Essential Financial & Accounting Terms Defined
Essential Financial & Accounting Terms
Accounting Function
Summarizing economic transactions.
Aging Schedule
Classification of accounts receivable by time outstanding.
American Option
An option that can be exercised at any time before its expiration date.
Annuity
An asset that pays a fixed sum each year for a specified number of years.
Authorized Share Capital
The maximum number of shares that a company is permitted to issue, as specified in the firm’s articles of incorporation.
Banker’s Acceptance
An
Read MoreFinancial Fundamentals: Assets, Statements, and Investment Appraisal
Key Financial Definitions
Current Assets
Assets that can be turned into cash within one operating cycle.
Non-Current Assets
Assets that cannot be liquidated quickly.
Company Creation & Financing
To establish a company, it’s essential to determine the required amount of assets and the necessary sources of long-term financing.
Operating Cycle
The process of converting investment in inventory (stocks) back into cash.
Average Period
The duration of the operating cycle; the time it takes for a firm to convert
Read MoreIndian Financial System: Evolution, Digital Payments, and Retail Banking
A Financial System Defined
A financial system is a complex network of institutions, markets, instruments, and services that facilitate the transfer of funds from savers (surplus units) to investors (deficit units) for productive purposes. It plays a crucial role in the economic development of a country by channeling savings into investments, thereby fostering capital formation, economic growth, and employment generation.
The Evolution of the Indian Financial System
The evolution of the Indian Financial
Read MoreBusiness Financing & Capital Valuation Methods
Key Capital & Valuation Concepts
Opportunity Cost of Capital
The value an investor foregoes when choosing not to invest in comparable projects.
Financing Modalities
- Internal: Financial resources belonging to the company (shareholder equity).
- External: Outside resources that generate debt (liabilities).
Share Valuation Methods
- Nominal Value: The value assigned to the title at issuance.
- Accounting Value: Owner’s equity divided by the number of shares.
- Market Value: The price at which stock is sold in the
Essential Financial Formulas and Valuation Concepts
Cost of Capital & Equity Valuation
Weighted Average Cost of Capital (WACC)
- WACC = Wd(YTM(1-Tax)) + (We * re) + (Wpfd * rpfd)
Cost of Equity
- Cost of Equity (Dividend Growth Model) = Div1 / P0 + g
- CAPM Expected Return (re) = Risk-Free Rate + [Beta * (Market Return – Risk-Free Rate)]
- Stock Excess Return = Market Excess Return x Beta
- Investment Expected Return = Risk-Free Rate + [Beta * (Market Return – Risk-Free Rate)]
- Market Value of Equity = Number of Shares x Share Price (also known as Market Capitalization)
Alternative Investments: Concepts & Strategies
Hedge Funds & Private Equity Fundamentals
Service Providers:
Prime brokers provide financing and trading; administrators manage pricing and reporting; custodians safeguard assets.Fee Structures:
Hedge funds typically charge 1–2% management fees and 10–20% incentive fees, often on realized and unrealized gains, unlike mutual funds which charge only flat management fees.Illiquidity in Private Equity:
Investors must deal with capital calls and cannot redeem easily. Secondary markets are thin, especially