Corporate Finance Assignment

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Assignment 1

Subject: Corporate Finance

Masters of Professional Accounting

Faculty of Business Studies

University of Dhaka

Submitted to:

Md. Maksudur Rahman Sarker

Professor

Department of Accounting & Information Systems

Faculty of Business Studies

University of Dhaka

Submitted by:

Md Mazharul Islam

MPA 18020740

7th Batch

Masters of Professional Accounting

Faculty of Business Studies

University of Dhaka

1. Finance and Accounting

Finance and Accounting are two separate disciples that often are lumped together (as we

obviously have done). At a high level, Finance is the science of planning the distribution of a

business’ assets. Accounting is the art of the recording and reporting financial transactions.

People tend to group Finance and Accounting because both functions deal with the

administration of a business’ assets.

Those who work in the financial department of a business are concerned with planning the

distribution of the business’ assets. This includes the coordination of capital investments and

debt backed investments for the purpose of improving the value of the business. Those in

Finance also plan the exit strategy for the investors of the business, which is the way in which

those that invest in the business receive their financial reward. The financial goals and objectives

of the business are designed by the business’ Chief Financial Officer, who is supported by people

focused on Financial Analysis, Financial Management, Budgeting, Purchasing, and Accounting.

Those who work in the Accounting function of a business are concerned with tracking and

reporting the financial transactions of a business. Those in the Accounting field are responsible

for managing the general ledger, cash flow management, collections, recognizing revenue,

analyzing profitability, reporting earnings, managing debt, and—of course—paying taxes.

Accountants research and report the financial transactions and health of the business using a

standard set of rules and principles, known as the Generally Accepted Accounting Principles

(GAAP), as well as Section 446 of the Internal Revenue Code. Jobs in the Accounting function

include Financial Reporting Accountants, Auditors, Bookkeepers, Accounts Receivable Clerks,

Accounts Payable Clerks, Controllers, Treasurers, and Tax Accountants. Typically, the entire

Accounting organization will report into the Chief Financial Officer.

Broadly speaking, Finance revolves around planning future financial transactions while

Accounting revolves around reporting past financial transactions. While these are two separate

functions that require different skill sets, they do both revolve around the management of assets;

therefore, they are grouped together more often than not.

2. Assets

An asset is anything of value or a resource of value that can be converted into cash. It is a

resource owned or controlled by an individual, corporation, or government with the expectation

that it will generate a positive economic value. Common types of assets include current, non–

current, physical, intangible, operating, and non-operating. Correctly identifying and classifying

the types of assets is critical to the survival of a company, specifically its solvency and

associated risks.

The International Financial Reporting Standards (IFRS) framework defines an asset as follows:

“An asset is a resource controlled by the enterprise as a result of past events and from which

future economic benefits are expected to flow to the enterprise.”

a. Real Asset

Real assets are physical assets that have an intrinsic worth due to their substance and properties.

They tend to be more stable but less liquid than financial assets. Real assets include precious

metals, commodities, real estate, land, equipment, and natural resources. Investors often use

these investments as a way to diversify their portfolios, as their value does not typically correlate

to what is happening in the stock or bond markets. Direct investments in real assets are usually

quite costly as investors must either maintain the property themselves or hire a manager to do it

for them. No two real assets are exactly the same, making real assets difficult to value and trade.

b. Financial Assets

Financial assets refer to assets that arise from contractual agreements on future cash flows or

from owning equity instruments of another entity. These are liquid assets as the economic

resources or ownership can be converted into something of value, such as cash. These are also

referred to as financial instruments or securities. They are widely used to finance real estate and

ownership of tangible assets.

i) Money Market Financial Asset: Money market Financial Assets are short-term financing

instruments aiming to increase the financial liquidity of businesses. The main characteristic of

these kinds of securities is that they can be converted to cash with ease, thereby preserving the

cash requirements of an investor.

The money market and its instruments are usually traded over the counter, and therefore, cannot

be done by standalone individual investors themselves. It has to be done through certified

brokers, or a money market mutual fund.

