Assam ASSEB Higher Secondary Finance cheat sheet

Finance is the study of how individuals, businesses, and governments raise, allocate, and manage monetary resources over time under uncertainty.

The financial system comprises financial institutions, financial markets, financial instruments, and financial services that channel funds from surplus units (savers) to deficit units (borrowers).

Direct finance: savers lend directly to borrowers by purchasing securities (shares, bonds) in financial markets; indirect finance: savers deposit funds with financial intermediaries that then lend to borrowers.

Primary market: securities are issued for the first time (IPO, fresh issue); secondary market: existing securities are traded among investors (stock exchanges).

Money market deals in short-term instruments (≤1 year): treasury bills, commercial paper, certificates of deposit, call money; capital market deals in long-term instruments (>1 year): equity shares, debentures, bonds.

Financial intermediaries reduce transaction costs, pool risk, and solve information asymmetry (adverse selection before lending, moral hazard after lending).

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment.

Regulators in India: RBI (banking, monetary policy, payment systems), SEBI (securities markets), IRDAI (insurance), PFRDA (pensions).

Commercial banks accept demand deposits (payable on demand, no interest) and time deposits (fixed term, interest-bearing); they create credit through the deposit multiplier = 1 / reserve ratio.

Development financial institutions (DFIs) provide long-term project finance; in India, examples include IFCI, IDBI, SIDBI, and NABARD.

NBFCs (Non-Banking Financial Companies) provide loans and advances but cannot accept demand deposits and are not part of the payment and settlement system.

SEBI regulates stock exchanges, brokers, mutual funds, and listed companies; its objectives include investor protection and market development.

Stock exchange functions: providing liquidity, price discovery, and a secondary market for securities; NSE and BSE are the principal Indian exchanges.

Money market instruments: Treasury bills (issued at discount, redeemed at face value), commercial paper (unsecured promissory note by corporates), certificate of deposit (issued by banks), call money (overnight interbank lending).

Mutual funds pool investor money and invest in diversified portfolios; NAV = (Total assets − Total liabilities) / Number of units outstanding.

Primary dealers underwrite government securities and support liquidity in the government securities market.

Future value of a single sum: FV = PV × (1 + r)^n, where r is the periodic interest rate and n is the number of periods.

Present value of a single sum: PV = FV / (1 + r)^n.

Future value of an ordinary annuity: FVA = PMT × [((1 + r)^n − 1) / r]; annuity due multiplies this by (1 + r).

Present value of an ordinary annuity: PVA = PMT × [(1 − (1 + r)^(−n)) / r].

Perpetuity present value: PV = PMT / r; growing perpetuity: PV = PMT / (r − g), valid when r > g.

Effective annual rate (EAR) = (1 + r/m)^m − 1, where m is the number of compounding periods per year; continuous compounding: EAR = e^r − 1.

Rule of 72: approximate doubling time ≈ 72 / annual interest rate (in percent).

Real rate ≈ nominal rate − inflation rate (Fisher approximation); exact Fisher equation: (1 + nominal) = (1 + real)(1 + inflation).

Equity shares: owners' capital, perpetual, voting rights, dividend not fixed; preference shares: fixed dividend, priority over equity in dividends and liquidation, usually no voting rights.

Retained earnings: internal source of finance, no flotation cost, but opportunity cost equals shareholders' required return.

Debentures and bonds: long-term debt, fixed interest, tax-deductible interest, secured or unsecured; debenture holders are creditors, not owners.

Bank loans and cash credit: short- to medium-term; cash credit is a running account against hypothecation of inventory.

Trade credit: spontaneous source from suppliers; cost of foregoing a cash discount = [Discount / (1 − Discount)] × [365 / (Credit period − Discount period)].

Lease financing: lessee obtains use of an asset without ownership; hire purchase transfers ownership at the end of payments.

Public deposits: unsecured short- to medium-term deposits raised directly from the public by companies, governed by Companies Act limits.

Venture capital and angel finance: equity or quasi-equity for high-risk start-ups; private equity funds invest in unlisted companies.

Balance sheet identity: Assets = Liabilities + Equity.

Current ratio = Current assets / Current liabilities; quick ratio = (Current assets − Inventory − Prepaid expenses) / Current liabilities.

Debt-to-equity ratio = Total debt / Total equity; interest coverage = EBIT / Interest expense.

Gross profit margin = (Sales − Cost of goods sold) / Sales; net profit margin = Net profit / Sales; return on assets = Net profit / Total assets; return on equity = Net profit / Equity.

Inventory turnover = Cost of goods sold / Average inventory; receivables turnover = Credit sales / Average receivables; days sales outstanding = 365 / Receivables turnover.

Asset turnover = Sales / Total assets; a higher ratio indicates more efficient asset use.

DuPont decomposition: ROE = Net profit margin × Asset turnover × Equity multiplier, where equity multiplier = Total assets / Equity.

Earnings per share = (Net profit − Preference dividends) / Number of equity shares outstanding.

Net present value (NPV) = Σ [CF_t / (1 + r)^t] − Initial investment; accept if NPV > 0, reject if NPV < 0; among mutually exclusive projects, choose the highest NPV.

Internal rate of return (IRR) is the discount rate at which NPV = 0; accept if IRR > cost of capital.

Profitability index (PI) = Present value of cash inflows / Initial investment; accept if PI > 1.

