economics( Inflation)
√ Interest refers to the payment made by the borrower to the lender of the capital for its use.
√ It is 'the premium which has to be offered to induce people to hold their wealth in some form
other than hoarded money.
√ The exchange rate between future consumption (future dollar) and current consumption (current
dollar) is the pure rate of interest.
√ In pure interest rate, there exists no inflation, no risk and no inconvenience.
Can Interest rate be below zero?
㊣ Negative interest rates can occur in high inflation environments particularly if inflation is growing
higher than interest being received on investment.
㊣ A negative interest rate means the lender is paying the individual or business to borrow money
from them, which means that borrowers get paid and savers are penalized. This strategy
stimulates borrowing and lending. During harsh economic times the central bank ensures
negative interest rate in order to stimulate investment, economic growth or infrastructural
development resulting in employment and growth.
㊣ Japan experienced negative interest rate 2 years ago to encourage investment.
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Business Digest 231 Economics(Unemployment )
Unemployment:
★ Unemployment is a situation when individuals who are employable (aged 15 to 64) and seeking a
job but are unable to find a job.
Types of unemployment:
√ Cyclical unemployment:It exists when individuals lose their jobs as a result of a downturn in
aggregate demand (AD).
√ Structural unemployment: It exists when certain industries closes/ changes their operation
procedure to adapt with changes in market infrastructure. This structural changes causes some job
cuts resulting unemployment.
√ Regional unemployment:When structural unemployment affects local areas of an economy, it is
called ‘regional’ unemployment.
√ Classical unemployment:when wages are ‘too’ high and employer cannot afford many employees
to be profitable
√ Seasonal unemployment:when certain industries only produce or distribute their products at
certain times of the year
√ Frictional unemployment:when workers lose their current job and are in the process of finding
another one.
√ Voluntary unemployment:when workers choose not to work at the current equilibrium wage rate.
What is disguised unemployment?
★ Disguised unemployment or hidden unemployment is a kind of unemployment where some people
seem to be employed but are actually not. For example, when 10 members of a farmer family
employed on small farm plot when 5 are enough. Those extra 5 members are actually unemployed
rather than being employed.
Natural Rate of Unemployment:
★ The natural rate of unemployment is the rate of unemployment when the labour market is in
equilibrium. It is the unemployment caused by frictional, structural, and surplus unemployment.
Full employment:
★ The economy is considered to be at full employment when the actual unemployment rate is equal
to the natural rate. When the economy is at full employment, real GDP is equal to potential real
GDP.
NAIRU (Non-Accelerating Inflation Rate of Unemployment)
★ The non-accelerating inflation rate of unemployment (NAIRU) is the specific unemployment rate
at which the rate of inflation stabilises. It refers to the level of unemployment at which the
economy settles if monetary policy is held stable.
★ According to Phillipe curve, unemployment rate has negative relation with inflation. Thus, NAIRU
helps in gauging the state of the business cycle, the outlook for future inflation, and the appropriate
stance of monetary policy.
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Business Digest 232 Economics(Domestic Production)
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Business Digest 233 Economics(Domestic Production)
►Excluded market transactions such as transfer payment, capital gains, illegal activities, second
hand sales.
►Practical difficulties in calculating imputed values
►Cost of environmental damage is excluded.
What are the methods of calculating national income?
★ Product method:Sum of total value of final goods and services produced in a country
★ Income method:Sum of net income payments received by all citizens of a country
★ Expenditure method:Sum of total expenditure incurred in a country in a particular year.
What is Gross domestic product (GDP), Real and nominal GDP?
★ Gross domestic product (GDP) is the value of all final goods and services produced in the
domestic economy during a specified period of time, usually a year. It includes domestic
production by foreigners and excludes foreign production by its citizen.
★ Real GDP is calculated by valuing outputs of different years at common prices.
★ Nominal GDP is calculated by valuing product in a particular year measured in that year’s prices
★ Net domestic product (NDP)= GDP minus the value of the depreciation of the country’s capital goods.
What is Gross National Product (GNP) and Net National Product (NNP)?
★ GNP is the sum of market value of all final goods and services produced by citizens of a country
during the year. GNP includes foreign production by citizens and excludes domestic production by
foreigners.
★ Net national product (NNP)= GNP minus the value of the depreciation of the country’s capital
goods.
Natural GDP Level:
★ Natural GDP is the optimum level of production of goods and services in an economy in a year,
given the existence of natural rate of unemployment, no supply/demand shocks and pre-existing
various natural and institutional constraints.
Limitation of GDP:
It can’t measure the quality of life
Exclusion of non-market transaction (babysitting, lawn mowing, illegal drug sales)
The failure to incorporate the degree of inequality in income
Failure to indicate whether the growth is sustainable or not
Failure to incorporate the cost on human health and environment
Alternative indicators:
★Human development index
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Business Digest 234 Economics(Domestic Production)
★ Economic growth (GDP growth) has a natural deflationary effect, even if the supply of money
does not actually shrink.
★ GDP is an imperfect representation of economic productivity. Rising economic productivity/
growth increases the value of money in circulation since each unit of currency can
subsequently be traded for more valuable goods and services.
★ In summary, when GDP increases , the money supply although remained unchgaed, results in
deflationary effect as the value of money increases
How the money supply affects GDP?
★ The long-run effects of an increase in the money supply are much more difficult to predict.
There is a strong historical tendency for asset prices, such as housing, stocks, etc. , to
artificially rise after too much money enters the economy. This means, the misallocation of
capital after large money supply leads to waste and speculative investments which often
results in burst bubbles and recession in the long run.
Can GDP become higher than GNP?
★ GDP can be higher than GNP if more foreigner/foreign investment come to the home country
and produce products and services worthier than the value of product and services produced
by domestic citizen residing in a foreign country.
What is Equilibrium level of output?
★ The equilibrium level of output is that level of output at which the total amount of planned
spending is just equal to the amount produced.
★ Equilibrium Level of Output is the level of output at which quantity of output produced (AS)
is equal to quantity demanded (AD).
What is Demand/Supply Shock?
An unexpected event that changes the demand or supply of a product or commodity due to
sudden change in its price is called demand shock or supply shock. The followings are some
examples of demand and supply shocks:
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Business Digest 235 Economics(Domestic Production)
★ If planned aggregate demand exceeds full employment output, the gap is called inflationary
gap and there will be upward pressure on prices (demand pull inflation). Govt. uses monetary
& fiscal policy to reduce aggregate demand in such situation.
★ If planned aggregate demand falls below the full employment output, the gap is called
deflationary gap and there will be downward pressure on prices. Government should use
monetary & fiscal policy to increase aggregate demand (as in the Great Depression).
Theory of Secular Stagnation:
1.Agriculture (14.10%)
3.Services (33.24%)
★ Gross domestic product (GDP) is the total value of output in an economy. Though, remittances
can be a source of GDP growth by increasing household consumption, it does not directly add
to GDP because the definition does not allow non-domestic production to include in GDP, but
it does affect GNP .
Define Consumption Function, Saving Functions and Investment function:
★ Consumption function is the formula laid out by famed economist John Keynes and it was
designed to show the relationship between real disposable income and consumer spending.
★ The saving function is a function which shows the relationship between savings and income
★ Investment function is a function that shows relationship between income and investment on
business.
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Accelerator vs Multiplier :
► Accelerator effect states that planned capital investment is linked positively to the past and
expected growth of national income
► Multiplier effect states that If there is an initial injection in input(e. g. a rise in exports), then the
final increase in aggregate demand and real GDP will be greater.
► While multiplier shows the effect of changes in investment on changes in income (and
employment), the accelerator shows the effect of a change in consumption on private investment.
What do you mean by Per Capita Income (PCI)?
★ In calculation of national Income, it must include some goods and services that are not traded in
the market place. Imputed value is an assumed value given to this untraded goods and services
such as
Value-added of meals cooked at home.
An unexpected event that changes the demand or supply of a product or commodity due to
sudden change in its price is called demand shock or supply shock. The followings are some
examples of demand and supply shocks:
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Business Digest 237 Economics( Monetary Policy )
★ Keeping balance with the fiscal policy, Bangladesh Bank has recently announced a contractionary
monetary policy statement for the second half (Jan-June) of the current fiscal year (2018-2019) to
control the supply of credits and inflation in a bid to maintain economic stability.
What happens if the government takes loan from BB/Private Bank?
★ From Bangladesh Bank: Money supply will increase, the country’s rate of inflation will increase.
★ From Private Bank: The individual or private investment in the country will decrease or fall
because the private entrepreneurs will be unable to avail loan facilities from the private banks.
With the downfall in the investment, the rate of unemployment increases. So, it becomes difficult
to continue the economic growth flow.
What is Dear money/Cheap money policy?
★ Dear money is the money that is expensive to borrow, because the rate of interest is high.
★ Cheap money is money that has been borrowed at a very low interest rate.
★ Cheap money policy is that monetary policy in which loans and advances are made available on
low interest rate and on easy terms. Reducing the CRR and Bank Rate are one of the main function
under cheap money policy when an economy is struggling
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Business Digest 238 Economics( Monetary Policy )
★ Dear money policy is the set of actions to restrict the volume of credit available in the economy
coupled with increasing the rate of interest. Increasing the CRR and Bank rate are the main
components of dear money policy. The objective of dear money policy is to counter inflation,
when an economy is running too hot.
Hot Money:
★ Hot Money is the regular and quick flow of funds (or capital) from one country to another country
in order to earn a short-term profit on interest rate differences between the countries, if prevails.
★ These financial transfers affect the exchange rate if the transfer is significant in sum and it might
negatively impact a country ‘s balance of payments (BoP).
What are the objectives of monetary policy?
► Stability in Price level
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Business Digest 239 Economics( Monetary Policy )
Money Supply:
► Money supply is the entire stock of currency and other liquid instruments circulating in a
country's economy as of a particular time.
► Narrow Money (M1):A category of money supply that includes all physical money like coins
and currency along with demand deposits and other liquid assets held by the central bank.
► Broad Money (M2):Broad money refers to the most inclusive definition of the money supply. It
is defined as narrow money plus time deposits accepted by other depository institutions. Interbank
deposits and Government deposits are excluded from monetary measures in this case.
What is Quasi Money?
★ Quasi-money is highly liquid assets which are not cash but can easily be converted into cash.
Examples of quasi money include gold certificates, Savings accounts, Money funds, Government
treasury securities (such as T-bills) etc.
What is Fiat Money?
★ Modern-day monetary systems are primarily based on fiat money. It does not have any intrinsic
value, but governments declare it as legal tender through regulation.
★ Fiat money is not backed by any commodity, such as gold, but only by the faith of the bearer.
What is Money-creating Power?
★ Banks can create money through the accounting they use when they make loans. For example, by
using customer’s debit card or internet banking, He can spend these IOUs as though they were the
same as 100Tk. notes. By creating these electronic IOUs, banks can effectively create a substitute
for money.
★ Most of the money we use, in fact more than 95% of the money supply is electronic money
created with accounting entries when loans are issued by the private banking sector.
What are the Measures of Money?
M1 (Narrow money-typically covers the All currency (i. e. Cash) in circulation traveller’s
most liquid forms of money checks,
Demand deposits at commercial banks (or other
depository institutions) held by the public,
other checkable deposits
M2 (intermediate money) M1 +
Savings deposits
Money market mutual funds
Small time deposits
M3 (Broad money) M2+
Large time deposits
Repurchase agreements
institutional money market funds
Eurodollars
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Business Digest 240 Economics( Monetary Policy )
★ Most of the participants in money market are also participants of capital market. So,
Bangladesh Bank as the regulator of money market should look into the matter. In addition If
the general investors incur loss in share market, they will indirectly blame Bangladesh Bank
for this.
How does Bangladesh Bank inject money into the economy (03 methods)?
1.By modifying reserve requirements — the amount of funds that banks must hold against deposits
in the bank accounts.
2.By lowering (or raising) the discount rate—the rates banks pay on short-term loans from
Bangladesh Bank,
3.By conducting open market operations.
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Business Digest 241 Economics( Monetary Policy )
√ Cash Ratio Reserve (CRR) refers to a portion of bank deposits (as cash) which banks are
supposed to keep or maintain with the central bank.
√ Statutory Liquidity Ratio (SLR) is a part of bank deposits that the commercial banks are
supposed to maintain with themselves in liquid form. Liquid form means cash, gold or
government bonds. SLR is mandatory to ensure that sufficient liquidity with the banks is kept.
√ CRR has to be maintained in cash while SLR can be maintained either in cash or in assets that
Bangladesh Bank suggests.
√ Banks do not earn any returns from the money parked in the form of CRR. However, banks can
earn returns from SLR.
√ CRR controls liquidity in economy while SLR regulates credit growth in the country.
