KEY FINANCE TOPICS
1. Time Value of Money (TVM)
• Present Value (PV) and Future Value (FV)
• Compounding Interest (Monthly & Annual)
• Annuities & Perpetuities
• Rule of 72 (Time to Double Money)
2. Capital Budgeting & Investment Decisions
• Net Present Value (NPV)
• Interest Rate Calculation
• Discount Rate & Cash Flow Valuation
3. Financial Markets & Instruments
• Financial Markets vs. Commodity Markets
• Certificates of Deposit (CDs) & Fixed Income Investments
• Debt vs. Equity Financing
4. Corporate Finance & Capital Structure
• Debt-to-Total Assets Ratio
• Liquidity vs. Profitability
• Times Interest Earned (TIE) Ratio
• Dividend Payments & Their Effect on Profitability
5. Working Capital Management
• Current Ratio & Liquidity Analysis
• Receivables Cycle & Cash Conversion Cycle
• Payables Management
6. Interest Rates & Economic Factors
• Impact of Interest Rate Changes on Investments & Borrowing
• Relationship Between Inflation & Interest Rates
These topics are commonly covered in corporate finance, financial management, and investment
analysis courses. Let me know if you need explanations or solutions for any topic!
EXPLAINATIONS
1. Time Value of Money (TVM)
Concept:
• Money today is worth more than the same amount in the future due to its earning potential.
• TVM is used to calculate Present Value (PV) and Future Value (FV).
Key Formulas:
• Future Value (FV) = PV × (1 + r)ⁿ
• Present Value (PV) = FV / (1 + r)ⁿ
• Compound Interest: A=P(1+rn)ntA = P(1 + \frac{r}{n})^{nt}
Applications:
• Investment decisions, retirement planning, loan payments.
2. Capital Budgeting & Investment Decisions
Concept:
• Process of evaluating investment opportunities to maximize shareholder wealth.
Methods:
• Net Present Value (NPV) → Compares PV of cash inflows vs. outflows.
• Internal Rate of Return (IRR) → The discount rate at which NPV = 0.
• Payback Period → Time required to recover the initial investment.
Application:
• Used in business expansion, equipment purchase, and project evaluation.
3. Financial Markets & Instruments
Concept:
• Financial markets facilitate the buying and selling of financial securities.
Types of Markets:
• Money Market → Short-term debt instruments (e.g., treasury bills).
• Capital Market → Long-term debt & equity instruments (e.g., stocks, bonds).
• Foreign Exchange Market → Currency trading.
Key Instruments:
• Bonds → Fixed-income debt securities.
• Stocks → Equity ownership in a company.
• Certificates of Deposit (CDs) → Fixed-term deposit with interest.
4. Corporate Finance & Capital Structure
Concept:
• How companies finance operations through debt and equity.
Key Ratios:
• Debt-to-Total Assets Ratio = Total Debt / Total Assets → Measures financial leverage.
• Times Interest Earned (TIE) Ratio = EBIT / Interest Expense → Ability to service debt.
Capital Structure:
• Debt Financing → Borrowing money (bonds, loans).
• Equity Financing → Selling shares (stock issuance).
5. Working Capital Management
Concept:
• Managing short-term assets and liabilities to ensure liquidity.
Key Components:
• Current Ratio = Current Assets / Current Liabilities → Measures liquidity.
• Receivables Cycle → Time taken to collect money from customers.
• Payables Cycle → Time taken to pay suppliers.
Application:
• Helps businesses maintain smooth operations and avoid liquidity crises.
6. Interest Rates & Economic Factors
Concept:
• Interest rates influence borrowing, investment, and overall economic growth.
Key Effects:
• Higher Interest Rates → Discourages borrowing, reduces corporate investments.
• Lower Interest Rates → Encourages spending and borrowing.
• Inflation vs. Interest Rate → Higher inflation often leads to higher interest rates.
Applications:
• Used in monetary policy, business loans, and investment decisions.
Here are detailed explanations along with key formulas and examples for each finance topic:
1. Time Value of Money (TVM)
Concept:
The value of money changes over time due to interest, inflation, and opportunity cost. A rupee today is
worth more than the same rupee in the future because it can be invested to earn returns.
