5.

ACCRUALS - are current liabilities for services received but for which complete payments have not
been made as of the reporting date. accruals include wages, taxes, rent and interest payable. accruals
are interest free sources of financing and do not involve either implicit or explicit costs. firms can alter
the amount of accrued wages by changing the frequency of wage payments, but they have less control
over other accruals.

24. EQUITY SHARE PRICE- usually increases with the announcement of a new or increased dividend.
Dividend absorb excess cash flow and may reduce agency costs that arise from conflicts between
management and shareholders. cash dividends can underscore good results and provide support to the
equity share
price. once established, dividend cuts are hard to make without adversely affecting a firm’s equity share
price.

60. shareholders wealth-the primary goal of financial management is to maximize not accounting
measures such as net income or eps.

64. treasury stocks- can be resold to raise funds possibly at higher price compare when the shares were
originally purchased.

acquiring firm-a merger allows the acquiring firm to enjoy a potentially desirable portfolio effect by
achieving risk reduction while perhaps maintaining the firm’s rate of return. first, acquiring a firm in a
growing market may enhance revenues. second, the acquiring firm’s revenue stream may become more
stable if the asset and liability portfolio of the target institution exhibits credit, interest rate, and liquidity
risk characteristics that differ from those of the acquirer. third, expanding into markets that are less than
fully competitive offers an opportunity for revenue enhancement.

beta- this approach to risk measurement involves the concepts of capital asset pricing model (capm). in
the capital budgeting context, beta is a measure of the systematic risk of a project. systematic risk
principle states that the reward of bearing riskdepends only on that asset’s systematic risk. the
underlying rationale for this principle is straightforward.is a measure of the sensitivity of a security’s
return relative to the returns of a broad-based market portfolio securities. beta is defined
mathematically as the ratio of the covariance of returns of security (i), and market portfolio (m), to the
variance of returns of the market portfolio.

management risk- decisions made by a firm’s management and board of directors materially affect the
risk aced by investors. borrowing agreements- many firms must keep certain average minimum balances
in their deposit accounts as part of borrowing agreements with their bank.

capital asset pricing model (capm)- is a model based on the proposition that any stock’s required rate of
return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining
after diversification this model provides a general framework for analyzing riskreturn relationships for all
types of assets. in evaluating these relationships. capm does not use total risk, which is measured
by standard deviation as a risk measure, but only one part of total risk called systematic risk
capital budgeting is a dynamic process because the firm’s changing environment may affect the
desirability of current or proposed investment. information is needed throughout the entire capital
budgeting process to ensure that the process is operating effectively.

capital structure- refers to the mix of debt, preferred stock and ordinary (common) equity that the firm
uses to finance the firm’s assets. so far, we have assumed that a firm’s capital structure that a firm uses
to finance its operations is either already given or is irrelevant to the capital investments budgeting
decisions we have been making. although this assumption can be appropriately used in the very short
term, firms can and do change their capital structures in the longer term. it is therefore necessary to
analyze factors that affect the firm’s decision to change the funding mix.

(cash needs) - liquidity ratios – ratios that measure the firm’s ability to meet cash needs as they arise
(e.g, payment of accounts payable, bank loans and operating costs). cash break-even chart this chart
shows the relationship between the company’s cash needs and cash sources. it indicates the
minimum amount of cash that should be maintained to enable the company to meet its obligation.

contemporary approach- to capital structure asserts that there is an optimal capital structure or
at least an optimal range of structures for every firm. this approach identifies several factors that can
lead to an optimal capital structure for a given firm such as tax effects (corporate and personal),
contemporary approach allows for the possibility that the firm may go bankrupt. this implies that the
firm’s debt holders will have to allow for the possibility that they might not receive everything they have
been promised. in this move realistic type of situation, bondholders will be asked to bear some firm risk
and therefore in turn will ask for a little more return. if a financial distress occurs or firms are perceived
as being close to bankruptcy, the firm could incur some substantial costs such as fees to lawyers,
consultants and accountants, loss of efficiency in the firm’s operations, reduced sales because of post-
sales support concerns, lightening of credit terms from suppliers, etc.

convertible security - potential earnings dilution may be partially minimized by issuing a convertible
security. if such a security is designed to sell at a premium over its conversion value, fewer common
shares will ultimately be issued. corporate bonds are offered publicly through investment banking firms
as underwriters, normally, the investment bank facilitates this transaction using a firm commitment.

discount period - credit received during the discount period is sometimes called free trade credit. the
view that trade credit is free may be misleading. there are costs associated with trade credit, but they
are not as obvious as costs of other forms of financing, such as interest charges. a convertible issue may
allow the acquiring company to comply with the seller’s income objectives without changing its own
dividend policy. if the firms have different dividend payout policies and the acquirer does not want to
commit its ordinary equity share to a dividend rate that suits the seller, convertible preferred share may
be an appropriate solution. paying a certain rate to shareholder will already be the after tax out of
pocket cost to the firm.

economic decision- useful to a wide range of users in making economic decisions.

effective interest rate - effective rate of interest charged by banks is higher than the initial rate quoted
by the bank on a loan. the commitment fee is charged a borrower to set up a line of credit. it is generally
assessed on the unused portion of the loan.

financial evaluation method- used to assess the inflows and outflows of cash within a business over a
specific period. it involves tracking and analyzing the movement of cash in and out of business to
understand its financial health and liquidity.

financial flexibility- which refers to company’s ability to respond and adapt to financial adversity and
unexpected needs and opportunities.

financial goals - budget is a financial plan of the resources needed to carry out tasks and meet financial
goals. it is also a quantitative expression of the goals the organizations wishes to achieve and the
cost of attaining these goals. financial leverage results from using borrowed capital as a
funding source when investing to expand the firm’s asset base and generate returns on risk capital.

financial leverage- refers to using borrowed amount for purchasing assets to build capital and expand a
business, with an expectation of earning or reaping gains, which would be more than the cost incurred in
borrowing from lenders .

financial managers- try to answer some, or all, of these questions the top financial manager within a
firm is usually the chief financial officer (cfo) has considerable responsibility and control in managing the
level of current assets and current liabilities. be able to identify the reasons for the prolonged operation
cycle and how it could be reduced.

financial plan- formulates the way in which financial goals are to be achieved. requires inputs in the form
of alternative sets of assumptions about important variables.

financial ratio – is a comparison in fractions, proportion, decimal or percentage of two significant figures
taken from financial statements.

FINANCIAL STATEMENTS- it is the process of extracting information from financial statements to better
understand a company’s current and future performance and financial condition.

foundation - the sales budget showing what products will be sold in what quantities at what prices, is
the foundation on which all other short-term budget are built.

general public - external users suppliers, lenders, government, potential investors, customers and
general public