Bank Rate:
★ Bank Rate is the rate at which the central bank lends money to other domestic commercial banks
or financial institutions. The bank rate signals the central bank ‘s long-term outlook on interest
rates. If the bank rate moves up, long-term interest rates also tend to move up.
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Business Digest 242 Economics( Monetary Policy )
Repo Rate:
★ Repo Rate is the rate at which banks borrow funds from the central bank (Bangladesh Bank)
against collateral on the event of a deficiency of funds to meet the gap between the demands they
are facing for money (loans) and how much they have on hand to lend.
★ It acts as a source of short-term borrowing in which the banks sell securities to the central bank in
return for credit.
Reverse Repo Rate :
★ The rate at which the central bank borrows money from the banks is termed as the reverse repo
rate. The central bank uses this tool when it feels there is too much money floating in the banking
system.
Why is reverse repo rate lower than repo rate?
★ Reverse repo is always less than repo rate as Bangladesh Bank cannot give more interest on
deposits and charge lesser interest on loans. It is unusual to pay more than what has been received.
★ In order to ensure that there is no multiplicity of the two major policy rates (repo rate and reverse
repo rate), Bangladesh Bank has decided to maintain a fixed spread between the two rates so that
there is only one policy rate and a clear message goes out to the market in terms of Bangladesh
Bank's policy.
Call money and market :
► Call Money is the money loaned by a bank from another bank that must be repaid on demand.
► Call Money Market is a short-term money market — which allows for large financial institutions
(such as banks, mutual funds and corporations) to borrow and lend money at inter-bank rates. The
loans in the call money market are very short, usually lasting no longer than a week and are often
used to help banks meet reserve requirements.
What is money laundering?
► The act of disguising the source or true nature, identity, original ownership, and destination of
money obtained through illegal means.
► The laundering is done with the intention of making it seem that the proceeds have come from a
legitimate source.
► .Money Laundering Prevention Act-2012 aims at tackling the illegal money transfer to different
countries. A huge amount of money is being transferred outside the country illegally as a good
number of Bangladeshis are building their second home in 8-10 countries globally.
► Financial Action Task Force (FATF) is an inter-governmental policymaking body established in
1989 by the ministers of its member jurisdictions to combat money laundering and terrorist
financing.
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Business Digest 243 Economics( Monetary Policy )
What is Hundi?
★ Hundi is a traditional system of transferring money used in South Asia whereby the money is paid
to an agent who then instructs an associate in the relevant country or area to pay the final
recipient. The Hawala is simply understood as manual transportation of huge amounts of money at
once. Hundi is a controversial, informal and unrecognized fund (money/remittance) transfer
channel which basically prevails in India and Bangladesh.
What is Black Money?
► Black Money is the money earned but not shown in the accounts for the purpose of tax evasion.
► Black money is the money which is earned through illegal activities beyond the rules and
regulations of a country.
Effects/Consequences of Black Economy:
㊣ Getting Black money as gifts from relatives and friends on different occasions.
What is Seigniorage?
★ It is the difference between the face value of coins/currencies and their production costs.
Bank Rate:
★ Bank Rate is the rate at which the central bank lends money to other domestic commercial banks
or financial institutions. The bank rate signals the central bank ‘s long-term outlook on interest
rates. If the bank rate moves up, long-term interest rates also tend to move up.
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Business Digest 244 Economics( Monetary Policy )
√ Over-invoiced plant and equipment: The fixed costs on plant and inventories are
reported higher than the actual amount so as to generate black money.
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Business Digest 245 Economics(Fiscal Policy)
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Business Digest 246 Economics(Fiscal Policy)
Kuwait, United Arab Emirates (UAE), Saudi Arabia, Libya, Singapore, Macau, Tuvalu, Norway,
Ireland and Russia. These countries mostly have budget surpluses every year. China achieved a
record growth of 12% in 2007 — the only year it had a small surplus and another record growth of
6. 7% in 2016 when it had a record deficit.
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Business Digest 247 Economics(International Trade)
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Business Digest 248 Economics(International Trade)
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Business Digest 249 Economics(International Trade)
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Business Digest 250 Economics(International Trade)
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Business Digest 251 Economics(International Trade)
Trade Embargoes:
★ A trade embargo imposes a ban on trade with a country or group of countries. This typically
stems from political differences between the two nations or economic circumstances that make
commercial trade undesirable.
Voluntary Export Restraints:
★ The fourth type of trade barrier is known as a voluntary export restraint. This type of barrier
limits the quantity of a good that can be exported from a country during a specific time period. In
effect, it is an export quota, self-imposed by the exporting country.
Anti-dumping measures:
★ When dumping is practiced in a foreign country, special duties are levied on imported goods that
allegedly are sold at too low prices (dumping price). These duties are called anti-dumping duty.
Countervailing measures:
★ Special duties levied on imported goods to counter subsidies granted in the exporting country
unless it takes place according to a previous procedure.
Safeguard measure:
► Special duty (may be combined with a tariff quota) levied on imported goods to protect an
industry in the importing country against a sudden and heavy increase in the country.
Subsidies:
► Subsidies are the state aid or incentive granted either directly or indirectly (for example tax
breaks) to local producers, to give them market advantage over imported products.
Export Subsidies:
► It is the business support or state aid granted to a producer on condition that the goods produced
is exported.
Free Trade Agreements:
► An agreement between two or more countries which eliminates tariffs on trade between the
countries, reduces non-tariff barriers to trade, cements rights and protections for investors and
corporations, and promises liberalized, pro-business economic environment.
SAARC Preferential Trading Arrangement (SAPTA) (In force-1995):
★ An inter-government group (IGG) formed by South Asian Association for Regional Cooperation
(SAARC) members to negotiate incremental tariff reforms between member countries.
★ The goal is to increase trade between Asian countries and to assist less economically advantaged
members through preferential treatment.
South Asian Free Trade Area (SAFTA) (In force-2006):
★ South Asian Free Trade Area (SAFTA) is a trade agreement to promote trade and economic
growth in South Asia by reducing tariffs for intra-regional exports. It includes the eight members
of the South Asian Area for Regional Cooperation (SAARC).
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Business Digest 252 Economics(International Trade)
√ TRIPS is arguably the most important and comprehensive international agreement on intellectual
property rights. Intellectual Property Rights are the rights given to persons/agencies for their
creativity/innovations. Such as patents, copyright, trademarks, geographical indications,
industrial designs, trade secrets, or exclusionary rights over new plant varieties.
√ The TRIPS Agreement provides minimum term of protection of 20 years to the creator or
innovator over the use of such innovation counted from the date of filing.
business interests located in another country. Generally, FDI takes place when an investor
establishes foreign business operations or acquires foreign business assets, including establishing
ownership or controlling interest in a foreign company. Foreign direct investments are
distinguished from portfolio investments in which an investor merely purchases equities of
foreign-based companies. Example: An Indian company having a stake in a Bangladeshi
company.
.
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Business Digest 253 Economics(International Trade)
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Business Digest 254 Economics(International Trade)
What is SDR?
► SDR (Special Drawing Rights) is a form of imaginary international money created by the IMF in
1969. It is designed to augment international liquidity by supplementing the standard reserve
currencies. IMF provides loans to its members in case of exchange rate instability in SDRs.
► SDR basket now consists of the following five currencies: U. S. dollar 41.73%, Euro 30.93%,
Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%
► 1 SDR= Taka 116.11 (till 21 August, 2019).
√ Bretton Woods system had all of the world’s currencies pegged to the dollar and the dollar pegged
to gold. Through Bretton woods system the leaders decided to tie world currencies to the dollar,
which, in turn, they agreed should be convertible into gold at $35 per ounce.
√ Central banks of countries other than the United States were given the task of maintaining fixed
exchange rates between their currencies and the dollar.
√ The exchange rate between other currencies and dollars can only fluctuate within 1% on the basic of
legal exchange rate.
√ If a country's currency value became too weak relative to the dollar, the bank would buy up its
currency in foreign exchange markets. That would lower the currency's supply and raise its price. If
its currency became too high, the bank would print more. That would increase the supply and lower
its price.
Why Bretton-wood System failed?
★ The system failed because of the increased deficit in trade balance and a surge in imports in US
economy due to Vietnam War. The US experienced depreciation of dollar caused by its huge
debt accumulated through war expense. Britain violated the agreement by depreciating its
currency. France had suspicious feelings that US could not afford continue to spend and borrow
at their current rate and guarantee delivery of gold.
★ Since Bretton Woods put an effective limit on how much money you could borrow, and the
United States wanted to spend more money than they could spend under those constraints. So,
the Americans simply announced that their currency would float against other currencies
instead of being fixed. So, Bretton wood system failed.
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Business Digest 255 Economics(International Trade)
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Business Digest 256 Economics (Foreign Exchange )
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Business Digest 257 Economics (Foreign Exchange )
► Trade alone does not result in foreign exchange inflows. Bangladesh gets enormous amount of
capital inflows (investments) that more than compensates for the export deficit. The sources
include:
√ Foreign inward remittances sent by Bangladeshis living abroad
√ Foreign exchange inflows come through portfolio investments in stocks and capital inflows
(FDI) Investments inflows from FDI also constitute a volume of inflows.
√ Corporate organizations are allowed to borrow in foreign currencies from abroad.
√ The reduction in value of oil imports and gold imports have also resulted in foreign exchange
savings.
√ Thus, Bangladesh Bank maintains a fine balance between foreign exchange reserves.
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Business Digest 258 Economics (Foreign Exchange )
The leading factors that influence the variations and fluctuations in exchange rates are:
Foreign exchange reserve and its components (Composition of foreign exchange reserves):
★ Foreign exchange reserves are the stocks/deposits of foreign currency denominated assets plus gold
held by the central banks and monetary authorities of a country. However, the term in popular usage
generally includes foreign currency, gold and IMF reserve positions.
The foreign exchange reserves of Bangladesh consist of three categories:
Foreign Currency Assets
Gold and
Special Drawing Rights (SDRs)
★ A reserve currency is a currency that is held in significant quantities by numerous governments and
central banks as part of their foreign exchange reserves. These currencies are used to transact global
business and trade — particularly in commodities such as gold and oil. The primary reserve
currencies used worldwide are the US dollar, followed by the Euro, the British pound, the Japanese
Yen and the Swiss Franc.
Advantages of holding a large amount of foreign exchange reserves:
√ It enables to solve short-term external financial debt without affecting the exchange rate.
√ The bigger the reserve held, the more a country can spend (investments and embark on new
projects).
√ Reserves allow countries to adopt slower speeds of adjustment when tackling balance of payments
crisis.
√ It contributes to the perceived creditworthiness of countries, lessening the occurrences of crises .
Disadvantages of holding a large amount of foreign exchange reserves:
★ Holding international reserves would cause a contemporary output loss (opportunity cost).
★ Balance of payment surpluses could reflect undervalued currencies, low levels of domestic
consumption and high levels of saving.
★ The more international reserves a country holds, the more exposed it is to fluctuations of foreign
asset (currency) prices, and susceptible to financial crises.
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Business Digest 259 Economics( Theories of Economics)
★ The theory states that (given the stock of capital, technology, natural resources, etc. ) at a given
time in an economy, there exists that number of populations, just sufficient to exploit fully the
resources of the economy and to obtain the highest possible output.
★ The Solow Growth Model is a standard neoclassical model of long-run economic growth. It shows
that savings determines the size of capital stock and thereby level of production. Thus, positive
relationship exists between them but high savings cannot ensure persistent economic growth since
new steady state is reached. The country should pursue Golden rule steady state level of savings at
which consumption is maximum and benefits the future generation.
★ The single point of capital stock at which the amount of investment equals the amount of
depreciation is called steady state capital stock. Steady state represents the long-run equilibrium of
economy.
★ Golden rule level of capital:The steady state value of capital that maximizes consumption is called
golden rule level of capital. At this golden rule level marginal product of capital equals the
depreciation rate. There is only one saving rate that produces golden rule level of capital.
★ According to this model, only technological progress can explain sustainable growth and
persistently rising level of standards.
► The endogenous growth theory is an economic theory which argues that economic growth is
generated from within a system as a direct result of internal processes.
► More specifically, the theory notes that the enhancement of a nation's human capital will lead to
economic growth by means of the development of new forms of technology and efficient and
effective means of production.
► This view contrasts with neoclassical economics, which contends that technological progress and
other external factors are the main sources of economic growth.
► As such, they advocate for government and private sector institutions to nurture innovation
initiatives while offering incentives for individuals and businesses to be more creative.
► Under this theory, knowledge-based industries play a particularly important role — especially
telecommunications, software and other high-tech industries — as they are becoming ever more
influential in developed and emerging economies.