Payback period = time to recover initial investment from cumulative cash inflows; ignores cash flows after payback and time value of money.

Discounted payback period uses discounted cash inflows; it still ignores cash flows beyond the cutoff.

Accounting rate of return (ARR) = Average annual profit / Average investment; average investment = (Initial investment + Salvage value) / 2.

Cash flows for capital budgeting are incremental after-tax cash flows; depreciation is a non-cash expense but provides a tax shield = Depreciation × Tax rate.

NPV and IRR can conflict for mutually exclusive projects due to scale differences or timing differences; NPV is preferred because it measures absolute value added.

Cost of debt after tax = Interest rate × (1 − Tax rate).

Cost of equity using dividend growth model: Ke = (D1 / P0) + g, where D1 = expected dividend, P0 = current price, g = growth rate.

Cost of equity using CAPM: Ke = Risk-free rate + Beta × (Market return − Risk-free rate).

Weighted average cost of capital (WACC) = (E/V) × Ke + (D/V) × Kd × (1 − Tax rate), where V = E + D.

Capital structure theories: net income approach (more debt lowers WACC and raises value), net operating income approach (capital structure irrelevant), Modigliani–Miller without taxes (irrelevance), with taxes (debt shield adds value), trade-off theory (balance tax shield against financial distress costs).

Financial leverage = EBIT / (EBIT − Interest); degree of financial leverage measures sensitivity of EPS to EBIT changes.

Operating leverage = Contribution / EBIT; degree of operating leverage measures sensitivity of EBIT to sales changes.

Pecking order theory: firms prefer internal funds first, then debt, then equity.

Working capital = Current assets − Current liabilities; gross working capital = total current assets; net working capital = current assets − current liabilities.

Operating cycle = Inventory conversion period + Receivables collection period − Payables deferral period.

Inventory conversion period = Average inventory / Cost of goods sold × 365; receivables collection period = Average receivables / Credit sales × 365.

Cash conversion cycle measures the time between paying suppliers and collecting from customers; a shorter cycle frees cash.

Economic order quantity (EOQ) = √(2 × Annual demand × Ordering cost / Carrying cost per unit).

At EOQ, total ordering cost equals total carrying cost; total inventory cost is minimized.

Working capital financing strategies: matching (hedging) approach finances current assets with short-term funds; conservative approach uses more long-term funds; aggressive approach uses more short-term funds.

Cash management models: Baumol model (EOQ-like for cash) and Miller–Orr model (random cash flows with upper and lower control limits).

Commercial banking functions: accepting deposits, lending, credit creation, agency services (payments, collections), and general utility services (lockers, letters of credit).

RBI monetary policy tools: repo rate (lending to banks against securities), reverse repo (absorbing liquidity), cash reserve ratio (CRR), statutory liquidity ratio (SLR), open market operations.

CRR is the share of net demand and time liabilities kept as cash with RBI; SLR is held in approved securities (cash, gold, government securities).

Non-performing asset (NPA): a loan on which principal or interest is overdue for more than 90 days.

Basel norms set minimum capital adequacy; Basel III requires capital adequacy ratio (CAR) of at least 8% of risk-weighted assets, with additional buffers.

Financial services include leasing, hire purchase, factoring, forfaiting, mutual funds, insurance, credit rating, and merchant banking.

Factoring: sale of receivables to a factor at a discount; forfaiting: export receivables financing without recourse.

Credit rating agencies (CRISIL, ICRA, CARE) assign ratings that indicate creditworthiness of issuers.

Insurance transfers risk from the insured to the insurer in exchange for a premium; it is based on the principle of pooling of risks.

Principles of insurance: insurable interest, utmost good faith, indemnity (for general insurance), subrogation, contribution, and proximate cause.

Life insurance is a contract of assurance (not indemnity) and includes savings and protection elements; general insurance covers property, liability, and marine risks.

Premium calculation depends on probability of loss, expected severity, administrative costs, and risk margin.

Moral hazard: insured behavior changes after insurance, increasing loss probability; adverse selection: higher-risk individuals are more likely to buy insurance.

Risk management process: identify risks, measure and evaluate, select techniques (avoidance, reduction, retention, transfer), implement, and monitor.

Deductible: the amount the insured pays before insurance covers the loss; coinsurance: sharing of loss between insurer and insured in a specified proportion.

IRDAI regulates the insurance sector in India; insurance penetration = premium as a percentage of GDP.

Personal financial planning steps: assess current financial position, set goals, develop a plan, implement, and monitor and revise.

Emergency fund: liquid savings covering 3–6 months of essential expenses, held in savings accounts or liquid mutual funds.

Budgeting rule of thumb (50/30/20): 50% of net income for needs, 30% for wants, 20% for savings and debt repayment.

Compounding: starting early increases future value because FV = PV × (1 + r)^n; time is the most powerful variable for long-term goals.

Diversification reduces unsystematic risk; asset allocation across equity, debt, and gold balances risk and return.

Insurance planning: term life cover of about 10–15 times annual income is a common guideline; health insurance covers medical expenses.

Tax planning uses deductions and exemptions legally available; tax avoidance is legal, tax evasion is illegal.

Retirement planning estimates required corpus using future expenses, inflation, and expected post-retirement return; a larger corpus is needed when inflation is higher.