BBM 2nd Year Part-II Honours 2021

Q 1. What is Financial Planning? Discuses basic elements.

Financial planning is the process of setting and achieving financial goals by effectively
managing resources and making informed decisions about money. It involves assessing
one's current financial situation, identifying objectives, and developing strategies to
achieve those objectives. Financial planning aims to ensure financial stability, security,
and growth over the short, medium, and long term. The basic elements of financial
planning typically include:

1. Setting Financial Goals: This involves identifying short-term, medium-term, and long-
term financial objectives. Goals may include saving for retirement, purchasing a home,
funding education, or building an emergency fund.
2. Assessing Current Financial Situation: It's essential to evaluate your current financial
position, including income, expenses, assets, liabilities, investments, and cash flow. This
assessment provides a baseline for developing a financial plan and helps identify areas
for improvement.
3. Budgeting and Cash Flow Management: Creating a budget involves allocating income
towards various expenses, savings, and investments. It helps prioritize spending, control
expenses, and ensure that money is allocated efficiently to meet financial goals. Cash
flow management ensures that income is sufficient to cover expenses and savings goals.
4. Risk Management and Insurance: Assessing and mitigating financial risks is crucial in
financial planning. This includes identifying potential risks such as illness, disability,
death, property damage, or liability. Insurance policies such as health insurance, life
insurance, disability insurance, and property insurance can provide protection against
these risks.
5. Investment Planning: Developing an investment strategy tailored to individual goals,
risk tolerance, and time horizon is an integral part of financial planning. This may involve
investing in stocks, bonds, mutual funds, real estate, or other assets to generate returns
and build wealth over time.
6. Tax Planning: Optimizing tax efficiency is essential to maximize after-tax income and
minimize tax liabilities. Tax planning involves understanding tax laws, utilizing tax-
advantaged investment accounts, deductions, credits, and strategies to reduce the tax
burden.
7. Retirement Planning: Planning for retirement involves estimating future expenses,
determining retirement income needs, and creating a strategy to accumulate savings to
fund retirement. This may include contributing to retirement accounts such as 401(k)s,
IRAs, and pension plans.
8. Estate Planning: Estate planning involves preparing for the distribution of assets and
wealth transfer to beneficiaries upon death. This may include drafting wills, establishing
 BBM 2nd Year Part-II Honours 2021

trusts, designating beneficiaries for retirement accounts and insurance policies, and
minimizing estate taxes.
9. Regular Review and Adjustment: Financial planning is not a one-time event but an
ongoing process. It's essential to review and adjust the financial plan regularly based on
changes in personal circumstances, financial goals, economic conditions, and tax laws.

Q 2. What is ‘Ratio analysis’? Write any five formulae of it mentioning its use.
Ratio analysis is a method of analyzing financial statements to evaluate a company's
performance and financial health. It involves calculating and interpreting various ratios
derived from financial data. These ratios help stakeholders assess different aspects of a
company's operations, profitability, efficiency, and solvency. Here are five common ratio
analysis formulas along with their uses:

1. Profit Margin Ratio: Formula: Profit Margin = (Net Income / Revenue) * 100 Use: This
ratio indicates how much profit a company generates for every dollar of revenue earned.
It's used to assess the company's ability to generate profit from its sales and to compare
profitability between companies or over time.
2. Return on Assets (ROA): Formula: ROA = (Net Income / Total Assets) * 100 Use: ROA
measures how efficiently a company utilizes its assets to generate profit. It indicates the
company's ability to generate earnings relative to its total assets. Higher ROA suggests
better asset utilization and profitability.
3. Current Ratio: Formula: Current Ratio = Current Assets / Current Liabilities Use: This
ratio assesses a company's ability to cover its short-term liabilities with its short-term
assets. It indicates the company's liquidity and its capacity to meet its short-term
obligations. A ratio above 1 suggests the company can meet its short-term obligations.
4. Debt-to-Equity Ratio: Formula: Debt-to-Equity Ratio = Total Debt / Shareholders'
Equity Use: This ratio measures the proportion of debt financing relative to equity
financing used by a company. It provides insight into the company's financial leverage
and risk. A higher ratio indicates higher financial risk due to higher debt levels.
5. Inventory Turnover Ratio: Formula: Inventory Turnover Ratio = Cost of Goods Sold /
Average Inventory Use: This ratio measures how efficiently a company manages its
inventory by showing how many times inventory is sold and replaced over a specific
period. A higher ratio suggests effective inventory management and faster turnover,
which can lead to higher profitability.

Q 3. What is debentures ? How they are different from shares ?

 BBM 2nd Year Part-II Honours 2021

Debentures and shares are both forms of securities issued by companies to raise capital,
but they represent different types of financial instruments and ownership rights.

Debentures:

1. Definition: Debentures are debt instruments issued by companies to raise funds from
investors. When an investor purchases a debenture, they are essentially lending money
to the company. In return, the company promises to repay the principal amount along
with periodic interest payments at a specified rate.
2. Nature of Ownership: Holders of debentures are creditors of the company rather than
owners. They do not have any ownership rights or voting privileges in the company.
3. Priority in Repayment: In the event of liquidation or bankruptcy, debenture holders
have priority over shareholders in terms of repayment. They are typically paid before
shareholders from the company's assets.
4. Fixed or Floating Rate: Debentures can have either a fixed interest rate, where the
interest remains constant throughout the tenure, or a floating interest rate, where the
interest rate fluctuates based on a benchmark rate such as the prime rate.
5. Security: Debentures may be secured or unsecured. Secured debentures are backed by
specific assets of the company, providing an additional layer of security for investors.
Unsecured debentures, also known as "unsecured bonds" or "debentures without a
charge," are not backed by any collateral.