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Business Digest 260 Economics( Theories of Economics)
Classical Keynesian
Market works best when it is left alone Market is flawed, real market is unstable and full of
disturbances
Any intervention or too much regulation or Interventions are needed to correct its oscillations
anything government does above the scope of what and to keep it as smooth as possible. (Active
is necessary to keep the market free, fair and monetary policies of central banks, government
lawfully just is harmful. spending even on short term loans in bad times repaid
in good times, government financial incentives,
active tax policies)
Classical economics assumes that people are Keynesian economics suggests that in difficult times,
rational and not subject to large swings in the confidence of businessmen and consumers can
confidence. collapse – causing a much larger fall in demand and
investment.
The classical model is often termed ‘laissez-faire’ The Keynesian supports government intervention,
because there is little need for the government to especially in a recession when there is a need for
intervene in managing the economy. government spending to offset the fall in private
sector investment.
In the classical model, there is an assumption that Keynesians argue that in the real world, wages are
prices and wages are flexible, and in the long-term often inflexible. In particular, wages are ‘sticky
markets will be efficient and clear downwards’. Workers resist nominal wage cuts.
A classical view would reject the long-run trade- Keynesians support the idea that there can be a trade-
off between unemployment, suggested by the off between unemployment and inflation.
Phillips Curve.
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Business Digest 261 Economics( Theories of Economics)
★ The Baumol-Tobin model argues that there is trade-off between the liquidity provided by holding
money (the ability to carry out transactions) and the interest foregone by holding one’s assets in the
form of non-interest-bearing money.
Fisher’s Quantity theory of money:
★ Other things remaining unchanged, as the quantity of money in circulation is increased, the price
level is also increased in direct proportion and thereby value of money decreases and vice versa.
★ MV=PY (here M is Money supply, V is velocity, P is price level, Y is total output in a economy).
If V and Y is constant, then M and V is direct proportional..
Bottleneck Problem:
★ According to this theory, money is a type of durable consumer good held for the services it
renders. In other words, money is demanded as an asset or capital and the theory of demand
for money is a part of the capital or wealth theory.
Permanent income hypothesis (Friedman):
★ The hypothesis states that the choices made by consumers regarding their consumption
patterns are largely determined by a change in permanent income, rather than change in
temporary income.
★ The key conclusion of this theory is that transitory, temporary changes in income have little
effect on consumer spending behaviour, whereas permanent changes can have large effects on
consumer spending behaviour.
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Business Digest 262 Economics( Theories of Economics)
Classical Theory (Adam smith, David Ricardo, Thomas Malthus, Jean-Baptiste Say)
► Classical economists maintain that the economy is always capable of achieving the natural
level of real GDP or output
► It stressed economic freedom and promoted ideas such as laissez-faire and free
competition.
► Aggregate demand will adjust to full potential GDP, assisted by flexible wages and prices.
► Natural output is the level of real GDP that is obtained when the economy's resources are
fully employed.
Game Theory:
★ Game theory is best exemplified by a classic hypothetical situation called the Prisoners'
Dilemma. In this scenario, two people are arrested for stealing a car. They will each serve 2
years in prison for their crime.
★ The case is air-tight, but the police have reason to suspect that the two prisoners are also
responsible for a recent string of high-profile bank robberies. Each prisoner is placed in a
separate cell. Each is told he is suspected of being a bank robber and questioned separately
regarding the robberies. The prisoners cannot communicate with each other.
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Business Digest 263 Economics( Theories of Economics)
★ The prisoners are told that a) if they both confess to the robberies, they'll each serve 3 years for the
robberies and the car theft, and b) if only one confesses to the robbery and the other does not, the
one who confesses will be rewarded with a 1 year sentence while the other will be punished with a
10 year sentence.
★ In the game, the prisoners have only two possible actions: confess to the bank robbery, or deny
having participated in the bank robbery.
★ Since there are two players, each with two different strategies, there are four outcomes that are
possible:
The best option for both prisoners is to deny committing the robberies and face 2 years in prison for
the car theft. But because neither can be guaranteed that the other won't confess, the most likely
outcome is that both prisoners will hedge their bets and confess to the robberies -- effectively
taking the 10 year sentence off the table and replacing it with the 3 year sentence.
★ When a nation can produce a product at a higher quality or at a faster rate than another country
can, the country is said to have absolute advantage over the other country. It is related with
efficiency. This concept was developed by Adam Smith. Simply, it means ability to produce
higher amount of output by using same amount of input than the second country does.
★ Comparative advantage refers to a Country's ability to produce goods and services at a lower
opportunity cost than that of another country. This concept was developed by David Ricardo.
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Business Digest 264 Economics( Various Concept ofEconomics)
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Business Digest 265 Economics( Various Concept ofEconomics)
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Business Digest 266 Economics( Various Concept ofEconomics)
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Business Digest 267 Economics( Various Concept ofEconomics)
√ A liquidity trap occurs when low/zero interest rates fail to stimulate consumer spending and
monetary policy becomes ineffective and it fails to stimulate aggregate demand.
√ It is a situation in which the general public is prepared to hold on to whatever amount of money is
supplied, at a given rate of interest. They do so because of the fear of adverse events like deflation,
war.
What is Capital Flight?
★ Capital flight is the uncertain and rapid movement of large sums of money out of a country.
★ It is a destructive process in which investors (both foreigners and domestic residents) withdraw
their financial capital from a country and might transfer to another country as a result of non-
favourable changes in economic policies, political conditions, or other factors.
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Business Digest 268 Economics( Various Concept ofEconomics)
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Business Digest 269 Economics( Various Concept ofEconomics)
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Business Digest 270 Economics( Various Concept ofEconomics)
What is Capitalism?
★ An economic system in which privately-owned companies and businesses undertake most
economic activity.
Mortgage:
★ A mortgage is a special kind of credit, usually longer-term in duration, used to finance the
construction or purchase of property or a long-lasting structure (such as a home or building).
What is Vicious Cycle?
★ Vicious cycle is a self-propagating disadvantageous situation in which a solution leads to another
problem whose solution, in turn, leads back to the first problem in a more severe form. For
example, “Economic inequality feeds into inequalities of political power, leading to still more
economic inequality”.
What is Collective bargaining agent (CBA)?
★ Collective bargaining agent means the workers’ trade union or a trade union federation which, is the
agent of the workers in the establishment, or group of establishments, for collective bargaining
matters regarding wage, safety, benefits and other working conditions, such as health and safety
provisions, and retirement or pension contributions.
What is Permanent-income Hypothesis?
★ Permanent-income hypothesis argues people base their consumption on what they consider their
"normal" income. In doing this, they attempt to maintain a fairly constant standard of living even
though their incomes may vary considerably.
★ Consumption would not respond to transitory changes in income in the same way as permanent
changes in income seems intuitively reasonable.
What is Absolute Income Hypothesis?
★ The theory shows that with the increase in absolute income, consumption also increases but the rate
of increase of consumption is smaller than the rate of increase of income.
What is Mercantilism?
★ An economic theory based on the belief that a country’s prosperity depended on its ability to
generate large and persistent surpluses in its foreign trade with other countries.
What is Monetarism?
★ Belief that inflation is a major danger to economic performance, and should be controlled through
disciplined policies
★ It argues that inflation could be controlled or eliminated by strictly controlling supply of money
What is Socialism?
★ An economic system in which most wealth is owned or controlled collectively through the state,
other public institutions, or non-profit organizations and the operation of market is influenced or
managed through regulation and planning.
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Business Digest 271 Economics( Taxation)
★ Tax is the non-penal but compulsory and unrequited transfer of resources from private sector
to the public sector (state owned fund) in order to ensure equitable welfare throughout the
community and country.
Cannons/principles of Taxation:
★ The canons of taxation were first presented by Adam Smith in his famous book “The Wealth
of Nations.” These canons of taxation define numerous rules and principles upon which a good
taxation system should be built. Although these canons of taxation were presented a good
while back, they are still used as the foundation of discussion on the principles of taxation.
★ Adam Smith presented 4 canons of taxation, which are also commonly referred to as the Main
Canons of Taxation:
1. Canon of Equality: he canon of equality or equity implies that taxation must ensure
justice. the burden of taxation must be distributed equally or equitably
2. Canon of Certainty: The tax which each individual is bound to pay ought to be certain
and not arbitrary. The time of payment, the manner of payment, the amount to be paid
ought to be clear and plain to the contributor and to every other person.
3. Canon of Convenience: This canon recommended that unnecessary trouble to the tax
payer should be avoided.
4. Canon of Economy: Every tax has a cost of collection. It is important that the cost of
collection should be as minimum as possible.
Characteristics of good tax system:
► Tax should be levied based on the fundamental principles of taxation
► The taxes should be imposed that are equitable, convenient, certain, elastic and
economical
► System should ensure balance between direct and indirect tax
► Tax system should be supported by sufficient laws, manpower and efficient
administrative tools
► Tax payer can easily find information about the tax system and how tax money is used.
► A good tax system should follow the principle of diversity. This implies that there should
not be a single or a few taxes from which Government seeks to raise large revenue.
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Business Digest 272 Economics( Taxation)
► Excise duty
► Supplementary duty
Tax return:
★ Tax return is the standard official form provided by the tax authorities on which a taxpayer reports
taxable income with permitted deductions and exemptions to compute his or her tax liability.
★ An income tax (IT) return is the tax form in a predefined worksheet format where the income
figures of the assessee are used to calculate the tax liability are written into the documents
themselves.
★ A tax return is an official form that one fills in with details about his income and personal
situation, so that the tax he owes can be calculated.
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Electronic Filing:
★ Filing One’s tax return online, also known as efiling or e-filing. This is generally more secure, more
accurate, and faster than filing taxes by paper through the mail.
Double Taxation:
★ Double taxation is a tax principle referring to income taxes paid twice on the same source of
income. It can occur when income is taxed at both the corporate level and personal level.
Tax heaven:
► Tax heaven is a country or island or state that has a low tax liability compared to other countries or
no taxes at all. Some countries deliberately set themselves up as tax havens in order to encourage
international corporations to register themselves there. Some countries that are not tax havens have
loopholes in their tax codes in order to allow certain persons and companies to place some of their
assets in an account in a tax haven.
► Examples: Bermuda, Netherlands, Luxembourg, Cayman Islands, Singapore, The Channel Islands,
Isle of Man , Mauritius, Switzerland, Ireland etc.
Estate:
★ A tax entity that receives and reports a person's income and pays taxes after that person's death.
Tax Deducted at Source (TDS):
★ Tax Deducted at Source or TDS is a type of indirect tax that is deducted from an individual’s
income on a periodic or occasional basis at the very source of income by the employer and
submitted to the tax authority.
★ This is the tax that is deducted from one’s income at the source of that particular income by
employer on salary, or by the bank on deposits .
Classification of taxes:
Based on number of taxes
Single tax:tax system comprises of only one type of tax
Multiple tax:tax system comprises of more than one type of tax
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Business Digest 275 Economics( Taxation)
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Business Digest 276 Economics( Taxation)
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Business Digest 277 Economics( Taxation)
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Business Digest 278 Economics( Taxation)
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Business Digest 279 Economics( Economics and Development)
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Business Digest 280 Economics( Economics and Development)
1.
Mention some economic development models:
Walt Whitman Rostow's Stages of Economic Growth
Harrod-Domar Growth Model
Lewis Structural Change (dual-sector) Model.
What is financial inclusion?
★ Financial Inclusion is the availability of banking services at an affordable cost in order to include
the weaker section of the society in the banking system and financial network.
Bail-out vs Bail-in :
Bail-in and Bail-out are two alternative ways of giving another chance to a financial
institution (such as bank) which is suffering from poor financial health and survival challenge.
In Bail-out the government usually provides the much-needed financial support to the poor
financial health of an institution (such as state-owned BASIC Bank Limited). The government
pays it from the government fund or taxpayer's money).
In Bail-in internal parties take part in rescue of the institution. It does not involve taxpayer ‘s
money and instead involves restructuring of liabilities of the distressed financial institution. It
might happen by making its creditors and depositors take a loss on their holdings or
cancellation of debts owed to creditors and depositors.
Nationalization vs Privatization:
★ Nationalization is the process of a government taking control of a company or industry which can
occur for a variety of reasons. When nationalization occurs, the former owners of the companies
may or may not be compensated for their loss in net worth and potential income.
★ Privatization is the transfer of ownership of property or businesses from a government to a
privately-owned entity in a bid to maximize the profit. Privatization is considered to bring more
efficiency and objectivity to the company.
What is Public-Private Partnership (PPP)?
Þ Public-Private Partnership (PPP) is a mechanism for the government to procure and implement
public infrastructure and/or services using the resources and expertise of the private sector. Where
governments are facing lack of infrastructure and require more efficient services, a partnership with
the private sector can help foster new solutions and bring finance. PPP combines the skills and
resources of both the public and private sectors through sharing of risks and responsibilities.