Features of Money Market Financial Assets are:

 Liquidity: They are considered highly liquid as they are fixed-income securities which

carry short maturity periods of a year or less.

 Safety: Since the issuers of money market instruments have strong credit ratings, it

automatically means that the money instruments issued by them will also be safe.

 Discounted price: One of the main features of money market instruments is that they are

issued at a discount on their face value.

Examples of Money Market Instrument

 Banker’s Acceptance

 Treasury Bills

 Repurchase Agreements

 Certificate of Deposits

 Commercial Papers

ii) Capital Market Financial Asset: Capital Market Financial Assets are long-term financing

instruments. They are traded in Capital Market where they are channeled between the suppliers

who have capital and those who are in need of capital. The entities that have capital include retail

and institutional investors while those who seek capital are businesses, governments, and people.

Capital markets consist of the primary market, where new securities are issued and sold, and the

secondary market, where already-issued securities are traded between investors. The most

common capital markets are the stock market and the bond market.

The principal capital market assets used for long term funds are:

 Mortgages.

 Corporation bonds.

 State and local government bonds.

 Federally sponsored credit agency securities.

 Finance company bonds.

 Commercial banks bonds and commercial paper.

 Corporate stock.

iii) Fixed Income Financial Asset: Fixed income Assets broadly refer to those types of

investment securities that pay investors fixed interest or dividend payments until its maturity

date. At maturity, investors are repaid the principal amount they had invested. The instruments

are issued by governments, corporations, and other entities to finance their operations. They

differ from equity, as they do not entail an ownership interest in a company, but they confer a

seniority of claim, as compared to equity interests, in cases of bankruptcy or default.

Example of Fixed Income Securities:

 Bonds

 Treasury Bills

 Money Market Instruments

 Asset Backed Securities

iv) Variable Income Financial Asset: Variable-income assets are a type of investment where

there is no assurance that all of the money invested will be recovered, and the amount of any

potential returns will not be guaranteed or known in advance. It is even possible for these returns

to be negative, even to the extent where the money initially invested may be lost entirely. This is

because the returns from variable-income investments depend on a variety of factors, such as the

growth of the company being invested in or its economic situation, the behavior of the financial

markets, etc. Financial exchanges and markets are sensitive to any changes that are interpreted in

a positive or negative way by investors, and these markets can therefore be considered as a sort

of thermometer for the economy.

Corporate stocks are one very common example of a variable-income investment. When

investors purchase shares in a company, they acquire a series of rights that includes the right to

collect dividends. If the company earns profits during a given fiscal year, it may distribute some

of these earnings to its shareholders in the form of dividends, as long as this is agreed upon at the

General Shareholders’ Meeting. Shareholders also acquire other rights such as the right to vote,

the right to access information, etc.

Over very long periods of time, variable-income securities are the only assets that can overcome

inflation. This is because, over the long term, there is a high correlation between returns from

variable-income securities and a country‘s economic growth. However, from a short-term and

medium-term perspective, it is possible to experience volatility that will affect the performance

of the investment.

v) Forward Derivatives: A forward contract is a customized contract between two parties to

buy or sell an asset at a specified price on a future date. Since the forward contract refers to the

underlying asset that will be delivered on the specified date, it is considered a type of derivative.

The Key Features of Forward Contracts are:

 They are bought and sold at a specified price (forward price)

 They are bought and sold at a specified time (contract maturity or expiration date)

 They are typically not traded on exchanges

Sellers and buyers of forward contracts are involved in a forward transaction – and are both

obligated to fulfill their end of the contract at maturity

Unlike standard futures contracts, a forward contract can be customized to a commodity, amount

and delivery date. Commodities traded can be grains, precious metals, natural gas, oil, or even

poultry. A forward contract settlement can occur on a cash or delivery basis.

vi) Future Derivatives: Futures are derivative financial contracts that obligate the parties to

transact an asset at a predetermined future date and price. Here, the buyer must purchase or the

seller must sell the underlying asset at the set price, regardless of the current market price at the