PRESTON UNIVERSITY

MID-TERM ASSIGNMENT

PESHAWAR

ABDULLAH HAYAT Program: BBA 1711-316001

Subject: Corporate Finance

Semester: Spring 2020

Instructions:
1. This is an assignment in-lieu of Mid-term Assessment and is not an examination.
2. All questions are compulsory.
3. You must submit the assignment by email directly to the email address of the teacher.
4. You are required to depict your understanding and knowledge of the subject by
Individually attempting all of the given questions.
5. The workload for this assignment is about 2-3 hours. However, considering the
Connectivity difficulties and limited/interrupted access to Internet, the maximum time
Allowed is 24 hours, starting on May 2nd, 2020 at 4.00 pm).
6. You are advised to submit your assignment as soon as possible without waiting till the
Last hour.
7. No assignment will be accepted for any reason whatsoever if submitted after the deadline.

Attempt all of the following questions:

1. Define risk & return, characteristics line & its beta also define why beta a measure of
systematic risk and what is its meaning?
Ans: Risk: Financial risk is any of various types of risk associated with financing, including
financial transactions that include company loans in risk of default. Often it is understood to
include only downside risk, meaning the potential for financial loss and uncertainty about its
extent.

 Return: In finance, return is a profit on an investment. It comprises any change in value

of the investment, and or cash flows which the investor receives from the investment,
such as interest payments or dividends. It may be measured either in absolute terms (e.g.,
dollars) or as a percentage of the amount invested.

 Characteristics line:

 A characteristic line indicates a security's systematic risk and rate of return.

 This line shows the security's performance versus the market's performance.
 The characteristic line is also referred to as the security characteristic line.
  Beta: Beta is a measure of a stock's volatility in relation to the market. It measures
the exposure of risk a particular stock or sector has in relation to the market. A beta
of indicates that the portfolio will move in the same direction, have the same
volatility and is sensitive to systematic risk. Beta, used in capital asset pricing model
(CAPM), is a measure of the volatility, or systematic risk, of a security or portfolio, in
comparison to the market as a whole.

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

Ans: There are four main financial statements. They are: (1) balance sheets. (2) Income
statements. (3) Cash flow statements. (4) Statements.

1 Balance sheet: A balance sheet is a financial statement that reports a company's assets,
liabilities and shareholders' equity. The balance sheet is one of the three (income statement and
statement of cash flows being the other two) core financial statements used to evaluate a
business.
 Assets: In financial accounting, an asset is any resource owned by the business.
Anything tangible or intangible that can be owned or controlled to produce value and that
is held by a company to produce positive economic value is an asset. Simply stated,
assets represent value of ownership that can be converted into cash.

 Liabilities: In financial accounting, a liability is defined as the future sacrifices of

economic benefits that the entity is obliged to make to other entities as a result of past
transactions or other past events.

 Equity: Equity is the remaining value of an owner's interest in a company, after all
liabilities have been deducted. You may hear of equity being referred to as “stockholders'
equity” (for corporations) or “owner's equity” (for sole proprietorships). Equity can be
calculated as: Equity = Assets – Liabilities.

2 Income statements: An income statement or profit and loss account is one of the financial
statements of a company and shows the company's revenues and expenses during a particular
period. It indicates how the revenues are transformed into the net income or net profit.

 Income: Income is the consumption and saving opportunity gained by an entity within a
specified timeframe, which is generally expressed in monetary terms.

 Expenses: An expense in accounting is the money spent, or costs incurred, by a business

in their effort to generate revenues. Essentially, accounts expenses represent the cost of
doing business; they are the sum of all the activities that result in (hopefully) a profit.

3 Cash flow statements: In financial accounting, a cash flow statement, also known as statement
of cash flows, is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to operating, investing,
and financing activities.
  Operating activities: Key operating activities for a company include manufacturing,
sales, advertising, and marketing activities. Cash flows from operations are an important
metric used by financial analysts and investors. Operating activities can be contrasted
with the investing and financing activities of a firm.

 Investing activities: Investing activities in accounting refers to the purchase and sale of
long-term assets and other business investments, within a specific reporting period. A
business's reported investing activities give insights into the total investment gains and
losses it experienced during a defined period.

 Financing activities; Financing activities are transactions or business events that affect
long-term liabilities and equity. In other words, financing activities are transactions with
creditors or investors used to fund either company operations or expansions.

4 statements of equity: A Statement of changes in equity and similarly the statement of

changes in owner's equity for a sole trader, statement of changes in partners' equity for a
partnership, statement of changes in Shareholders.

3. What is the purpose of the statement of cash flows? Explain in detail with examples. Also
Discuss the benefits that can be derived by the firm from cash budgeting?

Ans: The primary purpose of the statement of cash flows is to provide information about cash
receipts, cash payments, and the net change in cash resulting from the operating, investing, and
financing activities of a company during the period.
The Statement of Cash Flows identifies cash flows as being generated from three sources:
1. Operating Activities:
 Operating activities include the cash effects of all transactions that create revenues and
expenses and thus enter into the determination of net income.
 . In general Operating activities are those activities that the business was created to
perform and also includes interest from any source and any other type or revenue
producing (other revenue) types of activity
 Operating activities is the most important category because it shows the cash provided or
used by company operations.
 Cash provided by operations is generally considered to be the best measure of whether a
company can generate sufficient cash to continue as a going concern and to expand.
2. Investing Activities:
 Include all those activities involve in long-term uses or sources of cash.
 purchasing and disposing of investments and productive long-lived assets using cash and
 Lending money and collecting the loans.

1. Operating activities
i. Cash Inflows:
1. from sale of goods or services.
2. Returns on loans (interest received) and on equity securities (dividends received).
ii. Cash outflows:
1. To suppliers for inventory.
2. To employees for services.
3. To government for taxes.
4. To lenders for interest.
5. To others for expenses.

2. Investing activities
i. Cash inflows:
1. From sale of property, plant, and equipment.
2. From sale of debt or equity securities of other entities.
3. From collection of principal on loans to other entities.
ii. Cash outflows:
1. To purchase property, plant, and equipment.
2. To purchase debt or equity securities of other entities.
3. To make loans to other entities.

3 Financing activities
i. Cash inflows:
1. From sale of equity securities (company's own stock).
2. From issuance of debt (bonds and notes).
ii. Cash outflows:
1. To stockholders as dividends.
2. To redeem long-term debt or reacquire capital stock.

 benefits can be divided by the firm from cash budgeting

1 Practical benefit:
 Better debt management. The amount of debt your company carries and in what form
is an important measure of the financial health of your company.
 Identifying trends.
 Progress tracking in real time.
 Managing liabilities.
 Progress and compliance.

2 Strategic implications: It could also mean belonging to the Strategies. If it relates to the
business strategies, then strategic implications will be the direct and indirect consequences from
the strategies. In which case, they needed to be planned for and managed so that the indirect
consequences, whether good or bad, can be managed upfront.

3 Seasonal planning: For seasonal planning, the system aggregates the data of several periods of
a specific periodicity (such as a month) to a season, and the data of several seasons to a season
year. The system determines the valid season years based on the selected characteristic values
combinations.

***************