Þ PPPs have contract periods of 25 to 30 years or longer. Financing comes partly from the private
sector but requires payments from the public sector and/or users over the project's lifetime.
Þ PPPs have contract periods of 25 to 30 years or longer. Financing comes partly from the private
sector but requires payments from the public sector and/or users over the project's lifetime.
Challenges for the economy of Bangladesh are —
► Slow growth pace in private investment
► Downfall in manpower exports in foreign countries
► Slow growth pace in exports
► Negative influence in remittance inflow
► Capital shortfalls in the banking sector and structural and institutional inefficiency of the
government.
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References
㊣ Armstrong, G., Kotler, P. and Opresnik, M. (2010). Marketing.
㊣ Desler, G. (2004). Human resource management. New York: Prentice
Hall.
㊣ Dornbusch, R., Fischer, S. and Startz, R. (2012). Macroeconomics.
㊣ Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting.
㊣ Hull, J. and Hull, J. (2012). Options, futures and other derivatives. Upper
Saddle River, NJ: Pearson Education/Prentice Hall.
㊣ Jones, G. and Hill, C. (2013). Theory of strategic management.
Australia: United Kingdom.
㊣ Madura, J. (2014). Financial institutions and markets. Mason, Ohio:
Thomson South-Western.
㊣ Mankiw, N. (2010). Macroeconomics. New York, NY: Worth Publishers.
㊣ Reilly, F., Brown, K. and Leeds, S. (2014). Investment analysis &
portfolio management.
㊣ Ross, S., Westerfield, R. and Jaffe, J. (2015). Corporate finance.
㊣ Södersten, B. and Reed, G. (2012). International economics.
Basingstoke: Macmillan.
㊣ Gitman, L. and Zutter, C. (2014). Principles of managerial finance.
㊣ Gup, B. and Kolari, J. (2013). Commercial banking. Hoboken, NJ:
Wiley.
㊣ Income tax manual. (2018). Dhaka: Deputy Controller, Bangladesh
Govt. Press.
㊣ Larson, K. (2008). Essentials of accounting. Burr Ridge, IL: Irwin/
McGraw-Hill.
㊣ Larson, K. (2008). Essentials of financial accounting. Boston: Irwin/
McGraw-Hill.
㊣ Mankiw, N., Taylor, M. and Ncwadi, R. (2014). Microeconomics.
㊣ Rose, P. (2009). Commercial bank management. London: McGraw-Hill.
㊣ Weygandt, J., Kimmel, P. and Kieso, D. (2015). Accounting principles.
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Business Digest 1 Previos Exam’s Math and solution
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Business Digest 2 Previos Exam’s Math and solution
৩৭ তম বিবিএি (বিন্যান্স)
বিষয় ক াডঃ ৭১১
বিভাগ
(কেক ান ৪টি প্রকের উত্তর বিকত হকি)
মানঃ ২৫*৪=১০০
১। ) আবথ ি ব্যিস্থাপনা ব ? আবথ ি ব্যিস্থাপক র াে িািলী িংকেকপ বলখুন।
খ) মুনািা িি িাবি রকের চাইকত িম্পি িি িাবি রে লেয ক ন ব্যিিাবয় প্রবতষ্ঠাকনর জন্য কিবি মঙ্গলজন ? ব্যাখ্যা রুন।
২। ) িীর্ িকময়ািী বিবনকয়াগ প্র ল্প মূল্যায়ন ক ৌিলিমূহ বলখুন।
খ) িাংলাকিকির কপ্রবেকত মূলিন িাকজকের িীমািদ্ধতািমূহ বলখুন।
গ) এ টি ক াম্পাবনর আবথ ি বিকেষ গে বিবনকয়াকগর জন্য বনকনাক্ত বতনটি বিবনকয়াগ প্র ল্প বচবিত করকেন কেগুকলার নগিপ্রিাহ বনকচ
কিয়া হকলা। ঐ ক াম্পাবনর বিবনকয়াগ মূলিন খরচ ১০% এিং বিবনকয়াগ মূলিন ১ ক াটি ো া হকল মূলিন িরাদ্দ রকের নীবত অনুোয়ী
ক ান প্র ল্প গ্রহে রা উবচৎ?
প্র ল্প প্রাথবম মূলিন (ো ায়) িাৎিবর নীে আন্তঃপ্রিাহ (ো ায়)
১ম িের ২য় িের ৩য় িের ৪থ ি িের
১ ৬০,০০,০০০ ১২,০০,০০০ ২০,০০,০০০ ২৪,০০,০০০ ৩২,০০,০০০
২ ৩৬,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০ ১৪,০০,০০০
৩ ২০,০০,০০০ ৫,৬০,০০০ ৬,০০,০০০ ৮,৫০,০০০ ৮,৫০,০০০
৩। ) আবথ ি বিিরেী বিকেষে িলকত ব বুঝায়? আবথ ি বিিরেী বিকেষকের ক ৌিলিমূহ িংকেকপ বলখুন।
খ) অনুপাত বিকেষকের সুবিিা-অসুবিিা িমূহ বলখুন।
গ) বনকনাক্ত পেিমূহ ক ন আবথ ি বিিরেী বিকেষে কর তা বুবঝকয় বলখুনঃ
i) বিবনকয়াগ ারী
ii) পাওনািার
iii) ির ার
৪। ) িীমা চুবক্ত ও িাবজ চুবক্তর মকে পাথ ি য ব ?
খ) েবতপূরকের নীবত প্রকয়াকগর িতিািলী বলখুন।
গ) কপিা বহকিকি িীমাক মূল্যায়ন রুন।
র্) “িীমা চুবক্ত পরম বিশ্বাকির চুবক্ত”- ব্যাখ্যা রুন।
৫। েী া বলখুনঃ
) বিবডবিএল (BDBL)
খ) আইবিবি (ICB)
গ) স্ট এক্সকচঞ্জ(Stock Exchange)
র্) এিইবি (SEC)
ঙ) করা াকরজ হাউজ(Brokerage House)
খ বিভাগ
মানঃ ২৫*৪=১০০
৬। ) ক ন্দ্রীয় ব্যাং উত্তবির ইবতহািটি িংকেকপ বলখুন।
খ) কিকির উন্নয়কন ব্যাংক র ব ক ান ভূবম া আকে? আকলাচনা রুন।
গ) িাংলাকিকি এ টি ব্যাংক র উকদ্দশ্য ব হওয়া উবচৎ িকল আপবন মকন করন?
৭। ) ব্যাং তারল্য ব ? তারল্য ব্যিস্থাপনায় তত্ত্বিমূহ বলখুন।
খ) লমাবন ব্যাংক জরুরী তারল্য িং ে িমািাকন ব ভাকি িাহায্য কর? ব্যাখ্যা রুন।
গ) আমানত বমশ্রে এিং আমানত িীমা িলকত ব বুঝায়?
৮। ) ইিলামী আবথ ি ব্যিস্থার প্রিান প্রিান উকদ্দশ্যিলী বলখুন।
খ) ক ান ক ান বি কথক ইিলামী ব্যাংব ং ব্যিস্থা িািারে ব্যাংব ং ব্যিস্থা কথক অবি াে ি র? বুবঝকয় বলখুন।
গ) বিবনকয়াকগর গুরুত্বপূে ি ইিলামী খাতিমূহ ব ব ? িংকেকপ এই খাতগুকলা আকলাচনা রুন।
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Business Digest 3 Previos Exam’s Math and solution
২। গ) এ টি ক াম্পাবনর আবথ ি বিকেষ গে বিবনকয়াকগর জন্য বনকনাক্ত বতনটি বিবনকয়াগ প্র ল্প বচবিত করকেন কেগুকলার নগিপ্রিাহ বনকচ
কিয়া হকলা। ঐ ক াম্পাবনর বিবনকয়াগ মূলিন খরচ ১০% এিং বিবনকয়াগ মূলিন ১ ক াটি ো া হকল মূলিন িরাদ্দ রকের নীবত অনুোয়ী ক ান
প্র ল্প গ্রহে রা উবচৎ?
Project CF y1 y2 y3 y4 NPV
1 CF -6000000 1200000 2000000 2400000 3200000
Discounted CF -6000000 1090909 1652893 1803156 2185643 732,600.23
2 CF -3600000 1400000 1400000 1400000 1400000
Discounted CF -3600000 1272727 1157025 1051841 956218.8 837,811.62
3 CF -2000000 560000 600000 850000 850000
Discounted CF -2000000 509090.9 495867.8 638617.6 580561.4 224,137.70
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Business Digest 4 Previos Exam’s Math and solution
40th BCS
Finance
Subject Code: 711
Full Marks: 200
Time: 4 hours
Group A
(Answer any four questions)
Marks: 25*4=100
If the corporate tax rate is 40% and personal tax rate of common stockholders is 30%, calculate the
weighted average cost of capital.
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Business Digest 5 Previos Exam’s Math and solution
Requirements:
If the cost of capital is 10%, what is the net present value.
What is the internal rate of return?
Should the project be accepted? Show your argument.
Group B
Marks: 25*4=100
If the corporate tax rate is 40% and personal tax rate of common stockholders is 30%, calculate
the weighted average cost of capital.
****
Ke = Cost of Equity.
Kd = Cost of Debt.
Tc = Corporate Tax Rate.
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Business Digest 6 Previos Exam’s Math and solution
Ti 30% Tc 40%
1 2 3 4 5
Sources of Capital Amount Cost of weight(tk/total weighted
(tk) Capital(k) tk) cost(3*4)
Common Stock capital 10,00,000 14% 0.1428571 0.02
Retained earnings 20,00,000 14% 0.2857143 0.04
Preferred stock capital 10,00,000 12% 0.1428571 0.01714286
Debt Capital 30,00,000 10% 0.4285714 0.04285714
Total Capital 70,00,000 1
Cost of equity(Ke) 0.02+.04+0.01714286 0.07714286
Cost of debt after Tax- Kd(1-Tc) 0.04285714*(1-.40) 0.02571429
WACC 0.02571429+0.0257 0.1028
Weighted average 10.28%
cost of capital
5 c. A company is considering to purchase a new machine that costs Tk 60,000. The company’s tax rate is
40% and the company follows straight line method of depreciation. The annual cash flows have the
following cash projections:
Year Cash flows
1 21,000
2 29,000
3 36,000
4 16,000
5 12,000
Requirements:
If the cost of capital is 10%, what is the net present value.
What is the internal rate of return?
Should the project be accepted? Show your argument.
TOTAL PV 71284.74
NCO 60000
NPV 11284.74
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Business Digest 7 Previos Exam’s Math and solution
IF K 18%
1 2 3 4 5 6 7 8 9
year CFBT Annu taxable tax After tax NCF PV PV(7*8)
al Dep income (40%) income (3+6) Factor
(2-3) (1/1.18)n
1 21000 12000 9000 3600 5400 17400 0.8474 14744.76
2 29000 12000 17000 6800 10200 22200 0.7181 15941.82
3 36000 12000 24000 9600 14400 26400 0.6086 16067.04
4 16000 12000 4000 1600 2400 14400 0.5157 7426.08
5 12000 12000 0 0 0 12000 0.4371 5245.2
TOTAL 59424.9
PV
NCO 60000
NPV -575.1
IRR= Lower rate+ NPV at Lower rate *(Higher rate –Lower rate)
(PV Lr - PV Hr)
=17%+ {727/ (727+575) } * (18-17)%
=17%+.5583%
=17.56%
iii) As the NPV is positive as well as the IRR(17.56%) is greater than cost of
capital (10%), the project should be accepted.