Shares:

1. Definition: Shares, also known as stocks or equities, represent ownership interests in a

company. When an investor purchases shares of a company, they become partial
owners of that company.
2. Nature of Ownership: Shareholders have ownership rights in the company and are
entitled to participate in the company's profits through dividends (if declared) and
capital appreciation. They also have voting rights, allowing them to participate in
corporate decision-making processes, such as electing the board of directors.
3. Risk and Return: Shareholders bear the risk of the company's performance and are
subject to fluctuations in the stock price. Their returns come from dividends and capital
gains.
4. Priority in Repayment: Shareholders are the last to be repaid in the event of
liquidation or bankruptcy. After debenture holders and other creditors are paid, any
remaining assets are distributed to shareholders.
5. No Fixed Interest: Unlike debentures, shares do not have a fixed interest rate.
Shareholders' returns are dependent on the company's profitability and dividend
policies.
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Q 4. What are the differences between term loans, trade credit and bank credit?

Term loans, trade credit, and bank credit are all forms of financing that businesses can
use to meet their capital needs, but they differ in terms of structure, source, and
purpose. Here are the key differences between them:

1. Term Loans:
 Structure: Term loans involve borrowing a specific amount of money from a
lender (such as a bank) and agreeing to repay it over a set period, typically with
interest.
 Source: Term loans are usually provided by banks, financial institutions, or online
lenders.
 Purpose: Term loans are often used for financing long-term investments or
assets, such as purchasing equipment, expanding operations, or funding large
projects.
 Repayment: Repayment is structured with fixed installments over the loan term,
which could range from a few years to several decades, depending on the loan
amount and terms.
2. Trade Credit:
 Structure: Trade credit refers to the practice of buying goods or services on credit
from suppliers, allowing the buyer to defer payment for a certain period after
receiving the goods or services.
 Source: Trade credit is provided by suppliers or vendors as part of their business
transactions.
 Purpose: Trade credit is primarily used for purchasing inventory, raw materials, or
other goods/services necessary for business operations.
 Terms: The terms of trade credit may vary, but they often include a specified
credit period (e.g., net 30 days) within which the buyer must settle the invoice.
3. Bank Credit:
 Structure: Bank credit involves borrowing funds from a bank or financial
institution, often in the form of a line of credit or overdraft facility, which allows
businesses to access funds as needed within a pre-approved limit.
 Source: Bank credit is provided by banks or financial institutions.
 Purpose: Bank credit can be used for various short-term financing needs, such as
covering operating expenses, managing cash flow fluctuations, or seizing
opportunities for growth.
 Terms: Bank credit terms may include interest rates, repayment schedules, and
collateral requirements. Interest is typically charged only on the amount
borrowed and for the duration it's outstanding.
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Q. 5 Explain about different sources of industrial and business finance

Industrial and business finance refers to the various sources of funding available to
businesses to finance their operations, investments, and growth initiatives. These
sources can be broadly categorized into two main types: internal and external sources.
Here's an explanation of different sources of industrial and business finance:

1. Internal Sources:
 Retained Earnings: These are profits that a company reinvests into its business
rather than distributing them to shareholders as dividends. Retained earnings can
be used for funding expansions, acquisitions, or other investment opportunities.
 Depreciation Funds: Businesses can set aside a portion of their earnings as
depreciation funds to replace or upgrade fixed assets when they reach the end of
their useful life. These funds can be used for capital expenditures without relying
on external financing.
 Working Capital: Efficient management of working capital, which includes cash,
inventory, and accounts receivable, can provide internal funds for day-to-day
operations and short-term financing needs.
2. External Sources:
 Equity Financing:
 Share Capital: Businesses can raise funds by issuing shares of stock to
investors. Equity financing provides capital in exchange for ownership
stakes in the company.
 Venture Capital: Venture capital firms invest in startups and early-stage
companies with high growth potential in exchange for equity. They
typically provide not only funding but also strategic guidance and support.
 Angel Investors: Angel investors are high-net-worth individuals who
provide capital to startups and small businesses in exchange for ownership
equity or convertible debt.
 Debt Financing:
 Bank Loans: Businesses can borrow money from banks or financial
institutions by taking out term loans, lines of credit, or overdraft facilities.
These loans are typically repaid with interest over a specified period.
 Bonds: Companies can raise funds by issuing bonds to investors. Bonds
are debt securities that promise fixed or variable interest payments and
repayment of the principal amount at maturity.
 Asset-Based Financing: Asset-based lending involves using company
assets, such as accounts receivable, inventory, or equipment, as collateral
to secure loans or lines of credit.
 Government Sources:
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 Grants and Subsidies: Governments may offer grants or subsidies to

businesses for specific purposes, such as research and development,
innovation, or job creation.
 Loan Guarantees: Government agencies or programs may provide loan
guarantees to businesses, reducing the risk for lenders and making it
easier for companies to access financing.
 Alternative Financing:
 Crowdfunding: Crowdfunding platforms allow businesses to raise funds
from a large number of individuals or investors through online campaigns.
 Peer-to-Peer Lending: Peer-to-peer lending platforms connect borrowers
with individual lenders willing to provide financing outside of traditional
financial institutions.