Key Formulas:
1. Future Value (FV):
FV=PV×(1+r)nFV = PV \times (1 + r)^n
o PV = Present Value
o r = Interest rate per period
o n = Number of periods
2. Present Value (PV):
PV=FV(1+r)nPV = \frac{FV}{(1 + r)^n}
3. Compound Interest:
A=P(1+rn)ntA = P(1 + \frac{r}{n})^{nt}
o P = Principal amount
o r = Annual interest rate
o n = Number of times interest is compounded per year
o t = Number of years
Example:
If you invest PKR 5,000 in a bank account earning 9% annually, how much will it grow in 5 years?
FV=5000×(1+0.09)5=5000×1.5386=PKR7,693FV = 5000 \times (1 + 0.09)^5 = 5000 \times 1.5386 = PKR
7,693
2. Capital Budgeting & Investment Decisions
Concept:
Capital budgeting involves evaluating long-term investments, such as purchasing equipment or
launching a new project.
Key Formulas & Methods:
1. Net Present Value (NPV):
NPV=∑CashFlowt(1+r)t−InitialInvestmentNPV = \sum \frac{Cash Flow_t}{(1 + r)^t} - Initial Investment
o If NPV > 0, accept the project
o If NPV < 0, reject the project
2. Internal Rate of Return (IRR):
o The discount rate that makes NPV = 0
o Higher IRR means a better investment
3. Payback Period:
Payback Period=Initial InvestmentAnnual Cash InflowPayback\ Period = \frac{Initial\
Investment}{Annual\ Cash\ Inflow}
o Shorter payback periods are preferred
Example:
If a company invests PKR 100,000 in a project that generates PKR 30,000 per year, what is the payback
period?
Payback Period=100,00030,000=3.33 yearsPayback\ Period = \frac{100,000}{30,000} = 3.33\ years
3. Financial Markets & Instruments
Concept:
Financial markets facilitate the trading of securities like stocks, bonds, and currencies.
Types of Markets:
• Money Market: Short-term debt instruments (T-bills, commercial paper).
• Capital Market: Long-term investments (stocks, bonds).
• Foreign Exchange Market: Currency trading (USD/PKR).
Example:
A Certificate of Deposit (CD) is a money market instrument that earns fixed interest over time.
4. Corporate Finance & Capital Structure
Concept:
Companies finance their operations through debt (loans, bonds) and equity (shares, retained earnings).
Key Ratios:
1. Debt-to-Total Assets Ratio:
Debt Ratio=Total DebtTotal AssetsDebt\ Ratio = \frac{Total\ Debt}{Total\ Assets}
o A higher ratio means higher financial risk.
2. Times Interest Earned (TIE) Ratio:
TIE=EBITInterest ExpenseTIE = \frac{EBIT}{Interest\ Expense}
o Measures how easily a company can pay interest on its debt.
Example:
A company with EBIT of PKR 500,000 and interest expense of PKR 100,000 has a TIE ratio of:
TIE=500,000100,000=5.0TIE = \frac{500,000}{100,000} = 5.0
• A higher TIE ratio indicates financial stability.
5. Working Capital Management
Concept:
Managing short-term assets (cash, receivables, inventory) and liabilities (payables) to ensure liquidity.
Key Formulas:
1. Current Ratio:
Current Ratio=Current AssetsCurrent LiabilitiesCurrent\ Ratio = \frac{Current\ Assets}{Current\
Liabilities}
o A ratio above 1.0 indicates liquidity.
2. Receivables Turnover Ratio:
Receivables Turnover=Net Credit SalesAverage Accounts ReceivableReceivables\ Turnover = \frac{Net\
Credit\ Sales}{Average\ Accounts\ Receivable}
Example:
A company with PKR 500,000 in assets and PKR 250,000 in liabilities has a current ratio of:
Current Ratio=500,000250,000=2.0Current\ Ratio = \frac{500,000}{250,000} = 2.0
• A current ratio > 1 is considered good.
6. Interest Rates & Economic Factors
Concept:
Interest rates affect corporate borrowing, investment, and economic growth.
Effects of High Interest Rates:
• Discourages corporate investments (higher borrowing costs).
• Encourages savings (higher returns on deposits).
• Slows down economic expansion.
Key Formula:
1. Loan Interest Calculation: Interest Payment=Loan Amount×Interest Rate×TimeInterest\
Payment = Loan\ Amount \times Interest\ Rate \times Time
Example:
If you take a PKR 100,000 loan at 10% annual interest for 3 years:
Interest=100,000×0.10×3=PKR30,000Interest = 100,000 \times 0.10 \times 3 = PKR 30,000