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Business Digest 8 Previos Exam’s Math and solution
৩৭ তম বিবিএি (wnmveweÁvb)
বিষয় ক াডঃ ৭০১
পূে িমানঃ ১০০
(কেক ান ৪টি প্রকের উত্তর বিকত হকি)
িময়: ৪র্ণ্টা
2| (K) ÒwnmveweÁ‡bi †gŠwjK mgxKi‡Yi mgZv KL‡bv wewNœZ nq bvÓÑ e¨vL¨v Kiyb|
2| (L) Rbve Kwig 2017 mv‡ji 1jv gvP© GKwU †mev`vbKvix cÖwZôvb Pvjy K‡ib| cÖ_g gv‡mi †jb‡`b¸‡jv wb¤œiƒc:
gvP©-1: cÖviw¤¢K wewb‡qvM bM` 1,00,000 UvKv, AvmevecÎ 20,000 UvKv Ges GKvU †gwkb hvi µqg~j¨ 30,000
UvKv (Avqy®‹vj 5 eQi)
wZb gv‡mi Ni fvov AwMÖg cÖ`vb 30,000 UvKv|
mvcøvBR µq bM‡` 5,000 UvKvq Ges evwK‡Z 7,000 UvKvq|
‡gwk‡bi Rb¨ exgvwKw¯Í cÖ`vb 1,800 UvKv|
gvP©-5: ¯’vbxq ˆ`wbK cwÎKvq weÁvcb cÖ`vb 3,000 UvKv|
gvP©-10: †mev cÖ`vb eve` Avq bM‡` 15,000 UvKv, evwK‡Z 8,000 UvKv|
gvP©-15: wewea LiP cÖ`vb 200 UvKv|
gvP©-20: e¨w³MZ Li‡Pi Rb¨ D‡Ëvjb 7,500 UvKv|
gvP©-25: †mev cÖ`vb eve` bM‡` Avq 8,000 UvKv|
gvP©-28: weÁvcb wej m¤ú~Y© cÖ`vb Kiv nj|
gvP©-30: Kg©Pvixi †eZb cÖ`vb 7,500 UvKv|
BDwUwjwU wej cvIqv †Mj 5000 UvKv|
gvP©-31: mviv gv‡mi mvcøvBR LiP 8,000 UvKv|
evwK Av`vq 5,000 UvKv Ges evwK cwi‡kva 6,000 UvKv|
‡iIqvwgj
wW‡m¤^i 31, 2017
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Business Digest 9 Previos Exam’s Math and solution
mgš^qbg~n:
AbycvwR©Z †mev Avq †_‡K Avq n‡q‡Q 20,000 UvKv|
cÖvc¨ my` Avq 5,000 UvKv|
mvcøvBR gRy` 2,000 UvKv|
exgv †gqv` DËxb© n‡q‡Q 4,475 UvKv|
miÄv‡gi evwl©K AePq 10% Ges `vjv‡bi AePq 5%|
e‡Kqv my` LiP 10,000 UvKv|
KiYxq:
(K) 10 Ni wewkó Kvh©cÎ|
(L) mgvcbx `vwLjv|
4| (K) AePq Kx? AeP‡qi cwigvY wbY©‡q †Kvb ‡Kvb welq ¸iæZ¡c~Y©?
4| (L) †mvbvjx g¨vbyd¨vKPvwis †Kv¤úvwb wZbwU Avjv`v †gwk‡b Drcv`bKvh© cwiPvjbv K‡I Avm‡Q| †gwk‡bi cÖK„wZMZ Kvi‡Y wewfbœ
AePq c×wZ e¨envi K‡i cÖwZôv‡bi wnmveiÿY Kiv n‡q _v‡K| †gwkb¸‡jv msµvšÍ Z_¨ wb¤œiƒc:
‡gwkb µ‡qi ZvwiL g~j¨ Kvh©Kvj †k‡l g~j¨ Avqy®‹vj AePq
UvKv UvKv eQi c×wZ
A 1-1-2014 4,50,000 10,000 4 w¯’iwKw¯Í
B 1-1-2014 10,00,000 20,000 5 µgn«vmgvb
C 1-1-2015 8,00,000 50,000 5 Kvh©wfwËK
‡gwkb C Gi AvbygvwbK Kvh©Kvj 25,000 NÈv hvÑ
1g erm‡i 2q erm‡i 3q erm‡i 4_© erm‡i 5g erm‡i
4,000 NÈv; 5,000 NÈv; 6,000 NÈv; 6,000 NÈv; 4,000 NÈv|
KiYxq:
(1) 31‡k wW‡m¤^i 2016 Zvwi‡L AeP‡qi cwigvY wba©viY K‡i Rv‡e`v wjLyb Ges D³ Zvwi‡Li DØ„ËcÎ cÖwZ †gwk‡bi eyK f¨vjy
Avjv`vfv‡e cÖ`k©b Kiæb|
(2) hw` †gwkb B 1/1/2014 Gi cwie‡Z© 1/4/2014 Zvwi‡L µq Kiv n‡q _v‡K Z‡e D³ †gwk‡bi 2014 Ges 2015 mv‡ji
AeP‡qi cwigvY KZ n‡e?
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Business Digest 10 Previos Exam’s Math and solution
Bvfvbv †Kv¤úvwb
Zzjbvg~jK DØ„ËcÎ
wW‡m¤^i 31
m¤úwËmg~n 2017 UvKv 2016 UvKv
bM` 71,000 45,000
cÖvc¨ wnmve 44,000 62,000
gRy` cY¨ 1,51,000 1,42,000
AwMÖg LiP 15,280 21,000
f~wg 1,05,000 1,30,000
miÄvg 2,28,000 1,55,000
cywÄf’Z AePq miÄvg (45,000) (35,000)
`vjvb 2,00,000 2,00,000
cywÄf’Z AePq `vjvb (60,000) (40,000)
7,09,730 6,80,000
`vq I ÷K‡nvìviÕm BKz¨wqwU
cÖ‡`q wnmve 47,730 40,000
cÖ‡`q eÛ 2,60,000 3,00,00
mvaviY †kqvi (cÖwZwU 1 UvKv K‡i) 2,00,000 1,60,0000
msiwÿZ gybvdv 2,02,000 1,80,000
7,09,730 6,80,000
AwZwi³ Z_¨vewj:
1| 2017 mv‡ji bxU jvf
2| AePq LiP
3| bM‡` jf¨vsk cwi‡kva
4| bM‡` miÄvg µq 95,000 UvKv| 22,000 UvKv g~‡j¨i miÄvg hvi ewng~j¨ 10,000 UvKv| weµq Kiv nq 6,000 UvKv|
KiYxq:
c‡ivÿ cw×wZ‡Z GKwU bM` cÖevn weeiYx|
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Business Digest 11 Previos Exam’s Math and solution
৮। ) “এ টি সুষ্ঠ উৎপািন -ব্যয় বহিাি পদ্ধবত ব্যয় বনয়ন্ত্রকের উপায়”- ব্যাখ্যা রুন।
খ) উৎপািন -ব্যয় বহিািবিজ্ঞান ও আবথ ি বহিািবিজ্ঞাকনর মকে পাথ ি য বনে িয় রুন।
গ) “স্বাভাবি েবত এ টি পবর বল্পত েবত”- ব্যাখ্যা রুন।
র্) বমতব্যয় পবরমাে বনি িারকে ী ী বিষয় বিকিচনা রকত হয় িংকেকপ উকেখ রুন।
ঙ) “প্রবেয়া ব্যয় হকলা িমকয়র বিভাকগর এিং এ উৎপািকনর গড় ব্যয়”- ব্যাখ্যা রুন।
১১। ) “বনরীোর প্রিান উকদ্দশ্য ভুল ও জলা-জুয়াচুবর উির্ােন ও বনিারে”। মন্তব্য রুন।
খ) “ভাউবচং বনরীোর অপবরহাে ি উপািান”। ব্যাখ্যা রুন।
গ) “বনরীে মূল্য বনরূপ নন ব ন্তু মূকল্যর িাকথ বতবন র্বনষ্ঠভাকি জবড়ত”। আকলাচনা রুন।
র্) অভযন্তরীে বনয়ন্ত্রে, বনিারে ও বনরীোর মকে পাথ ি য কিখান।
ঙ) ভুল-ত্রুটি ও জুয়াচুবর িম্পক ি বনরীেক র তিব্য িে িনা রুন।
চ) বিি ভাউচাকরর বিবিষ্ট্য ী ী?
ে) িাংলাকিি বনরীোর কেকে আন্তজিাবত মানিমূহ িাস্তিায়ন িম্পক ি আকলাচনা রুন।
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Business Digest 12 Previos Exam’s Math and solution
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Business Digest 13 Previos Exam’s Math and solution
Solution 4(i):
Depreciation for the year 2016 = (Cost –Salvage Value) / number of Years
= (Tk.4,50,000 - Tk.10,000) / 4 = Tk.4,40,000 /4= Tk. 1,10,000.
r = 1 - (S/C)1/n
r = 1 - (20,000/10,00,000)1/5
r = 54 %
Where:
r = Rate of depreciation
n = Estimated useful life of asset = 5 Years
S = Residual value after the expiry of useful life = Tk. 20,000
C = Original cost of asset = Tk. 10,00,000.
So, Depreciation of Machine B under Reducing balance method in 2016 is Tk. 1,14,264.
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Deprecation Expense-............………Dr. 1,10,000
2016
Accumulated Depreciation– Machine A…….Cr. 1,10,000
Dec 31
(to record depreciation expense of machine A)
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Business Digest 14 Previos Exam’s Math and solution
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Deprecation Expense-............………Dr. 1,14,264
2016 1,14,264
Accumulated Depreciation– Machine B…….Cr.
Dec 31
(to record depreciation expense of machine B)
Sonali Manufacturing
Balance Sheet
As on 31 December 2016
Solution: 4 (ii)
If Machine was purchased on 1 April 2014 instead of 1 January 2014 the amount of depreciation in 2014 &
2015 would be as follows:
Assets Taka
Machine A………………..…………………………………...Tk. 4,50,000
Less: Accumulated Depreciation– Machine A…………...Tk. 3,30,000 1,20,000
If Machine was purchased on 1 April 2014 instead of 1 January 2014 the amount of depreciation in 2014 &
2015 would be as follows:
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Business Digest 15 Previos Exam’s Math and solution
Solution 6 (b)
Required Journals:
Date Etu Company (Buyer) Noshin Company (Seller)
10 Inventory A/C…...Dr. 80,000
Nov Accounts payable……..Cr. 80,000 Accounts receivable (Etu)……...Dr, 80,000
Sales A/c……………………………....Cr,80,000
COGS…………………………...Dr. 60,000
Inventory…………………………. Cr., 60,000
11 Inventory……………..Dr. 2,000
Nov Cash…………………….Cr. 2000
Solution 6 ©:
Navana Company
Cash flow statement (indirect method)
For the year ended 31st Decemeber, 2017
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Business Digest 16 Previos Exam’s Math and solution
Continued:
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Business Digest 17 Previos Exam’s Math and solution
Using ‘Weighted Averaged Cost’ method under periodic inventory system, calculate the value of
i.Ending inventory
ii.Cost of goods sold; and
iii.Gross profit.
3. Differentiate between depreciation and impairment of assets with examples.
4. Explain LCNRV principle as per IAS-2.
5. Walton Company had net sales in 2015 of Tk. 14,00,000. On December 31, 2015, before adjusting entries, the
balances in selected accounts were accounts receivable Tk. 2,50,000 debit and allowance for doubtful accounts Tk.
2,400 credit. If Walton estimates that 2% of its net sales will prove to be uncollectible, prepare journal entry to record
bad debt expense on December 31, 2015.
6. Net income for the year for RFL company was Tk. 7,50,000. But the statement of cash flows reports that net cash
provided by operating activities was Tk. 8,60,000. RFL also reported capital expenditures of Tk. 75,000 and paid
dividend of Tk. 30,000. Compute RFL’s free cash flow. [
7. KBC Company’s bank statement for May 2018 shows the following data.
Balance on 1/05/2018 Tk. 1,26,500 and Balance on 31/05/2018 Tk. 1,42,800
Debit Memorandum:
NSF check Tk. 1,750
Credit Memorandum:
Collection of note receivable Tk. 5,050
The cash balance per books on May 31 is Tk. 1,33,190. Your review of the data reveals the following:
1)The NSF check was from Copple Co., a customer.
2)The note collected by the bank was a Tk. 5,000, 3-month, 12% note. The bank charged Tk. 100 collection fee.
No interest has been accrued.
3)Outstanding cheques on May 31 totalled Tk. 24,100.
4)Deposits in transits on May 31 toatalled Tk. 17,520.
5)A Victoria Peak Company cheque for Tk. 3,520, dated May 10, cleared the bank on May 25. The company
recovered this cheque, which was a payment on account for Tk. 3,250.
Required:
Prepare a bank reconciliation (Only adjusted cash balance as per Cash Book) on May 31.
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Business Digest 18 Previos Exam’s Math and solution
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Business Digest 19 Previos Exam’s Math and solution
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Business Digest 20 Previos Exam’s Math and solution
Question-1:
To give opinion on Financial Statement
Management
Question-2:( a)
Description Amount
Beginning inventory (100 x 2.10) 210.00
(-) Costs of Sales (75 x 2.10) 157.50
[Of rest 25 units] 52.50
(+) Purchase (150 x 2.80) 420.00
[Of 175 units] 472.50
[per unit cost=472.5/175=2.7]
(-) Cost of Sales (100 x 2.70) 270.00
[Of 75 units] 202.50
(+) Purchase (50 x 3) 150.00
Ending Inventory 352.50
Question-4:
LCNRV= Lower of Cost Net Realized Value
It is a principle of accounting that we have to recognize the lower amount of an asset between its book
value and market value.
Question-5:
Bad debt expense on net sales= 1,400,000 x 2% =28,000
Question-6:
FCF = Cash Flow from Operation – Capital Expenditure
= 8,60,000 – 75,000
= 7,85,000
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Business Digest 21 Previos Exam’s Math and solution
Question-7:
Description Amount
Balance on Bank Statement 1,42,800
(-) Outstanding Cheque (24,000)
(+) Deposit in Transit 17,520
Ending Balance 1,36,220
Balance on cash Book 1,33,190
(-) NSF Cheque (1,750)
(+) Collection of Notes Receivable 5,050
(-) Error in recording (270)
Ending Balance 1,36,220
Question-8:
Off-Balance Sheet (OBS) items:
OBS items are those items which don’t come in Financial Statements directly but mention in Notes
to the Accounts. This is because those items are yet to be recognized as transaction.
How they arise:
They arise from contingent assets or liabilities.
Question-9:
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Business Digest 22 Previos Exam’s Math and solution
= 6,581
Note:
Sales 2,00,000
(-) Operating cost (1,10,000)
Gross Profit 90,000
(-) Depreciation (1,80,000/3) (60,000)
EBIT 30,000
(-) Tax (40%) (12,000)
18,000
(+) Depreciation 60,000
Net income 78,000
For Better understaning please check relevant chapters and formula given in the main
sections of the book
Debit Memorandum:
NSF check Tk. 1,750
Credit Memorandum:
Collection of note receivable Tk. 5,050
a. The cash balance per books on May 31 is Tk. 1,33,190. Your review of the data reveals the
following:
b. The NSF check was from Copple Co., a customer.
c. The note collected by the bank was a Tk. 5,000, 3-month, 12% note. The bank charged Tk. 100
collection fee. No interest has been accrued.
d. Outstanding cheques on May 31 totalled Tk. 24,100.
e. Deposits in transits on May 31 toatalled Tk. 17,520.
f. A Victoria Peak Company cheque for Tk. 3,520, dated May 10, cleared the bank on May 25.
The company recovered this cheque, which was a payment on account for Tk. 3,250.
Required:
Prepare a bank reconciliation statement on May 31and pass the necessary journal entries.
3. The selling price per unit, variable-expense ratio, and total fixed costs for the year of Barilgoan Company
Limited are Tk. 125, 60% and Tk. 3,84,000 respectively. How many units will have to be sold in order to
earn a target profit of Tk. 96,000 if income tax rate is 40%?
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Business Digest 23 Previos Exam’s Math and solution
13. A and B together have Tk. 1210. If 4/15 of A’s amount is equal to 2/5 of B’s amount. How much
amount does B have?
14. Two numbers are respectively 20% and 50% more than a third number. The ratio of the two number
is:
15. Which is the missing letters in this series: SCD, TEF, UGH, ____ , WKI.
16. The captain of Bangladesh cricket team of 11 members is 26 years old and the wicket keeper is 3
years older. If the ages of these two are excluded, the average age of the remaining players is one
year less than the average age of the whole team. What is the average age of the team?
17. There are 100 employees in a conference hall of AB bank. You note that 99% of them are managers.
How many managers would need to leave the conference in order to reduce the percentage of
managers in the hall to 98%?
18. Tickets numbered 1 to 20 are mixed up and then a ticket is drawn at random. What is the probability
that the ticket drawn has a number which is multiple of 3 or 5?
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Business Digest 24 Previos Exam’s Math and solution
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Business Digest 25 Previos Exam’s Math and solution
CB questions:
Question-1:
Financial statements are formal written records of the financial performance and financial
position of a company. There are Five Components of Financial Statements:
1. Balance Sheet or, Statement of Financial Position
2. Income Statement or, Statement of Comprehensive income
3. Statement of Changes in Shareholders’ Equity or Retained Earnings Statement
4. Statement of Cash Flow
5. Notes to the financial statements.
Financial statements are the main source of financial information for most decision
makers. There are many users of the financial statements produced by an organization. The
users may be classified into internal and external users.
A) Internal Users: Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business for the interest of the organization. e. g.
Proprietor, Management authority, Internal auditor, Accounts departments, Company
officers etc.
B) External Users: External users are individuals and organizations outside a company
who want financial information about the company for their own interest. For example,
Government, Shareholders, Lenders, Creditors, Investors, Customers, Researchers,
Chamber of commerce, General public, External Auditor, Stock Exchanges, Tax authority
etc .
Question-2:
Bank Reconciliation Statement
Description Amount
Balance on Bank Statement 1,42,800
(-) Outstanding Cheque (24,000)
(+) Deposit in Transit 17,520
Ending Balance 1,36,220
Balance on cash Book 1,33,190
(-) NSF Cheque (1,750)
(+) Collection of Notes Receivable 5,050
(-) Error in recording (270)
Ending Balance 1,36,220
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Question-3:
Business Digest 26 Previos Exam’s Math and solution
Journal Entries:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Question:3
As the tax rate is 40%, so in order to earn a profit of Tk. 96,000 the company has to earn Tk.
160,000 as profit before tax.
We know,
Units be sold in order to earn a target profit =
=
=544,000 / 50 =10,880 Units
Here, variable cost per unit= Selling per unit Price * variable-expense ratio= ( Tk. 125*60%) = Tk. 75 .
Question:4
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Business Digest 27 Previos Exam’s Math and solution
Question:5
We know, Economic Value Added = NOPAT - Capital Invested * WACC
= Tk. 700- Tk. 2,500*10%
= Tk. 700– Tk. 250
= Tk. 450.
Here, Capital Invested= Total Debt + capital leases + shareholders'' equity.
Question:6
According to the People’s target capital structure, the amount needed as internal financing
(equity) for the Tk. 5 million expenditure would be Tk. Tk. 2 Million (Tk. 5 million * 40%). As
People Pharmaceutical follows residual distribution policy, the amount available for
distribution as dividend would be Tk. 1 million (Tk. 3 million - Tk. 2 million). We know
dividend payout ratio = (Cash Dividend / Net Income). So, the dividend payout ratio of People
Pharmaceutical would be 33.33% (Tk. 1 million/ Tk. 3 million).
Question:7
As per NPV decision criteria, Project B is not feasible as it provides negative NPV. Here, Project
A , C & D have a Profitability index (PI) of 2.00, 4.00 & 3.67 respectively. Now, as the firm has
only Tk. 50,000, the firm will not be able to invest in all the Projects, so the firm need to make
capital rationing decision. Here, both C & D have a higher PI than Project A but C & D are
mutually exclusive. As all the projects are divisible, so we must choose Project A and one from
Project C & Project D. So let’s examine Project combinations:
Project C & A: Investment pattern would be Tk. 10,000 in Project C & rest Tk. 40,000 in Project A. So
the total NPV would be Tk.1,20,000 (Tk. 40,000 from Project C & Tk. 80,000 from Project A).
Project D & A: Investment pattern would be Tk. 15,000 in Project D & rest Tk. 35,000 in Project A.
So the total NPV would be Tk.1,25,000 (Tk. 55,000 from Project C & Tk. 70,000 from Project A).
So, as Investment in Project A & D end up with higher NPV, the optimal investment decision
for the firm is to invest in in project A tk.35,000 and in Project D Tk.15,000.
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Question:8
Right shares are those shares which are issued by a corporation in ratio of equity shares to existing
shareholders to raise capital for corporation. Rights shares protect against dilution of ownership by
allowing existing stockholders to purchase additional shares of any new stock issues. Without
this protection controlling & voting power of the existing shareholders will be reduced.
Question:9
Ethical conduct is essential when performing an audit in order to meet the defining
characteristics of the auditing profession which are trust, independence and integrity.
Respecting the audit rules and standards is not enough, while in fact legislation is a minimum
to respect in the audit process. Often the rules need to be interpreted and auditors find
themselves is a need for reliance on good judgment and so, professional awareness as well as
respect of moral and ethical precepts are key in conducting an audit.
The Code of Ethics is a statement of principles and expectations governing behavior of
individuals and organizations in the conduct of auditing. Code of Ethics for Professional
Accountants includes:
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behavior
Question:10
Audit risk refers to the risk that an auditor may issue an unqualified report due to the auditor's
failure to detect material misstatement either due to error or fraud.
Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Question:11
nternal Audit is the appraisal and monitoring activity established within the entity to examine,
evaluate and report to the management and directors on the adequacy and effectiveness of the
accounting and internal control system. Five components of an effective "internal control system"
that an auditor must understand as part of understanding the entity are as follows:
1) Control Environment
2) Risk Assessment
3) Control Activities
4) Information and Communication
5) Monitoring
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Business Digest 29 Previos Exam’s Math and solution
01. Write the answers or the following questions in the answer booklet (a-j): [20]
a. Patents would appear in which section of the balance sheet?
Answer: Patents go in the intangible assets subsection of the classified balance sheet.
b. In an accounting period, when does firm usually take a physical inventory?
Answer: A full physical count is usually performed once a year, closer to the end of the year.
c. In a period of rising prices, which inventory method tends to give the highest reported inventory?
Answer: FIFO.
d. A company's five-day weekly payroll of Tk. 2,940 is paid on Fridays (Saturday and Sunday
are weekend). Assume that the last day of the month falls on Wednesday. What will be the
required adjusting entry for the month end?
Answer:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Wages Expense....……………Dr. 1764
Wages Payable..………………….…Cr. 1764
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2. The charcoal company is purchasing a second-hand polishing machine from a competitor who has gone
bankrupt.it will incur the following costs:
Agreed price to be paid to tender………………………………… Tk. 8,000
Dismantling the machine at its current location……………...…….. Tk. 400
Transportation to Charcoal’s factory………………………….……. Tk. 350
Machine refurbishment cost prior to re-installation……………...… Tk. 175
Re-installation …………………………………………………....… Tk. 125
What should be the total amount to be included in non-current assets in respect of the machine? [10]
Answer: According to IAS 16: Property, Plant and Equipment is initially measured at its cost. Cost includes:
its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates;
any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management;
and the estimated costs of dismantling and removing the item and restoring the site on which it is
located, unless those costs relate to inventories produced during that period.
So for the given scenario, total amount to be included in non-current assets in respect of the machine
would be Tk. 9,050 (Tk. 8,000+400+350+175+125).
3. You just paid Tk. 750,000 for an annuity that will pay you and your heirs Tk. 45,000 a year forever.
What rate of return are you earning on this policy? [10]
Solution:
We know, Present Value of perpetuity =
From the above formula we can derive the return of perpetuity, which will be Cash Flow / Present Value
of perpetuity. So, the return on the perpetuity would be 6% (Tk.45,000/ Tk. 750,000).
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Business Digest 31 Previos Exam’s Math and solution
1. Write only the ANSWERS of the following questions in the answer booklet
a. An annuity is a stream of Equal annual flows.
b. Beta is useful for comparing the relative Volatility/ Riskiness of different stocks.
c. If the NPV of a project is greater than 0, the PI will be greater than One (1).
d. LUCKY Enterprise has a dividend yield ration of 4% and price earnings ratio of 10 and paid a dividend per
share of Tk. 0.60. What is the earning per share?
Answer: Given,
Dividend yield ratio is 4% and dividend paid per share is Tk.0.60, so market price per share= (0.60/4)*100=Tk.15.
Again, here, price earnings ratio is 10 & price per share is Tk. 15, so earning per share is Tk.1.5 (Tk.15/10).
e. In 3 years you are to receive $ 5000. If the interest rate were to suddenly increase, the present value of that
future amount to you would Decrease.
f. Minden Co has sales of $500,000, operating profit of $50,000. Interest expense of $10,000, tax
expense of $20,000, total equity of $125,000 and total debt of $275,000. is the debt to assets
ratio?
Answer: We know, debt to assets ratio = = = 68.75%
Here, total assets = total equity + total debt = $125,000 + $275,000 =$400,000.
g. What is the equation of Acid-Test Ratio in accounting?
h. A company purchased a car at a cost of $42,000 and expects its salvage value to be $6,000 after
120,000 miles of service. Using the units-of-production methods, what is the first year’s depreciation
if the car is driven 24,000 miles?
Answer: we know,
Depreciation under units-of-production method = * Production during the year
= * 24,000 =$7,200
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2. The accounting records of ABC Company show the following data. Beginning inventory
4,000 units at $3, purchases 6,000 units at $4, sales 7,000 units at $12. Determine the cost of
goods sold during the period under a periodic inventory system using (a) the FIFO method,
and (b) the LIFO method.
Answer:
(a) Cost of goods sold under the FIFO method will be comprised of first 4,000 units (from
beginning inventory) at $3 and the remaining 3,000 (from purchase) units at $4. Which is,
4,000*$3 + 3,000*$4=$12,000+$12,000=$24,000.
(b) Cost of goods sold under the LIFO method will be comprised of 6,000 units (from purchase)
at $4 and remaining 1,000 units (from beginning inventory) at $3. Which is, 6,000*$4 +
1,000*$3=$24,000+$3,000=$27,000.
3. The Sprouts-N-Steel Company has two divisions; health foods and specialty metals. Each
division employs debt equal to 30 percent and preferred stock equal to 10 percent of its total
requirements, with equity capital used for the remainder. The current borrowing rate is 15
percent, and the company's tax rate is 40 percent. At present, preferred stock can be sold
yielding 13 percent. Sprouts-N-Steel wishes to establish a minimum return standard for each
division based on the risk of that division. The company has thought about using the capital-
asset pricing model in this regard. It has identified two samples of companies, with modal
value betas of 0.90 for health foods and 1.30 for specialty metals. The risk-free rate is
currently 12 percent and the expected return on the market portfolio 17 percent. Using the
CAPM approach, what weighted average required returns on investment would you
recommend for these two divisions?
Answer:
Here, weight of debt= 30%, weight of Preferred stock=10% and weight of equity= 60% (100%-30%-10%)
After tax cost of debt= 15 %*( 1-.40) =9%;
Cost of preferred stock=13%
Cost of equity for health food division under CAPM approach= 12%+ (17%-12%)*.9=12%+4.5%=16.5%
Cost of equity for specialty metals division under CAPM approach= 12%+ (17%-12%)*1.3=12%+6.5%=18.5%
5. A restaurant has a set menu for 700 Taka. A 15, VAT is also imposed on the food value.
The set meal has a discount of 20%. Find the effective discount for the set meal?
Answer: Here, the original price of the set menu is Tk. 700, at a 20% discount the price
would be Tk. 560 (Tk. 700*.80). Now as 15% VAT is applicable to the product so the
amount to be paid would be Tk.560+ Tk.560*15%= Tk. 644. So, the effective discount for
the set meal will be Tk.56 (Tk. 700- Tk.644).
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Business Digest 33 Previos Exam’s Math and solution
1. Write only the ANSWERS of the following question in the answer booklet: [20]
a. The discount rate at which two projects have identical NPV is referred to as cross over rate.
b. Net profit margin (NPM) is 5 Percent, total assets are $8 million, and ROI is 8 percent, the firm's
total asset turnover (TAT) is 1.6 Times.
Explanation: we know, Total Asset Turnover = = =1.6 times
Here, the amount of net sales is not given, but we can find the amount of net sales in the following
ways. NPM is 5%, so we can say that if net profit is $5 then amount of net sales would be $100. On the
other hand, ROI is 8% so the amount of net income would be $640,000 ($8,000,000*.08). So, now the
value of net sales would be $12,800,000 ($640,000/.05).
Note: ROI= (Net Income/ Total Investment), but as here the amount of investment is not given so
we can use total asset as a proxy of investment.
c. When the market’s required rate of return for a particular bond is much less than its coupon rate, the
bond is selling at a premium.
d. The use of fixed operating costs to magnify the effects of changes in sales on the firm's earnings before
interest and taxes is defined as Operating leverage.
e. Zetro Co. had a beginning retained earnings balance of $54,000 on January 1, 2019. Net income
before taxes in 2019 was $18,000. The income tax rate was 40%. Lamed also paid out $7.000 in
dividends during 2019. What is the ending retained earnings balance?
Answer: Ending Retained earnings = Opening Retained earnings + Net income after tax - Dividend paid
= $54,000+$10,800-$7000
= $ 57,800
Here, net income after tax= $ 18,000*(1-.4) = $10,800
f. Who bears the shipping cost in case of FOB shipping point? Answer: the buyer of the goods.
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j. Visual Company overstated its 2010 ending inventory, by Tk. 22,000. What impact this
error has on ending inventory, in 2010 and 2011?
Answer: in 2010 ending inventory will be overstated by Tk. 22,000 & in 2011 there will
be no impact on ending inventory. The reason is, the overstated amount of inventory at
the end of one accounting period becomes the beginning inventory of the following
period, the following period's cost of goods sold will be too high and will result in the
period's gross profit and net income being too low.
2. T. Co. assigned Tk. 500,000 of accounts receivable to M. Finance Co.as security for a
loan of Tk. 420,000. M. Finance Co. charged a 2% commission on the amount of the
loan; the interest rate on the note was 10%. During the first month, T. Co. collected Tk.
140,000 on assigned accounts after deducting Tk.380 of discounts. T. Co. accepted returns
worth Tk. 1,350 and wrote off assigned accounts totaling Tk.3730. Calculate the amount
of cash T. Co. received from M. Finance Co. at the time of the assignment? [10]
Answer: To find out the amount received by T. Co. from M. Finance Co. at the time of the
assignment let’s see the journal entries for the entire transaction for first month:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
i) Cash……………………….…………………….……Dr.
4,11,600
Commission on Loan…………………..………Dr.
8,400
At the Note Payable ………………….………………..Cr.
4,20,000
time of (to record receipt of cash and commission on loan)
Consign- ii) Accounts Receivable - Assigned …………Dr. 5,00,000
ment Accounts Receivable……………………..…..Cr. 5,00,000
(to record receipt of assigning of accounts)
As the requirement was to calculate the amount of cash T. Co. received from M. Finance Co. at the
time of the assignment. So the answer is TK. 4,11,600.
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Business Digest 35 Previos Exam’s Math and solution
3. The ledger of Harun, Inc. on March 31, 2018, includes the following selected accounts
before adjusting entries. Debit Credit Prepaid Insurance 3,600 Office Supplies 2,800
Office Equipment 25,000 Accumulated Depreciation-Office Equipment 5,000 Unearned
Revenue 9,200. An analysis of the accounts shows the following. i) Insurance expires at
the rate of Tk. 100 per month. ii) Supplies on hand total Tk. 800. iii) The office
equipment depreciates Tk.200 a month. iv) One-half of the unearned revenue was
earned in March. Prepare the adjusting entries for the month of March. [10]
Adjusting Entries
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
i) Insurance Expense………………………Dr. 100
Mar-31, Prepaid Insurance ………………………….Cr. 100
2018 (to record expired prepaid insurance)
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Business Digest 36 Previos Exam’s Math and solution
5. Topical questions:[9*10]
a) An old machine is sold for TK 50,000, its cost being 90,000 and accumulated
depreciation TK 20,000. Give the journal entry for the sale.
Answer:
Amount (Tk.)
Date Account Title and Explanations Ref Debit Credit
Accumulated Depreciation-Machine...Dr. 20,000
Cash…………………….…………....……………Dr. 50,000
Loss on the sale of Machine...……………Dr. 20,000
Machine………………………....………………….…Cr. 90,000
(to record sale of old machine)
b) Briefly explain two limitations an income statement.
Income statements include judgments and estimates, which mean that items that might be
relevant but cannot be reliably measured are not reported and that some reported figures
have a subjective component.
With respect to accounting methods, one of the limitations of the income statement is that
income is reported based on accounting rules and often does not reflect cash changing hands.
c) Cost of goods sold is TK 16,000, profit margin on sales is 20%, then determine sales revenue.
Answer: We know, Sales Revenue = Cost of goods sold / (1-Profit margin rate)
= Tk. 16,000 / (1-.20)
= Tk. 16,000 / .8 = Tk. 20,000.
d) Inventory TK 30,000, accounts receivable TK 45,000, cash TK 15,000, accounts payable TK
25000, tax payable TK 18,000. Determine current ratio.
Answer: We know, Current Ratio= Currant Asset / Current Liabilities.
So, current Ratio=(30,000+45,000+15,000) / (25,000+18,000)
= 90,000 / 43,000b = 2.09 Times.
e) The business of the government is not to do business. Do you agree? Why?
Answer: Although corporations and governments are organizations, that may be one of the
few traits they have in common. The role of a business, any business, is to make money.
Although governments must respond to the desires of their constituents (consumers) by
providing necessary services (products), here the path diverges because public officials,
unlike those in the private sector, must balance meeting the bottom line with the expectation
that they will also provide for the common good, however that's defined. And, they must
differentiate between Profit vs. People, Shareholders vs. Citizens, and Customers vs.
Constituents. So, I agree to the statement “The business of the government is not to do
business”.
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Business Digest 37 Previos Exam’s Math and solution
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Business Digest 38 Previos Exam’s Math and solution
Saghor Company distributes a single product. The company’s sales and expenses for last
month follow:
Total Per Unit
Sales. . . . . . . . . . . . . . . . . . . . . . . . 450,000 30
Variable expenses . . . . . . . . . . . . . 180,000 12
Contribution margin . . . . . . . . . . . 270,000 18
Fixed expenses. . . . . . . . . . . . . . . 216,000
Net operating income . . . . . . . . . . . 54,000
Required:
1.What is the monthly break-even point in units sold and in sales Tk. ?
2. What is the total contribution margin at the break-even point?
3. How many units would have to be sold each month to earn a target profit of 90,000? Use the
formula method. Verify your answer by preparing a contribution format income statement at the target
sales level.
4. Compute the company’s margin of safety in both Taka and percentage terms.
5. What is the company’s CM ratio? If sales increase by 50,000 per month and there is no change in fixed
expenses, by how much would you expect monthly net operating income to increase?
6. Compute the company’s degree of operating leverage.
7. Using the degree of operating leverage, estimate the impact on net operating income of a 5%
increase in sales.
8. Verify your estimate by constructing a new contribution format income statement for the company
assuming a 5% increase in sales.
Solution 1.
Unit sales to break even
=12000 Units
Solution 2. Total contribution margin is equal to fixed expense at break even point. Thus Total
contribution margin is Tk. 216000. Alternatively,
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Solution 3. Unit Sales to Target Profit = ( Target Profit+Fixed Expense)÷Unit Contribution margin
= (90000+216000)÷18= 17000 Units
Solution 4.
Margin of Safety in Taka = ( Total Sales- Break Even Sales)
= (450000-360000)
= 90000
= 90000÷450000
= 20%
Solution 5.
= 18÷30
= 60%
Thus, Given no change in fixed expense, will lead to 30000 increase in net operating
income if sales increase by 50000 Tk.
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Business Digest 40 Previos Exam’s Math and solution
Solution 8.
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Business Digest 42 Previos Exam’s Math and solution
Rule-A: In case of error only in a single account, while opposite account is correct.
Give entry for the correct account- Debit/Credit
Suspense account- Credit/Debit
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Business Digest 43 Previos Exam’s Math and solution
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Business Digest 44 Previos Exam’s Math and solution
1) Prepaid Expense:
a) If first time it was recorded as an asset (British Method):
One year has passed of prepaid insurance 5000 taka for 5 years.
Recorded during first time Adjusting entry
Prepaid insurance -----------------Dr 5000 Insurance expense -------------------Dr 1000
Cash ------------------------------Cr 5000 Prepaid insurance--------------------------Cr 1000
2) Unearned Revenue:
a) If first time it was recorded as a liability (British Method):
Half portion of unearned revenue 10,000 taka has been earned.
Recorded during first time Adjusting entry
Cash -----------------------------Dr 10,000 Unearned Revenue A/C----------------Dr 5,000
Unearned Revenue ---------------Cr 10,000 Service Revenue A/C------------------------Cr 5,000
Adjusting entry
Accrued Commission A/C----------------Dr 2,500
Commission Revenue A/C-----------------Cr 2,500
4) Accrued Expense:
Commission earned but still not been received/recorded 2,500 taka.
Adjusting entry
Rent expense A/C----------------Dr 2,500
Accrued rent A/C--------------------Cr 2,500
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Business Digest 45 Previos Exam’s Math and solution
5) Merchandise Inventory:
a) Perpetual Inventory System: If COGS and Ending inventory is given in the question
b) Periodic Inventory System: If purchase and beginning inventory is given in the question.
[GLv‡b cÖviw¤¢K gRy‡`i e¨v‡jÝ k~Y¨ (0) K‡i †`qv nq]
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Business Digest 47 Previos Exam’s Math and solution
Income Statement
Expenditure Amount Income Amount
Bad debt expense 5,000
Balance Sheet
Asset Amount Amount
Current Asset:
Account Receivable 1,00,000
(-) Bad debt expense (5,000) 95,000
Allowance Method:
B-1) Percentage of receivable system:
In this method, allowance needs to be adjusted with the beginning balance and conditions given in the
questions. The beginning balance of bad debt allowance should be adjusted in such a way so that the
calculated result (bad debt expense) from the question should be the net balance or ending balance of bad
debt allowance.
Example-2.1: Credit balance of bad debt allowance on 01 January, 2018 is 5,000. Account Receivable in
this year was 80,000. It is decided that bad debt allowance would be 10% of Account Receivable.
Solution:
On 31 Dec, 2018, Ending balance of bad debt allowance = 80,000 x 10%
= 8,000
So, we need to adjust = 8,000 – 5,000
= 3,000
Date Description Source Debit Credit
2013 Bad debt expense----------------------------Dr 3,000
Dec-31 Bad debt allowance -----------------------Cr 3,000
Income Statement
Expenditure Amount Revenue Amount
Bad debt expense 3,000
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Balance Sheet
Business Digest 48 Previos Exam’s Math and solution
Balance Sheet
Liabilities and Equities Amount Amount
Allowance:
Old Bad debt allowance 5,000
(+) New Bad debt allowance 3,000 8,000
Income Statemen
Expenditure Amount Revenue Amount
Bad debt expense 9,000
Balance Sheet
Liabilities & Equities Amount Assets Amount
Allowance:
Old Bad debt allowance----------5,000
(+) New Bad debt allowance---9,000 14,000
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Business Digest 49 Previos Exam’s Math and solution
Calculate the depreciation and then prepare journal and financial statement for the 4 years.
Solution:
Depreciation rate= 100%/4 years = 25%
Machine= 1,80,000 + 12,000 + 8,000 = 2,00,00
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Business Digest 50 Previos Exam’s Math and solution
৩৮ তম বিবিএি
ব্যিস্থাপনা
বিষয় ক াডঃ ৭৩১
বনি িাবরত িময়-৪ র্ন্টা
পূে িমান-২০০
বিভাগ
মানঃ ২৫*৪=১০০
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Business Digest 51 Previos Exam’s Math and solution
40th BCS
Management
Subject Code: 731
Full Marks: 200
Time: 4 hours
Group A
(Answer any four questions from each group)
Marks: 25*4=100
1.a) Management is getting things done by others. Do you agree with this statement? Explain.
b) A manager plays many roles in an organization. What are those roles?
c) A manager must possess different skills/. What are those skills? Which skill is essential for top
level managers?
2.A) Planning is the preliminary function of management. Explain why.
b) Discuss the different types of planning. What kind of planning is Padma Bridge?
c) As a manager of an organization what factors would you consider while making a plan?
3. a) Increasing productivity is the main theme of scientific management. Explain the statement.
b) Tailor, the father of scientific management, believes that employees work only for money. Do
you agree with this statement? Give your opinion.
c) Henry Fayol’s principles are universal. Explain.
4.a) Discuss the different methods of coordination among the different departments of an organization.
b) A manager prepares different types of reports. Briefly discuss the different parts of report.
c) How would you conduct a good meeting?
5.a) Write down the direct and indirect financial benefits that an employee receives.
b) Describe the Theory of Equity in giving financial benefits.
c) What factors should be considered while deciding salary is a competitive market?
Group B
Marks: 25*4=100
6.a) Show arguments for and against the social responsibility of management.
b) How would you raise the ethical standard of a manager?
c) Discuss the similarities and differences between the management systems in Japan and Bangladesh.
7.a) What do you mean by management by objective (MBO)? What are the merits and limitations of
MBO?
b) Discuss the steps of strategic level planning.
c) What are the steps of decision making process? Mention the decision making errors.
8.a) Distinguish between a manager and a leader.
b) A leader influences other’s behavior by utilizing his authority. What are the different types of
authority used by leader?
c) Benevolent leadership is essential for the development of an organization. Give your opinion.
9.a) Discuss the steps of motivation process.
b) Explain the Maslow’s theory of motivation.
c) How would you motivate the individual workers of Bangladesh?
10.a) Correct and effective controlling system is the main driving force for executing a plan. Give your
arguments.
b) Analyze the techniques of non-budgetary control system.
c) Discuss the various steps of controlling and their limitation.
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Business Digest 52 Previos Exam’s Math and solution
Subject: Marketing
Full marks: 200
Time: 4 hours
Part-1
Answer any five questions
Marks: 20*5=100
1. a) Write a modern definition of marketing and explain it.
b) Show the differences between product concept and selling concept?
c) “The key to creating long-term consumer relationship is to ensure superior value and satisfaction
for consumers”- Discuss the statement logically. 7
2. a) What is meant by product mix? What are the essential decision making issues in product
development?
b) Explain your idea of three product levels with examples.
c) Identify decision making areas in determining brand strategy.
3.a) Explain the differences between full-cost pricing and marginal-cost pricing with
examples.
b) State the objectives of pricing.
c) Briefly discuss the strategies used for adjusting price increase and decrease in the market.
4. a) What do you mean by marketing environment? Why is it important?
b) Describe the environmental forces/factors that affect a company’s ability to serve
its customers.
c) Explain the key changes that occur in the cultural environment, and discuss how
these changes affect marketing decisions.
5.a) What are the major steps of target marketing?
b) Discuss the level of market segmentation.
c) Explain which variables are used in segmenting the market for soft drinks.
6.A) Explain the new product development process.
b) What is meant by fad, fashion and style in product life cycle?
c) The marketing manager has nothing to do when a product reaches the decline stage- Comment.
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Business Digest 53 Previos Exam’s Math and solution
14 a) How would you use Michael Porter’s model in analyzing market competition?
b) Elucidate the strategies used in competition by market challengers.
Subject: Marketing
Full marks: 200
Time: 4 hours
Part-1
Answer any five questions
Marks: 20*5=100
1 a) Discuss the basis of market segmentation.
b) Explain various strategies that may be adopted to determine product positioning in the target
market.
2 a) What is meant by service?
b) Describe characteristics of service with examples.
c) What strategies must be followed in service marketing? Explain.
3 a) What are the differences between direct and indirect channels of distribution.
b) “Proper selection, management, motivation and job performance evaluation of distribution
channel members are the salient responsibilities in managing indirect channel of distribution.”
Justify the statement.
c) Under what condition is it logical to use multiple channels of distribution?
4 a) Discuss the role of ‘Export Promotion of Bureau of Bangladesh’ in the export development of the
country.
b) Identify the basic problems in the marketing of consumer goods in Bangladesh.
c) How would you evaluate the role of stock exchanges in developing the capital market of
Bangladesh?
5 a) Explain with examples the difference between the selling concept and marketing concept in the
present context of Bangladesh?
b) What are the marketing challenges of the new millennium and how are the companies facing
them? Explain.
6 a) What is meant by price? Explain the relationship between price and demand.
b) Discuss the external factors that determine the price.
c) What is meant by break even pricing? Explain the role of cost, demand, and competition in setting
the price.
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Business Digest 54 Previos Exam’s Math and solution
Part-2
Answer any five questions
Marks: 20*5=100
9 a) What is meant by personal selling? Evaluate the contribution of personal selling in our economy
and society.
b) Explain “Personal selling means personal advertising.”
c) Is personal selling an art, science or a profession? Explain.
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Average return
Name of the Formula Explanation
Formula
Holding
Period Return 𝐸𝑛𝑑𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
HPR= 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
(F-1)
Holding HPR=Holding Period Return
Period Yield HPY=HPR-1
(HPY): (F-2)
Arithmetic
Mean ∑ 𝐻𝑃𝑌 ΣHPY= sum of all holding period
(F-3) 𝐴𝑀 = yields
𝑛
Geometric
Mean GM= [πHPR]1/n – 1
(determines
the = [(1+Return1) x (1+Return2) x
performance (1+Return3))]1/n - 1
results of an
investment or
portfolio)
(F-4)
Accounting
Name of the Formula Explanation
Formula
F-23
Current assets
Current ratio=Current liabilities
(F-24)
Cash+Short term investments+Receivables
Quick ratio=
Current liabilities
Debtor or
receivable Credit Sales
Receivable turnover = Average Account Receivable
turnover or,
Days Sales
Outstanding
(F-26)
Account
receivable Average receivable collection period
period or, Days 365 Days
Sales =
Debtor or receivable turnover
Outstanding
(F-27)
Stock or
inventory Cost of Goods Sols (COGS)
turnover Average Inventory
(F-28)
Inventory
period or, Days Average inventory processing period=
Inventory
Outstanding 365 Days
(F-29) Inventory turnover
Creditor or
Payable Credit Purchase
turnover Average Account Payable
(F-30)
Account
payable period Payable payment period
or, Days
Payable 365 Days
Outstanding =
Creditor or payable turnover
(F-31)
Total Asset
Turnover
(F-32) Net Sales
Average Total Net Assets
(F-33)
Net Sales
Fixed Asset Turnover=Average Net Fixed Assetss
(F-34)
Net Sales
Equity Turnover=Average Equitys
Gross Profit
margin Gross Profit
(F-35) Net Sales
Operating
Profit margin Operating Profit
(F-36) Net Sales
Return on
Owner’s Net income − Preferred Dividend
Equity Average Common Equity
(F-40)
Dupont
System: ROE Net Income Net Sales Total Assets
(F-41) = Net Sales
x Total Assests x Total Equity
Financial
Leverage Total Assets
Multiplier Common Equity
(F-42)
Tax Retention
Ratio Income Taxes
100% −
(F-43) Net Income before tax
𝒏 𝟐
√∑ (𝐎𝐄𝐢 − 𝐄(𝐎𝐄)) /𝐧
𝒊=𝟏
=
∑𝒏𝒊=𝟏 𝐎𝐄𝐢/𝐧
Debt Equity
Ratio Total Long Term debt
(F-45) total equity
Retention rate
(F-48) Dividends Declared
1−
Net Earnings
Valuation
Name of the Formula Explanation
Formula
Valuation of a
preferred Dividend kp=current market price
stock V=
kp
(F-49)
Valuation
through DDM Vj=Value of common stock j
𝒏
(Dividend Dt Dt=Dividend during period t
Vj= ∑ 𝐭
𝒊=𝟏 (1+k)
Discount K=Required rate of return on
Model) stock j
(F-50)
D/P=Expected dividend
Earning Price payout ratio
Earning multiplier =
Multiplier Earning ratio K= Expected required rate of
(F-51) D/P return on the stock
= g= Expected growth rate of
k−g
dividend for the stock
Portfolio Management
Name of the Formula Explanation
Formula
In Passive Management, total actual return = Risk free rate +
Total Actual Risk premium
Return
(F-61) In Active Management, total actual return = Risk free rate +
Risk premium+ Alpha
securities)
(F-73)
Cost of trade
𝑬𝑰𝑹
credit
(F-74)
𝒄𝒂𝒔𝒉 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝒓𝒂𝒕𝒆 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔
= 𝐱 𝒙𝟏𝟎𝟎
𝟏𝟎𝟎 − 𝒄𝒂𝒔𝒉 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒓𝒂𝒕𝒆 𝒄𝒓𝒆𝒅𝒊𝒕𝒑𝒆𝒓𝒊𝒐𝒅 − 𝒄𝒂𝒔𝒉𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕 𝒑𝒆𝒓𝒊𝒐𝒅
Cost of
Commercial 𝑷𝒂𝒓𝒗𝒂𝒍𝒖𝒆 − 𝑺𝒂𝒍𝒆 𝒗𝒂𝒍𝒖𝒆 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔
Paper 𝑬𝑰𝑹 = 𝐱 𝒙𝟏𝟎𝟎
𝑺𝒂𝒍𝒆𝒗𝒂𝒍𝒖𝒆 − 𝒇𝒍𝒐𝒂𝒕𝒊𝒐𝒏𝒄𝒐𝒔𝒕 𝒎𝒂𝒕𝒖𝒓𝒊𝒏𝒚𝒑𝒆𝒓𝒊𝒐𝒅
(F-75)
(F-78)
Degree of
Combined Percent change in EPS
DCL=Percent change in Slaes
(DCL)
(F-79)
Float
(difference
between firm’s Float= firm’s bank cash – firm’s book cash
bank cash and
book cash)
(F-83)
Synergy VAB=Value of both firm A
(F-84) Synergy = VAB − (VA + VB ) and B after acquisition
VA=Value of firm A
VB=Value of firm B
NPV of a
merger NPV of a merger to acquirer=Synergy - Premium
(F-85)
Z Score
Model: EBIT Net Working Capital
Z= 3.3Total Assets + 1.2 Total Assets
+
Predicting Sales Market Value of Equity
Corporate 1.0 + 0.6 +
Total Assets Book Value of Debt
bankruptcy Accumulated Retained Earnings
1.4 Total Assets
(F-86)
Depreciation
Name of the Formula Explanation
Formula
Straight-Line Cost= Acquisition cost+
Depreciation Dep. Expense = (Cost – Salvage value) / Useful life Installation cost+
Method transportation cost
(F-101)
Double declining Dep. Expense = Beginning book value x Rate of N= number of years as
balance method depreciation useful life
(F-102)
Where, Rate= (1/N) x 2 x 100 N= life in years
r = salvage value
Or, Rate= c= cost
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